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AI skepticism, leaders and laggards, plus why bond investors are concerned about a Hassett-led Fed Market Domination anchor Josh Lipton breaks down the latest market moves for December 4, 2025. Argent Capital Management Portfolio Manager Jed Ellerbroek spoke with Josh Lipton about the winners and losers in the AI trade and why there is no justification for investor skepticism over artificial intelligence.
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Operator: Good morning, and welcome to the BMO Financial Group's Q4 2025 Earnings Release and Conference Call for December 4, 2025. Your host for today is Christine Viau. Please go ahead. Christine Viau: Thank you, and good morning. We will begin the call today with remarks from Darryl White, BMO's CEO; followed by Tayfun Tuzun, our Chief Financial Officer; and Piyush Agrawal, our Chief Risk Officer. Also present to answer questions are our group heads: Matt Mehrotra from Canadian Personal and Business Banking; Sharon Haward-Laird, Canadian Commercial Banking; Aron Levine, U.S. Banking; Alan Tannenbaum, BMO Capital Markets; Deland Kamanga, BMO Wealth Management; and Darrel Hackett, BMO U.S. CEO. [Operator Instructions] As noted on Slide 2, forward-looking statements may be made during this call, which involve assumptions that have inherent risks and uncertainties. Actual results could differ materially from these statements. I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results, management measures performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. Darryl and Tayfun will be referring to adjusted results in their remarks unless otherwise noted as reported. I will now turn the call over to Darryl. Darryl White: Thank you, Christine, and good morning, everyone. This morning, we reported adjusted EPS of $3.28 for the fourth quarter and $12.16 for the year. Fiscal 2025 was a strong year for BMO. We made meaningful progress against our financial and strategic commitments, strengthening profitability, delivering for our clients and supporting the communities we serve. At this time last year, we laid out specific financial commitments and a clear path. And through 2025, we delivered against each of those commitments with disciplined execution. Here are some highlights. Our top imperative is rebuilding our ROE together with profitable earnings growth. These priorities are not mutually exclusive, but mutually reinforcing as we demonstrated in 2025. We increased full year ROE by 150 basis points from 9.8% to 11.3%, and we exited Q4 with momentum at 11.8%. At the same time, we delivered EPS growth of 26% and record net income of $9.2 billion. We made progress across each of our 4 strategic levers. The most important driver was strong operating performance in each of our businesses with PPPT up 18% for the year to $15.8 billion. We met our long-standing commitment to positive operating leverage, achieving 4% for the year. Operating leverage was positive in each segment, driven by disciplined expense management and solid revenue performance. Our efficiency ratio improved by 230 basis points to 56.3%. Strength in risk management remains a core differentiator for BMO. As expected, impaired provisions moderated from the peak in Q4 '24 to 44 basis points this quarter. We built allowances during the first half of the year to account for a slower economy and trade uncertainty, and we are well reserved for potential risks in the environment. Finally, we're actively optimizing our capital position. Over the course of 2025, we returned over $8 billion in capital to our shareholders through buybacks and dividends. And today, we announced a dividend increase of $0.04 to $1.67 per share, up 5% over last year. Our CET1 ratio of 13.3% remains above our target, and we're maintaining steady execution of our share buyback program. Our strategy is clear and consistent and team BMO is executing with pace and momentum. Our digital-first AI-powered strategy is reshaping how we operate to serve our clients while putting AI in the hands of everyone. To support this, we recently introduced a leading Gen AI productivity tool to all BMO employees and award-winning learning modules to help them unlock the power of artificial intelligence with over 80% active users. We're creating value through strategic partnerships and investments we've made in data, risk governance and talent that are accelerating our AI capabilities to realize even greater efficiencies and business growth. We've executed and captured benefits from Gen AI tools like Lumi and Rover, digital assistants that support our frontline employees, enabling faster customer advice and insights. We're the first Canadian bank to access the IBM Quantum network and are actively using machine and reinforcement learning models in credit and capital markets and across the bank. Turning to highlights in each of our businesses. Starting with Wealth Management, our highest ROE business, which had a very strong year with record revenues and net income driven by continued growth in client assets and constructive markets. Clients are rewarding us with more business as we continue to deliver competitive investment returns and innovative solutions to meet their needs. This quarter, BMO Global Asset Management received 12 Lipper Fund Awards recognizing continued excellence in delivering strong risk-adjusted returns for clients across a diverse range of investment solutions. And with Burgundy Asset Management joining BMO on November 1, we're positioned to further expand private wealth solutions for the benefit of our clients. Capital Markets is a key contributor to BMO's diversified earnings. PPPT growth for the full year was strong with each quarter above our expectations. We strengthened our platform and enhanced client coverage to achieve and advance our position as a leader across priority markets and products, including in our globally leading metals and mining business, while expanding our equity derivatives and U.S. rate businesses. In Canadian Investment Banking, this year, we ranked #1 in M&A deals and #2 in ECM league tables. Our flagship Canadian P&C business delivered record revenue this year and strong PPPT growth of 8% as we're acquiring high-quality accounts and deepening client relationships through market-leading digital sales, engagement and experience. We continue to offer innovative solutions to clients -- to help clients make real financial progress. And this quarter, we launched joint programs with Instacart and Walmart to deliver convenience and savings to Canadians. In Canadian Commercial Banking, steady client growth supported by increased referrals between commercial, wealth and capital markets and continued momentum in digital engagement led to good loan growth of 7% and deposit growth of 5% despite a complex environment. A key driver of client and deposit growth is through our leading North American Treasury and Payment Solutions platform, which offers clients a comprehensive product suite, including real-time payments, virtual account management and payment APIs that connect directly to their enterprise resource planning and treasury systems. Turning to U.S. banking. This is the first quarter reporting under the unified structure with teams integrated to deliver the full power of BMO to our clients and momentum is building. We've made strong progress this year on improving the ROE in our U.S. banking towards our 12% medium-term target, executing against deliberate action plans to support this priority. Through a disciplined focus on stronger connectivity across our businesses, funding optimization and redeployment of resources to higher returning relationships, profitability has strengthened across key metrics. Execution of pricing optimization led to increased deposit spreads and margin expansion of 15 basis points from Q4 of last year. To date, we've completed optimization actions for approximately 80% of the loans we identified as nonstrategic and below our return targets and reduced RWA by USD 4.6 billion. We continue to expect these activities to be largely completed by the second quarter. At the same time, we successfully grown recurring fee revenues, up 10% this year. Commercial TPS fees grew 23% year-over-year and strong growth in net new assets and AUM drove a 12% increase in private wealth fees. Momentum continues to build in retail banking with 60% higher growth in net new checking accounts year-over-year. The results are evident in our fiscal 2025 performance. PPPT growth accelerated to 7% with positive operating leverage of 3% and meaningful improvement in PCL, all leading to ROE improvement of 170 basis points to 8.1% for the full year. We recently announced the sale of 138 branches in certain markets where we did not have local scale to compete and are strategically reinvesting to strengthen our network and densify our presence in key markets where we can achieve local scale and have the greatest opportunity for long-term growth. We plan to add 150 new branches over the next 5 years with a focus on further densifying in California, where we recently opened a newly integrated financial center in Manhattan Beach. We've also invested in key talent positions, adding and promoting over 100 frontline commercial and private bankers in the U.S., building significant capacity to further accelerate performance. Overall, 2025 was a productive year, realigning our U.S. banking structure and optimizing the portfolio. We're now advancing to the next phase of our strategy, positioning the business for growth, leveraging the strength and scale of all 3 businesses to drive greater synergies and continued ROE improvement. As we look ahead to 2026 with the -- while the economic environment has remained resilient, GDP growth has been modest and is expected to grow 1.8% in the U.S. and 1.4% in Canada. The Canadian unemployment rate is likely to remain above 7% through the middle of next year, presenting some challenges, particularly to consumer credit. While trade uncertainty persists pending the review of the USMCA agreement, at the same time, I'm encouraged that initiatives to invest in Canada and diversify trade relationships to strengthen the Canadian economy over the medium term are beginning to move forward. We're well positioned to benefit from a renewed CapEx cycle given our advantaged position in commercial banking and in capital markets. At BMO, we've set the foundation for continued momentum in 2026 and are moving forward with pace. I'm pleased to announce that we plan to host an All Bank Investor Day on March 26, where we will share with you more details on our strategy and our progress. In summary, we're delivering world-class client experiences grounded in one client leadership and fostering a high-performing, winning culture to drive progress for our clients and our performance. We continue to invest and leverage our digital-first AI power strategy, reshaping how we operate and serve our clients. Our consistent focus on superior risk management is foundational and through continued discipline and improving credit market conditions, we expect PCL to continue to normalize over time. Our #1 imperative continues to be our ROE rebuild, and I'm confident in the momentum we've built this year and that it will continue to deliver profitable growth and long-term shareholder value. With that, I'll turn it over to Tayfun. Tayfun Tuzun: Thank you, Darryl. Good morning, and thank you for joining us. My comments will start on Slide 9. On a reported basis, fourth quarter EPS was $2.97 and net income was $2.3 billion. Adjusting items are shown on Slide 46 and included a goodwill write-down related to the announced sale of certain U.S. branches. The remainder of my comments will focus on adjusted results. Adjusted EPS of $3.28 was up significantly from $1.90 last year with net income of $2.5 billion, driven by strong PPPT growth of 16% and lower PCLs. Return on equity of 11.8% improved 440 basis points and return on tangible common equity of 15.4% improved 570 basis points. Revenue increased 12%, with broad-based growth across all businesses, including continued strong fee growth in wealth and capital markets and NIM expansion. Expenses grew 9% or 5% excluding higher performance-based compensation and the impact of stronger U.S. dollar, and we delivered positive operating leverage of 3%. Total PCL decreased $768 million from the prior year with lower impaired and performing provisions. Piyush will speak to this in his remarks. Moving to Slide 10. Average loans grew 1% year-over-year, driven by higher residential mortgages and commercial loans in Canada, offset by lower U.S. commercial balances, including the impact of optimization actions. Customer deposits were up 1% from last year with good growth in Canadian everyday banking and commercial operating balances, offset by lower term deposits in both countries. Turning to Slide 11. On an ex-trading basis, net interest income was up 10% from the prior year with good growth in all operating segments supported by continued margin expansion and balanced growth in Canadian P&C and Wealth as well as higher net interest income in Corporate Services. Net interest margin ex trading was 206 basis points, up 7 basis points sequentially, reflecting improved deposit margins and contribution from corporate services, including the benefit of higher reinvestment rates. In Canadian P&C, NIM was stable with higher deposit margins, offset by changes in product mix. U.S. banking NIM was up 5 basis points, with higher deposit margins, partially offset by the impact of lower deposit balances. Year-over-year all bank NIM widened by 15 basis points and we expect it to remain relatively stable through next year based on the current rate expectations and continued benefit from latter investments. Turning to Slide 12. Noninterest revenue was up 9% from the prior year and up 17% excluding trading, driven by strong wealth management fees and underwriting fees in capital markets, as well as continued growth in deposit fees reflecting strength in our TPS business. Moving to Slide 13. Underlying expense growth was up 5% driven by higher employee-related costs, including investments in talent as well as higher technology investments. For the full year, underlying expense growth of 4% was in line with our mid-single-digit growth guidance given at the beginning of the year and achieved positive operating leverage of 4.3%. We have a long track record of disciplined expense management through continuous assessment of our expense base, balanced against strategic investments for future growth. We believe that we still have room to improve our structural expense base and have identified further efficiencies, mainly in the form of workforce optimization that will require an upfront charge. We are in the process of finalizing the details and currently expect to record a charge of approximately $225 million in the first quarter, which we expect will deliver annualized savings of $250 million when fully executed. We expect to realize about half of the savings in 2026. We expect core expense growth to be in the mid-single-digit range in 2026, including the upfront charge and our growing investments in talent, technology and automation with a particular focus on our U.S. banking and wealth businesses. We expect to still achieve positive operating leverage for the year, including the impact of the first quarter charge. A reminder that similar to previous years, Q1 will include seasonally higher benefits and impact of stock-based compensation for employees eligible to retire, which we project to be in the range of $250 million to $270 million. Turning to Slide 14. Our CET1 ratio is strong at 13.3% and remains above management targets. The ratio declined 20 basis points from last quarter with continued good internal capital generation more than offset by share repurchases and moderate growth in source currency RWA. We completed 8 million share repurchases during the quarter and 22.2 million shares in total during fiscal 2025. In 2026, we expect to continue buying back our shares while supporting business growth opportunities and maintaining a strong capital position. Our CET1 management target remains 12.5%. Moving to the operating segments and starting on Slide 15. Canadian P&C net income was up 5% year-over-year as good PPPT growth of 7% was partly offset by an increase in impaired and performing PCLs. Revenue of $3.1 billion was up 7%, driven by higher net interest income, reflecting both balanced growth and higher margins. Higher noninterest revenue reflected good growth in mutual fund fees, deposit fees and net investment gains in our commercial business. Expense growth of 6% reflected higher technology and employee-related costs. Canadian P&C, again delivered positive operating leverage for the full year with the efficiency ratio improving to 43.1%. Moving to U.S. Banking on Slide 16. My comments here will speak to the U.S. dollar performance and reflect the change to our organizational structure, combining the U.S. wealth business with our U.S. personal and commercial businesses. Net income was $627 million, up from $262 million a year ago, reflecting good PPPT growth of 8%, positive operating leverage of 3.6% and lower PCLs. Revenue growth was driven by higher deposit margins more than offsetting lower deposit and loan balances and improving noninterest revenue driven by strong TPS fees and net asset growth in wealth. Expenses were flat compared with the prior year as lower technology and other operating expenses were offset by higher employee-related costs. Moving to Slide 17. Wealth Management net income was up 28% from last year, driven by strong revenue performance in Wealth and Asset Management, up 14%, reflecting higher markets and continued growth in net sales, strong balance sheet growth and higher brokerage transactions. Insurance revenue increased due to underlying business growth and favorable market movements. Expense growth of 11% was driven by employee-related expenses, including higher revenue-based costs. In Q1, our first quarter results will include a full quarter of results from Burgundy Asset Management. Moving to Slide 18. Capital Markets net income was $532 million compared with $270 million last year, reflecting strong PPPT performance of $712 million, up 32% and lower PCL. Revenue was up 14%, reflecting 10% growth in Global Markets driven by higher debt and equity insurances and higher equities trading revenue partially offset by lower interest rate trading. Investment and corporate banking revenue increased 18% driven by higher debt and equity underwriting fees as we saw strong client activity during the quarter. Expenses were up 4%, mainly driven by higher performance-based compensation. Turning now to Slide 19. Corporate Services net loss was $73 million, reflecting above trend revenue in the quarter. We expect Corporate Services net loss in 2026 to average a similar range as the current year with the first quarter net loss expected to be the high point, including seasonal items. In summary, in 2025, we delivered strong performance with record revenue, PPPT and net income and met our commitments on positive operating leverage while investing in the business. We've made strong progress in ROE improvements at both the total bank and U.S. banking levels with strategies in place to drive further improvement. As we look ahead towards 2026, in Canada, we expect low single-digit loan growth as challenges in the macroeconomic environment continues to impact personal and commercial demand. Despite the muted environment, we are well positioned to generate continued market share gains in our businesses and anticipate improving conditions during the year from fiscal initiatives in addition to further policy rate easing and lower borrowing costs. In the U.S., we expect to benefit from the improved economic backdrop and focus on allocating resources to areas of competitive strength and higher returns. We expect to largely complete our balance sheet optimization in the early part of the year and expect year-over-year loan growth to strengthen and reach mid-single digits by the end of the year. Assuming markets remain constructive, we expect Capital Markets and Wealth Management to maintain their strong performance in 2026. And lastly, we expect an effective tax rate in the range of 25% to 26%. Overall, we are focused on building on our current earnings momentum and deliver continued progress towards our medium-term ROE targets. Across all of our businesses, resource deployment decisions today are predominantly driven by this ambition, and we are confident that the strength of our franchise on both sides of the border will help accelerate our performance. I will now turn it over to Piyush. Piyush Agrawal: Thank you, Tayfun, and good morning, everyone. My remarks start on Slide 21. Our credit performance this year was in line with our expectations. Impaired provision for credit losses was 46 basis points for the fiscal year at the lower end of the guidance of high 40s. Through fiscal 2025, performance improved in U.S. banking. At the same time, softness in the Canadian economy, including rising unemployment and trade uncertainty, resulted in higher losses in our Canadian Personal and Commercial business. Now turning to the fourth quarter. Total provision for credit losses was $755 million or 44 basis points with impaired provision of $750 million, down $23 million or one basis point from prior quarter, primarily due to lower losses in U.S. banking with relatively stable losses in Canadian Personal and Commercial banking and capital markets, which increased $7 million and $4 million, respectively. Turning to Slide 22. The performing provision for the quarter was $5 million with a build in Canadian Personal and Commercial, largely offset by a release in U.S. banking, consistent with the risks in the economy and credit trends in our portfolios. Overall, the provision this quarter reflected an improvement in the macroeconomic scenarios and lower balances in certain portfolios, which were offset by the uncertainty in credit conditions. The performing allowance of $4.7 billion provides a robust coverage of 70 basis points over performing loans, and we remain well reserved. Turning to Slide 23. Impaired formations were stable at $1.8 billion this quarter. The increase in the consumer segment came largely from mortgages, which are well secured with low LTVs and we do not expect to see significant losses. Wholesale formations have come down since last year and have been relatively stable over the last 3 quarters. Gross impaired loans increased to $7.1 billion or 104 basis points, up 2 basis points from last quarter. While it takes time to work through impaired files, we have seen a steady decline in new watch list formations and expect that this will lead to lower impaired balances over time. This quarter, we included in the appendix additional details on the nonbank financial institutions, or NBFI portfolio. This portfolio is well diversified across products, clients and collateral pools. It is well structured, generally secured and managed through specialized teams and differentiated underwriting criteria. 50% of this portfolio relates to equity subscription loans which has a very strong risk profile with no losses over a 30-year history of this business. In closing, while downside risks remain the impaired PCL ratio has improved 22 basis points since the end of last year. As we look to 2026, we anticipate a softer economic environment in Canada during the first half with trade uncertainty and subdued consumer sentiment continuing to weigh on the economy. At the same time, expansionary fiscal policies and growth initiatives as well as support from monetary policy should lead to stronger growth as we go through the year. Assuming the consensus macroeconomic outlook plays out, we expect impaired provision to remain in the mid-40 basis points range with quarterly variability. In conclusion, our performance continues to be supported by the diversification of our portfolio and risk management capabilities underscored by a strong risk culture. The robust allowance coverage, strong capital and liquidity not only equip us to navigate any challenges in the environment, they position the bank to capture opportunities as market conditions evolve. I will now turn the call back to the operator for the Q&A portion of this call. Operator: [Operator Instructions] Our first question comes from Paul Holden from CIBC. Paul Holden: A question on ROE. Now given the 11.3% in '25, wouldn't expect you to increase the target at this point. That's for sure. But just wondering in terms of that 15% target, do you think it's realistic that you could achieve that in 2027 given the pace at which you're executing against your strategy? Is it a realistic objective? Or are we going to have to wait a little bit longer? Darryl White: Paul, it's Darryl. So the 15% is still absolutely the target. Thank you for the question. In terms of the timeline, we're pretty clear to say that, that's our medium-term target, which we sort of think about as 3 to 5 years. And we started to establish that language pretty clearly through the course of this year. So it's difficult for me to put a particular date on when we hit the 15% for you right now. But we also have said and I stand by it, that assuming constructive environments, we hope to get there by the early part of this range. Operator: Our next question comes from John Aiken from Jefferies. John Aiken: Tayfun, you reiterated your preference for a CET1 ratio, getting closer to 12.5%. You guys are actually a little bit more aggressive in that regard. I'll preface this question by saying that I do agree that 13% is still a little bit too high for you and the group. But how comfortable do you believe that you and BMO are in terms of breaking ranks with the peer group if you drop below 13% before anybody else does? Tayfun Tuzun: So John, good question. I will reiterate how we think about our approach to capital management. There are 3 factors that we've been very public about this. One is obviously the regulatory minimums. The second one is the economic -- macroeconomic backdrop and our own performance within that macroeconomic backdrop. And the third one is the peer group distribution. So when we arrived at 12.5% management target, we considered all these 3 points. And we're quite comfortable that at 12.5%. This is a very sound approach to managing our capital ratio. And thus, we've been very public about that for a while now. Operator: Our next question comes from Ebrahim Poonawala from Bank of America. Ebrahim Poonawala: I guess just 2 questions -- one or 2-part questions since we can only ask one. I guess when we think about the commercial loan growth outlook, ex your optimization actions. I understand that's going to mitigate growth in the near term. But when we look at the U.S., there are obviously mixed signals around what's happening with the economy. Are you actually seeing signs that the tax bill is having an impact on how businesses are behaving around investments and hiring? And when you look at the first half loan growth in the U.S. one, like do you see a pickup? Or do you see risks of downside given the tariff uncertainties? And similarly, in Canada, what needs to happen to really lift the macro overhang if we don't get some clarity on [ CUSMA ] maybe until the back half of '26? Aron Levine: Ebrahim, thanks for the question. It's Aron. So in terms of the U.S. we're hearing from clients, general optimism, obviously, that's cautious and there's always the questions as you're asking. But generally, we're seeing pickup in activity. We're seeing pipelines grow. We're having good conversations with clients that are feeling generally a level of optimism. For us, in particular, as we think about this inflection point that we're hitting with moving out of optimization towards growth, right, the strength of our commercial relationships that really came through with the fee growth that we showed. Second, as Darryl mentioned, hiring over 100 commercial bankers and private advisers over the last 12 months. They're just effectively getting going. So you're going to see that benefit us over the next 12 months. And then, of course, our continued investment in both client-facing and internal technology as we get more efficient, make it easier to do business. So for all of those reasons, I feel very confident that we'll start to see the loan growth, as Darryl mentioned, as we get into the second quarter, third quarter of 2026, again, assuming some of the optimism stays and the U.S. economy stays as we think it will. Ebrahim Poonawala: Got it. [indiscernible] on Canada. Aron Levine: Yes. Here it comes. Sharon Haward-Laird: Thank you. Here it comes. It's Sharon. Thanks for the question. I'd say similar to Aron, I've been out talking to clients, and we would describe the tone as cautiously optimistic. There's obviously a lot of pent-up demand and pipelines are very strong. We did see the end of the fourth quarter was stronger than the beginning of the fourth quarter. So we're seeing good momentum going into this coming year. But we're also really focused on deposit growth. And you see we've taken a lot of market share in operating deposits and our TPS business has had double-digit -- high double-digit growth this year as well. So we've had very strong commercial revenue growth, and we're ready for the CapEx. On your question of what has to happen. I think at some point, we are starting to see, especially in the middle market, more clients moving and starting to draw down. But utilization rates are still low. So there's room there as well. Obviously, any more certainty will be a positive contributor to things moving. But whenever things pick up, we think we'll be in a good position to take share. Operator: Our next question comes from Gabriel Dechaine from National Bank Financial. Gabriel Dechaine: I know the impaired PCL discussion over the past while it's focused on the U.S., but I want to ask about the Canadian credit card book. We're seeing the delinquency rates there rise above the peer average. We're seeing the balances shrink over the course of the year. And I'm wondering what I should take away from that data? Are you -- did you grow too fast at a certain point in time? Are we maybe going to see a blip in post-Christmas period credit metrics? And then I'll throw this one in there while I'm at it for Darryl, M&A, would you be willing to issue stock to do a deal? Or are you looking at more tuck-in type things? Mathew Mehrotra: Thanks for the question, Gabe. It's Matt speaking. I'll just go back to the comments at the beginning of the call on the macro economy. That -- the overall conditions are definitely affecting mass consumers and particularly the lower end of the credit spectrum, not surprisingly, unemployment and solvency is up. Those stresses are more visible for us given our portfolio composition. We tend to have a smaller premium book, think about sort of large airline co-brand hasn't been a big part of our business up until recently with Porter. We've made adjustments that manage our exposure to that segment and equally on the flip side are seeing good growth with Porter and sort of our premium segment overall, 16,000 accounts acquired since launch. They have a deep active collector base. So overall, we're looking ahead towards that top end of the market. But I mean, obviously, with the macro conditions as they are, the impact on that lower segment is visible for us, and we're waiting for that improvement. Operator: Our next question comes from Mario Mendonca from TD Securities. Mario Mendonca: Sort of similar question to what Gabe just asked on acquisitions. There's plenty of speculation that BMO is actively looking to make an acquisition in the U.S. banking. And I know it's difficult for you to comment on that speculation because that would be a speculation, but perhaps you could speak to this. If BMO were to do a deal in the U.S., would you sacrifice that ROE target of 12%, at least for a few years, for the benefit of that increased scale? Darryl White: Yes. Okay. So it's Darryl, Mario. Thanks, Gabe, for the question as well. We rolled into the next one pretty quickly. So it's fine. I'll pair them together. The short answer to Mario's question is no, and absolutely no. So let me step back and give you a little bit of color behind that. I think we've been pretty clear about how we think about capital deployment and achieving the ROE targets is the top imperative across the bank and in U.S. banking. So every decision that we make is evaluated through that lens. Will it support the ROE improvement and sustainable profitable growth or not? That applies to an organic growth decision and it applies to M&A decisions as well. I've also said before good management teams always have their M&A antenna up. But equally, you got to be really disciplined. And we would only take a hard look at anything that met both the strategic and the ROE objectives. We've discussed a lot about how we're optimizing the redeployment in the United States. You saw it in my comments. You saw it in our new slide. You heard from Aron just now. The reinvestment is targeted at densifying and building local scale in markets where we think we're positioned to compete and win. So that's a really important point when you think about your question. Is there a tuck-in opportunity in those markets that would enable us to continue our ROE journey and not slow it down. In fact, if it would accelerate it, might we look at it? Sure. But if it doesn't meet those criteria, both strategically and financially, we're not on. Our #1 priority is to grow organically, and we're confident we could do that and reach those objectives with or without M&A. Mario Mendonca: Okay. And I need one quick clarification on the restructuring. Is that a number you're leaving in the core number? Or are you going to take that out and adjust that for it? It sounds like you're leaving it in, but some clarification? Tayfun Tuzun: Yes. We are leaving it in. We've always -- yes, we -- our record is that we typically leave it in. Operator: Our last question comes from Darko Mihelic from RBC. Darko Mihelic: I have a 2-part question. Just the first part of this is just a clarification on the corporate segment. Can you just speak to what it was that you did in the quarter that had this segment do much better than the typical loss? And importantly for me is just whatever was done in there, it doesn't seem like it has any kind of impact on the tractoring or anything like that? That's just the most important part of the answer to that. And the second part of my question is completely unrelated to -- with the disclosure you provided, Piyush, one of the things that -- on NBFI, one of the things I just want to confirm with you is you mentioned in your remarks that the -- there's no losses, so to speak, in a significant part of this book. And I guess, where I am with that is, were there losses in the other parts of the book and specifically, Piyush, I'm very interested in understanding if any part of this NBFI lending contributed to the higher losses we saw in '24 and to some extent '25? Tayfun Tuzun: So I'll begin with the first question, Darko. We have not done anything unique this quarter. So if you're asking, like, have you triggered something on your latter investments, et cetera, that resulted in outperformance? No. I think sometimes, we will have quarters when we may have some gains and that go to corporate services. We are doing a very good job in managing the overall liquidity and the low-yielding asset balances, which typically contributes to revenues in corporate services. And it's reflected in our margin improvement as well. As you can see, I mean, we've done a very good job in managing the margin. But there is nothing unique to the quarter. In some quarters, it happens to be higher. Some quarters, it tends to be lower. But there's nothing that we triggered caused this outcome. Piyush Agrawal: Okay. Let me Darko -- it's Piyush, let me talk to the NBFI. So the NBFI sector, you've disclosed information as you saw in the appendix. It's a big part of our business. It's a very profitable part of our business, very high returns. The big piece, as you saw is our equity subscription lines, 50% of it. We've been in this for a long time. I think you understand this business well. Over 99% almost is investment grade, and it's at the epicenter of a one client business of how we take this exposure and have multiproduct relationships across TPS, across wealth, across capital markets. In the other pieces, again, it's an amalgamation of many forms of clients, but it's well secured, well structured. Over 10 years, I would tell you, the loss rate is one basis point, and some of that came from what we've disclosed 2 years ago in the insurance sector. It's not a typical NBFI segment, but depending on how the nomenclature is, we have included insurance as well. So it's a high-performing, high investment grade, very, very low gross impaired loans. So what I would leave you with is, well secured, well structured, managed by dedicated teams and specialized underwriting criteria. Operator: Our next question comes from Ebrahim Poonawala from Bank of America. Ebrahim Poonawala: So I guess, Tayfun for you, as we think about the regulatory changes in the U.S., the SLR change, et cetera, does that -- any of that actually impact how you think about the capital levels within BMO's U.S. bank or the holding company? Like could any of that change? And I'm just wondering, as we think about the path to the 12% ROE, is there an element of capital flex that we may be underappreciating, especially in light of what seems like we could have a pretty busy period of rule making in the U.S. around some of the capital requirements? Tayfun Tuzun: Yes. Good question. Our capital position in the U.S. today and in the coming quarters, we'll continue to be above our peers. So today, the FC has 13.75% CET1 capital. The bank has 14.73% capital. So those are very strong levels. And given our income accretion, they are expected to go up. There is nothing in our ROE outlook that would be achieved by a lower capital position in the U.S. We're currently continuing to keep that accretion. So any changes from a regulatory perspective potentially could give us more flexibility, but we're not baking that into our ROE outlook. Our desire is to continue to utilize that capital supporting our balance sheet growth. Ebrahim Poonawala: Got it. And if I could follow up, maybe, Darryl, for you, given just how frequently bank M&A comes up with any conversation on BMO. One, why would you not want to do a deal in a world with the regulatory backdrop and wide open, you have excess capital. I'm assuming you could deploy some of that U.S. capital in a deal, I get it needs to meet the financial hurdles, but we didn't scale and -- scale be the way to go when you think about density, regional scale a priority for you? Darryl White: Okay. Ebrahim, thanks for the question. Look, the first thing is we don't -- we don't think about M&A timing regulatory environment, timing windows. You've seen us do deals in different administrations, and you've seen us do it through different macro environments as well. It's all about whether we have something that fits both strategically and financially, and I've reemphasized on this call the discipline that we're applying to that. And so I'll just come back to my question -- my answer earlier when I say that the focus is on densification and regional scale in markets where we can win. We have a really good strategy that Aron is leading in terms of making sure we have the highest probability of climbing up that ROE curve as fast as possible in the U.S. organically. And right now, that's job one. If something comes along that fits in the tuck-in category where we can accelerate that and not slow it down, yes, we'll have a good look. Otherwise, we've got other things to do. Operator: We have no further questions. I would like to turn the call back over to Darryl White for closing remarks. Darryl White: Okay. Thanks, everyone, for your questions this morning. I'll just wrap up by saying we had a really strong 2025, and we're well positioned for the year ahead. As I think about today's call, I'm reminding all of us that we're laser-focused on achieving our ROE imperative as quickly as possible and delivering earnings growth at the same time. And we'll share more on those plans and our outcomes at our Investor Day in March. Before closing the call, I want to acknowledge the contributions of our CFO, Tayfun, on his last quarterly call before retiring at the end of the year. Over the course of the last 5 years, he has served as an exceptional CFO, executive committee member and trusted adviser, and he has had a tremendous impact on BMO's growth trajectory, strategy and ambition to win. He's taken significant personal initiative to develop the next generation of leaders and strengthen the future of the bank. Tayfun, thank you for your leadership. And with that, I wish everybody a happy holiday season and look forward to speaking to you again in the New Year. Operator: This concludes the BMO Financial Group's Q4 2025 Earnings Release and Conference Call. Thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Addex Therapeutics Third Quarter 2025 Financial Results and Corporate Update Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Tim Dyer, CEO. Please go ahead. Timothy Dyer: Thank you. Hello, everyone. I'd like to thank you all for attending our third quarter 2025 financial results conference call. I'm here with Misha Kalinichev, our Head of Translational Science, who will be providing an update on our R&D programs. I draw your attention to the press release and the financial statements issued earlier today, which are available on our website. I also draw your attention to our disclaimers. We will be making certain forward-looking statements that are based on the knowledge we have today. I will start this conference call by giving a quick overview of our recent activities and achievements before reviewing our pipeline. I will then hand over to Misha, who will review in more detail our dipraglurant post-stroke recovery program and GABAB PAM preclinical program for cough. I will then review our Q3 2025 financial results. Following that, we will open the call for Q&A. The third quarter of 2025 has seen several important achievements across our pipeline. We've made excellent progress in our GABAB PAM program. We continue to complete preclinical characterization of our selected compound. We've also selected a backup compound for this important program. As a reminder, our partner, Indivior, successfully completed IND-enabling studies with their selected drug candidate for substance use disorders. Under the terms of the agreement, Addex is eligible for payments of up to USD 330 million on successful achievement of prespecified regulatory clinical and commercial milestones as well as tiered royalties on the level of net sales from high single digits up to low double digits. Also under the terms of the agreement, we have the right to select compounds for development in a predefined list of reserved indications. As mentioned, we have selected a compound and are advancing its development for chronic cough. We have repositioned dipraglurant, our mGlu5 negative allosteric modulator for brain injury recovery and have made good progress in preparing the program for clinical studies. As a reminder, earlier this year, we entered into an option agreement, giving us access to an exclusive license to intellectual property covering the use of mGlu5 inhibitors in this interesting therapeutic indication. Included in this agreement is a research collaboration in which we are working with Sinntaxis and the University of Lund to complete preclinical profiling of dipraglurant and prepare the clinical studies. Our spin-out company, Neurosterix is making excellent progress in advancing its portfolio of preclinical programs, including a potentially best-in-class M4 PAM schizophrenia. In June, we invested in Stalicla, a private clinical stage neurodevelopmental disorders focused company. Stalicla has developed a proprietary precision medicine patient stratification technology platform, which allows the company to select patients based on the biological dysregulation rather than behavioral phenotype. Proof-of-concept platform has been demonstrated by applying the technologies to identify and develop drugs in subpopulations of patients suffering from autism spectrum disorders. Stalicla has made excellent progress in advancing its patient stratification study in autism as well as advancing discussions with pharma to apply its technology more broadly in neuropsychiatric disorders. We completed the third quarter with CHF 2.2 million of cash, which provides us with a cash runway through mid-2026. I'd like to highlight that the cash burn has been significantly reduced following the Neurosterix spinout transaction; however, current cash does not fund progression of our unpartnered programs into the clinic. Now for a quick review of our pipeline. We continue to believe in dipraglurant and are executing our plans to reposition the development of brain injury recovery. As mentioned, our partner, Indivior has selected the GABAB PAM drug candidate for development in substance use disorders and we successfully completed IND-enabling studies. We are advancing an independent GABAB PAM program for chronic cough and are ready to start IND-enabling studies subject to securing financing. Neurosterix made excellent progress advancing its pipeline, including completing IND-enabling studies for their M4 PAM program. Program is on track to dose patients this year, and we expect to be able to announce further progress in the coming months. Now I will hand over to Misha, who will give you some more details about our exciting portfolio. Mikhail Kalinichev: Thanks, Tim. Hello, everyone. I will start by speaking about dipraglurant and our plans for development in brain injury recovery. Dipraglurant is an orally available, highly selective mGlu5 negative allosteric modulator, which we believe could improve the outcome of rehabilitation for patients suffering from traumatic brain injury or stroke. The mechanism of action of dipraglurant targets neuroplasticity early in rehabilitation to promote rebuilding of neuronal connections and sensory motor recovery. There is large unmet medical need in post-stroke recovery and rehabilitation. Stroke is among leading causes of chronic often lifelong disability as it leads to motor, sensory, cognitive impairment and multiple comorbidities. There are over 100 million stroke survivors worldwide, and the number is growing at the annual rate of 12 million. A variety of rehabilitation therapies are used with post-stroke patients, but the recovery is slow and often inadequate. There is an urgent need for pharmacological agents that can promote the recovery stimulated by rehabilitation therapy. mGlu5 receptor is a suitable target to address post-stroke recovery as it is densely expressed in the brain, involved in neuroplasticity and modulates excitatory-inhibitory equilibrium. In fact, activation of mGlu5 has been observed in a range of neurological disorders, including stroke, where it plays a role in maladaptive rewiring of the brain following stroke. Inhibition of mGlu5, on the other hand, can facilitate adaptive rewiring of the brain, promoting neuroplasticity and creating of new functional pathways moving the neural network towards the pre-lesion state. Exciting new evidence recently published in the Journal Brain suggests that the negative allosteric modulator of mGlu5, MPEP administered daily in rats following stroke results in a sustained and growing improvement in sensory motor function in comparison to vehicle treatment. Similar improvement in sensory motor function was observed in animals treated with our mGlu5 NAM dipraglurant. MRI imaging of the resting state functional connectivity in post-stroke rodents shows that daily administration of MTEP also stimulates intra and interhemispheric connectivity in the brain disrupted by stroke. It is important to note that improvement in brain connectivity after stroke is known to correlate with functional recovery and is observed across species. Dipraglurant is ideally suited to be used in tandem with rehabilitation therapies in post-stroke patients as it has a fast onset of action and short half-life. It has shown good tolerability in healthy subjects and in Parkinsonian patients showing only mild to moderate CNS-related adverse events. We have a drug product ready and a strong patent position and believe dipraglurant can become a first-in-class drug to facilitate post-stroke recovery. We can also speculate that dipraglurant-mediated adaptive rewiring and facilitation of recovery following brain damage would also be seen in traumatic brain injury patients. Let me now turn to GABAB program and the exciting opportunity that it offers to the chronic cough patients. There is a strong rationale for developing GABAB PAM for chronic cough. Chronic cough is a persistent cough that lasts for more than 8 weeks and can be caused by a variety of factors, including respiratory infections, asthma, allergies and acid reflux, but also by cough hypersensitivity syndrome. There is a large unmet medical need in novel antitussive drugs as current standards of care are ineffective in 30% of patients and only moderately effective in up to 60% of patients. In addition, the current treatments carry risks of serious side effects. Support for using GABAB positive allosteric modulators in treatment of chronic cough comes from the clinical evidence that baclofen GABAB agonist is used off-label in cough patients and from the anatomical evidence that GABAB receptors are strongly expressed in airways and in the neuronal pathway regulating cough. Therefore, we believe that GABAB PAMs could offer superior efficacy in cough patients. The pre-IND activities, including in vivo proof-of-concept studies, non-GLP tox and CMC have been completed. Our clinical candidate has shown favorable efficacy, tolerability and developability profiles. The compound has demonstrated a consistent minimum effective dose of 1 mg per kg and ED50 of 6 mg per kg in models of cough in vivo. No signs of tolerance were seen after subchronic dosing and more than 60-fold safety margin was demonstrated based on respiratory depression, a sedation biomarker. The IND-enabling studies are planned and ready to start subject to securing financing. In the model of citric acid-induced cough guinea pig, acutely administered compound A delivered a robust antitussive efficacy, reducing the cough number dose dependently and achieving 70% reductions at the maximal doses. The antitussive profile of compound A was similar to that of nalbuphine, Orvepitant, Baclofen, and Codeine. Compound A increased the latency to first cough dose dependently, thus delaying the onset of cough. The antitussive profile of compound A in delaying cough onset was similar or better than that of reference drugs. In the same experiment, compound A appeared well tolerated as there were no marked changes in respiratory rate at up to 60 mg per kg. In contrast, Nalbuphine, Orvepitant, Baclofen, and Codeine resulted in robust reductions in respiratory rate at their highest doses, indicative of sedative-like effects. When evaluation of the antitussive efficacy across compounds was done at the respective high doses free from respiratory effects, compound A was shown to be superior to Nalbuphine, Orvepitant, Baclofen, and Codeine in both cough number and cough latency measures. In the model of ATP potentiated citric acid cough in guinea pig in a head-to-head comparison experiment, acutely administered compound A exhibited a trend of better efficacy and potency in comparison to that of P2X3 inhibitor while showing signs of similar tolerability. In summary, we have selected a clinical candidate for chronic cough with a robust reproducible antitussive efficacy of 1 mg per kg and good PK/PD. The compound has the potential to have the best-in-class efficacy and tolerability profile and broad application in cough patients. The compound showed a favorable developability profile in non-GLP tox studies performed in rats, dogs and nonhuman primates. Subject to raising financing, we are ready to start the IND-enabling studies. This concludes our prepared remarks on the progress of our R&D. Now I'll hand it back to Tim. Timothy Dyer: Thanks, Misha. Now for a review of the Q3 2025 financials. Starting with the income statement. Income in Q3 2025 remains similar to our income in Q3 of 2024 and amounted to CHF 0.1 million, which is mainly related to the maintenance of patents licensed to Indivior, which they are funding and to the fair value of services received from Neurosterix Group at 0 cost. R&D expenses of CHF 0.2 million in Q3 2025 are primarily related to our GABAB PAM program remain similar to Q3 2024. G&A expenses of CHF 0.5 million in Q3 2025 remained stable compared to Q3 2024. As a reminder, we are accounting for our investment in Neurosterix using the equity method of accounting and therefore, recognized our share of the net loss of CHF 0.9 million for Q3 2025, which is similar to the amount for Q3 2024. Now to the balance sheet. Our assets are primarily held in cash, and we completed Q3 2025 with CHF 2.2 million of cash held in Swiss francs and U.S. dollars. Other current assets amounted to CHF 0.2 million, primarily related to prepaid R&D and G&A costs. Our noncurrent assets of CHF 5 million as of September 30, 2025, primarily related to our 20% equity interest in Neurosterix Group recorded on the balance sheet under the equity method of accounting for associates and also, to a lesser extent, our investment in Stalicla. Current liabilities of CHF 1.2 million at the end of September increased by CHF 0.4 million compared to December 31, 2024. This is primarily due to increased payables related to professional services. Noncurrent liabilities of CHF 0.2 million at the end of Q3 are consistent with amounts at the end of December of 2024 and primarily attributable to retirement benefit obligations. Now to summarize, we've made excellent progress in advancing our GABAB PAM program for cough and our dipraglurant post-stroke recovery program. Our spin-out company, Neurosterix continues to advance its portfolio with the M4 PAM program set to start Phase I this year. We are very pleased to be -- by the progress Stalicla is making advancing its business strategy and pipeline. We're looking forward to completing our evaluation of potential indications for our mGlu2 PAM program, which we received back from J&J and continuing to advance our portfolio towards clinical studies. This concludes the presentation, and we will now open the call for questions. Operator: [Operator Instructions] And now we take our first question -- and it comes from the line of Ram Selvaraju from H.C. Wainwright. Raghuram Selvaraju: Four quick ones. Firstly, I was wondering if you could comment on the commercial outlook for a potential therapeutic intervention in chronic refractory cough, particularly in the context of the fact that gefapixant doesn't appear to now be a factor in the United States market. Secondly, I wanted to ask about ultimately, what you expect the next funding catalyst for Stalicla to be and what the outlook might be for Stalicla to pursue a path to a public listing, if that's something you can comment on at this time. Thirdly, I wanted to see if you could give us some context around competitive clinical development in the post-stroke recovery space, particularly as this pertains to CCR5 receptor modulators and especially the ongoing clinical programs with maraviroc, which was originally approved as an anti-HIV medication. And if you could perhaps give us a sense of how those trials, particularly the CAMAROS trial might provide important learnings for future development of a candidate in post-stroke recovery like dipraglurant. And lastly, maybe you can give us a sense of what Indivior is looking for next in your ongoing collaboration and what catalysts you expect over the course of 2026? Timothy Dyer: Okay. Yes. So the first question regarding the commercial outlook in cough. You're absolutely right. Gefapixant seems not to be doing particularly well. I think -- I mean, there are a number -- well, first of all, it's not registered in the U.S. I mean one of the reasons that Camlipixant was acquired by GSK when GSK acquired BELLUS for CHF 2 billion is because it seems to not have the same taste disturbance issues that Gefapixant had. And we understand that data from the Phase III with Camlipixant is coming out in the coming months. We have done some commercial assessments on cough. We haven't actually disclosed our position on how we see the commercial opportunity. However, we still see it as a significant unmet medical need. We know from our discussions with KOLs that baclofen is efficacious in cough patients. And the only reason it's not being used more widely. It's a drug that has to be dosed about 5 times a day. And the efficacious dose is sedative. So patients can't drive their cars. And therefore, it's really a last resort. What we've also heard from KOLs that we're working with is that up to 50% of cough patients who take P2X3 inhibitors or gefapixant are discontinuing treatment or nonresponding. We haven't got any breakout of the nonresponders versus the ones that discontinue due to the disturbance. So that's question one. Misha, would you like to add anything to that? Mikhail Kalinichev: Yes. I just wanted to mention that recent evaluation of responders to gefapixant shows that there are up to 50% of patients that have no benefit from this mechanism, which is higher than was initially predicted, which was around 30%. It's not surprising considering that P2X3 inhibitor really captures only single mechanism, peripheral mechanism that is responsible for chronic cough. There are multiple other peripheral mechanisms leading to chronic cough. And importantly, there are central mechanisms that remain to be addressed. And the advantage of the approach that we are taking is that centrally acting GABAB PAM will be able to address needs of all these patients. Timothy Dyer: So on to the question too about Stalicla. Yes. So we're very happy with the progress that Stalicla is making. I mean they are -- they're continuing to execute on their warehousing study. So they are recruiting nonpharmacological intervention study, but they're recruiting patients in order to stratify them into the different phenotypes that they've identified. And these patients are sort of been warehoused ready for the pharmacological intervention studies. And -- regarding the fundraising, they are currently working on a private company. I think it's well understood that they are working on a Series C financing. This financing is to fund 2 clinical program, Phase II clinical studies for 2 subpopulations within autism spectrum disorders. They are also in parallel working on out-licensing an asset that they in-licensed from Novartis. This is mavoglurant, an mGlu5 -- most advanced mGlu5 negative allosteric modulator, which has shown excellent data in a Phase II study for cocaine use disorder. I know that they are getting some traction from various pharma parties around the out-licensing of that. So I think one of these activities or both, we're hoping will occur. Now the question regarding IPO. I mean, private companies are always staying close to the idea of IPOs, especially if there's a strong need for capital, given the current warming up of the market, I'm aware that Stalicla is certainly looking at this as a potential funding mechanism. So that's number two. Number three, regarding stroke, thank you very much for raising the topic of the CAMAROS trial with [indiscernible]. Two weeks ago, we were actually in Sweden discussing with our partner, Sinntaxis, Lund University, and we had the pleasure of meeting the lead investigator, Sean Dukelow, who is leading that study, and we are certainly planning to collaborate with him and others that are involved in that study and there's a lot of learnings from that study that we can certainly benefit from when planning the study of dipraglurant. And Misha, would you like to add? Mikhail Kalinichev: Yes, happy to follow up this topic. Of course, we follow this story since it was first shared by the Science magazine a few years back and then a series of very elegant experiments published in the [ cell ] journal and now a clinical trial. We follow this with interest and excitement. We believe that it shows that there is a potential for improvement in post-stroke recovery via adding a pharmacological agent exactly as we proposed with mGlu5. We are not surprised as there are multiple overlapping and redundant mechanisms in the brain and identifying yet another mechanism that follows very similar path kind of supports our hypothesis. Very much like mGlu5, CCR5 is upregulated after stroke. Its inhibition in the animal either genetically or pharmacologically facilitates recovery exactly like what happens with mGlu5. Both receptors are GPCRs. And both receptors are upregulated after stroke. So there are multiple parallels, and we are very excited. For sure, there will be many learnings for us at the end of this CAMAROS clinical trial, in particular, to understand how one can address sensory versus motor recovery readouts and the CAMAROS study is heavily leaning towards more motor. And in our discussion with clinical experts, we will put as much emphasis on sensory readouts as the motor ones. So for sure, there's a lot to learn, but we are very much in tune with this approach and looking forward to the outcome of this clinical trial. Timothy Dyer: Thanks. So on to the fourth question regarding Indivior. I mean Indivior, as I said, they've successfully completed the IND-enabling studies, and they are currently preparing to move the program forward. Unfortunately, I cannot give any more information on that at this stage. But again, we are still happy with the progress they are making to move the study forward. Are there any other questions? Operator: [Operator Instructions] Thank you, ladies and gentlemen. This brings the main part of our conference to a close. And I would now like to hand the conference back to Tim Dyer for closing remarks. Timothy Dyer: So I'd like to thank you all for attending, and we look forward to speaking to you again soon. I wish you all a great day. Operator: This concludes today's conference call. Thank you for participating. You may now all disconnect.
Operator: Greetings. Welcome to Build-A-Bear Workshop, Inc. Third Quarter 2025 Earnings Call. Please note this conference is being recorded. I would now like to turn the conference over to Gary Schnierow with Investor Relations. Thank you. You may begin. Gary Schnierow: Thank you. Good morning, everyone, and welcome to Build-A-Bear Workshop, Inc.'s third quarter 2025 earnings conference call. With us today are Sharon Price John, Build-A-Bear Workshop, Inc.'s Chief Executive Officer, Christopher Hurt, Chief Operating Officer, and Voin Todorovic, Chief Financial Officer. During this call, we will refer to forward-looking statements that are subject to risks and uncertainties. Actual results could differ materially. Please refer to our forms 10-K and 10-Q, including the risk factors section. We undertake no obligation to update any forward-looking statement. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website. And now I'll turn the call over to Sharon Price John. Sharon Price John: Thank you, Gary. Good morning, and thanks for joining us for Build-A-Bear Workshop, Inc.'s third quarter fiscal 2025 earnings call. Today, I would like to begin by thanking the entire team for continuing to drive our positive momentum from the first half to deliver year-to-date record revenue and pretax income. Results that reflect the many strategic and operational advancements we have been systematically executing over the past few years. Solid third quarter results coupled with the consistency of the underlying fundamentals give us confidence in reaffirming our full-year guidance inclusive of ongoing tariff headwinds. Based on this guidance, Build-A-Bear Workshop, Inc. is positioned to deliver fiscal 2025 revenue of over half a billion dollars for the first time in the company's history. We believe our year-to-date results and positive outlook underscore the resilience of our evolved and diversified business model. Even as we navigate a challenging macro environment, we remain on track to deliver top-tier store contribution margins for the fifth consecutive year while our asset-light commercial segment is expected to achieve its fourth straight year of growth exceeding 20%. This strong performance reflects our continued efforts to monetize the power, positioning, and equity of the Build-A-Bear Workshop, Inc. brand such as leveraging our multigenerational appeal to expand the addressable market, with teens and adults now representing about 40% of sales. Opening unique experiential retail concepts, new cobranded locations, and scaling through initiatives designed to go beyond our workshop. Like our new mini bins collection. Simply put, we're building on the brand's iconic status to reach more people in more places with more types of products for more occasions. Specifically for the quarter, revenue grew nearly 3% to almost $123 million and pretax income declined $2 million to nearly $11 million, inclusive of about a $4 million negative tariff impact. For the first nine months, revenue grew more than 8% to over $375 million and pretax income increased by 15% to almost $46 million, inclusive of about $5 million in a negative tariff impact. We also returned more than $26 million to shareholders through dividends as well as buybacks, which contributed to more than 24% EPS growth for the first three quarters of the fiscal year. Overall, shareholders have received over $160 million since the beginning of fiscal 2021. If we look toward the final, and most impactful quarter of the year, our primary focus remains on delivering strong 2025 results. At the same time, we continue to advance the long-term strategic initiative that positions us for future success. As a reminder, these priorities have remained consistent over the last few years and include one, expanding and evolving our experiential retail footprint, two, advancing our comprehensive digital transformation, and three, leveraging the powerful equity of the Build-A-Bear Workshop, Inc. brand beyond our workshop while continuing to return capital to shareholders. Now Christopher Hurt, Build-A-Bear Workshop, Inc.'s Chief Operations Officer, who has been an instrumental part of delivering our positive results over the past decade, will share more on expanding our retail footprint. Christopher Hurt: Thanks, Sharon. We remain committed to bringing our signature workshop experience, the cornerstone of the Build-A-Bear Workshop, Inc. brand, into new markets through a mix of our corporately managed, partner-operated, and franchise business model. This quarter, we made significant progress adding 24 net new experience locations with 70% of those openings outside the United States, bringing our total locations to 651 and extending our reach to 33 countries, underscoring the global appeal of our brand. We also expanded our corporately operated business model in North America with seven new stores, including three in Canada, three in the greater metro areas of New York and Atlanta, plus a return to Puerto Rico in the highly popular Plaza Las Americas mall, where the store opening was well met with tremendous fanfare, as our guests were excited to once again engage with the Build-A-Bear Workshop, Inc. brand. These openings, varying in size and format, reinforce our commitment to high-return opportunities in new markets. Our international partners and franchisees continue to drive growth and expansion with new locations in Colombia, Denmark, Finland, Mexico, New Zealand, Panama, Qatar, South Africa, Sweden, and The UAE. This expansion by our international partners and franchisees further demonstrates the scalability of the brand and our ability to continue to grow our international presence. We ended the quarter with 375 corporately managed stores, 108 franchise locations, and 168 partner-operated locations. Since 2023, we have doubled the number of asset-light partner-operated locations, which now represents more than 25% of our total units. An emphasis on optimizing operations during the busy holiday season, we opened the vast majority of our planned expansion through the first nine months and remain on track to achieve our guidance of at least 60 net new locations this year. We are also excited to share that after a decade, the Build-A-Bear Workshop, Inc. brand reentered Germany in the first part of the fourth quarter with one of our existing European partners, InnerSource. With locations now open in Berlin and Frankfurt, these openings were a tremendous success as guests were thrilled to once again experience the brand in their home market. Additional locations are planned for later in the quarter. This marks another important step in our overall European growth strategy and further strengthens our global footprint by demonstrating international scalability. As a reminder, we opened the first Build-A-Bear Hello Kitty and Friends Workshop in the popular Century City Mall in Los Angeles in November 2024, and it quickly became a successful destination for devoted Sanrio fans, collectors, families, kids of all ages, and even Hello Kitty herself. This one-of-a-kind collaboration made it clear that the experience deserved a broader presence, especially in unique places that attract millions of visitors both domestically and from around the world. As announced this morning, we are expanding the Build-A-Bear Hello Kitty and Friends workshop concept with corporately managed stores opening in early 2026 at two premier malls, American Dream, just outside New York City, and Mall of America in Minneapolis. These cobranded experiential stores will complement our already established Build-A-Bear Workshop at both shopping destinations. As new Build-A-Bear Workshop experience locations open around the globe, we are not only expanding our reach, adding a little more heart to life in more places for more people, positioning Build-A-Bear Workshop, Inc. for sustained global growth. Sharon Price John: Thank you, Chris. Our workshops and the emotional, memorable experiences they provide remain at the heart of the Build-A-Bear Workshop, Inc. brand. And we're excited about continuing the expansion of our global footprint, especially through our asset-light partner-operated model, which we believe offers a meaningful runway as we bring the Build-A-Bear Workshop, Inc. experience to more markets and consumers around the world. As part of our digital transformation objective, which is focused on driving omnichannel growth, we recently appointed Carmen Flores as the Senior Vice President of Ecommerce and Digital Experiences. Carmen, a seasoned executive having led digital evolution at companies like Mont Blanc and The Lego Group, will partner closely with our brand and technology team to strengthen consumer engagement to drive our digital business through more personalized, seamless interactions powered by technology and AI. Because we know that some of our visitors come to buildabear.com to transact, while others come to find a store and plan a visit, we believe the real unlock for the concept of e-commerce at Build-A-Bear Workshop, Inc. is striking the right balance between e-commerce and e-communication. Over the past few years, we have built a strong infrastructure. And the next step is leveraging it through our people and processes to monetize that investment fully. Our third area is capitalizing on opportunities that leverage our thirty years of multigenerational brand equity for incremental growth. On top of our experience location expansion that Chris discussed, one example of this effort is represented by PreStuffed branded plush that can be sold outside of our workshops in a wide variety of retail environments. While we originally launched our proprietary mini beans in Build-A-Bear Workshop, Inc. as a pilot project, given that we are now approaching 3 million units sold with over 60% growth in the third quarter alone, we believe this highlights the opportunity to drive broader global reach of the brand through thousands of additional points of sale beyond the workshop. In fact, mini beans distribution has already expanded into a number of independent retailers. Specific third quarter highlights include our strong Halloween collection, featuring a new fan favorite poseable bat, that generated over 3 million social views, raising awareness of the entire Halloween offering. You may recall that 2024 had been our best-selling Halloween assortment on record. But we're pleased to share that we saw a double-digit increase in 2025, likely driven by the continued macro interest in the holiday but also from our strong seasonal offering, including our exclusive Hello Kitty and Friends cobranded Halloween characters, further solidifying the power of that special relationship. Separately, on September 9, once again, we positioned Build-A-Bear Workshop, Inc. as the celebrated centerpiece of National Teddy Bear Day, delivering record results on top of all of those fuzzy hugs during a special acknowledgment of the importance of stuffed animals. From a fourth quarter to date perspective, we're pleased to share that we delivered the best Black Friday in the company's history, with momentum improving after a slowdown at the end of the third quarter in October. While some of this shift may reflect external factors, we believe our holiday merchandising and marketing efforts have played a key role in driving our stronger conversion and higher dollars per transaction so far in the quarter. Turning to the holiday strategy, this season, we are offering fun trend animals like gingerbread ocelotls, classics like our timeless teddy and Santa gear, stocking stuffers, including our all-important gift cards, which are key to driving January traffic and sales, seasonal mini beans, and new on-trend bag charms inspired by some of our historical bestsellers. And as always, we are reinforcing Build-A-Bear Workshop, Inc. as an experiential destination. A big part of this strategy is being seen as a part of our guest holiday tradition. That is why our core messaging leverages our centerpiece Merry Mission animated feature film, which this year, celebrates the tenth anniversary of GLSEN, the magical snow deer and heroine of the movie with a limited edition version that really lights up. In closing, it's been a delight to be here in Manhattan this week participating in Giving Tuesday with our value partner, Salesforce and First Book, alongside the Build-A-Bear Foundation to provide books and bears to kids in need. This week's events culminate with today's earnings call from the New York Stock Exchange, where we'll also take part in the annual tree lighting ceremony this evening. Without a doubt, I feel a genuine sense of pride and gratitude for this remarkable organization, our partners, our board, shareholders, and amazing guests around the world, who not only enable us but also share in our mission to add a little more heart to life. And with that, I'll turn the call over to Voin Todorovic. Thank you, Sharon. Voin Todorovic: And good morning, everyone. I will discuss the quarterly results and then share more about our full-year outlook. We achieved the highest revenue in the company's history for both the third quarter and the first nine months of the year. This was also the highest pretax income for the first nine months. And absent the impact of tariffs, it would have also been a record for third quarter pretax income. These results underscore the durability of our evolved business model and the effectiveness of the strategic initiatives that we have implemented over the past several years. Moving to a more detailed review of our third quarter results. Total revenues were $122.7 million, an increase of 2.7%. As a reminder, this was on top of 11% growth last year. Net retail sales were $112.3 million, an increase of 2.5%. Looking at our direct-to-consumer sales in more detail, we saw solid performance in August and September, followed by a decline in October around the time of the government shutdown. As Sharon mentioned, the fourth quarter to date has shown a positive rebound from October. The quarter overall, store sales were up with a slight transaction decrease driven by a 1% decline in traffic. October also faced a tougher comparison due to a new license introduction last year that benefited traffic. The quarter, domestic store traffic outperformed the national benchmark. Also, dollars per transaction were up. As selected price increases and product mix contributed to higher average unit retail prices. Ecommerce demand declined 10.8% primarily due to challenging comparison driven by strong licensed product plus last year. Timing of web launches also shifted revenue between quarters and as such, on a year-to-date basis, ecommerce demand is down less than 1%. Commercial revenue which primarily represents wholesale sales to our partner operators. Grew 4.2% for the quarter. The timing of shipments negatively impacted our third quarter. However, commercial revenue has increased 15.3% year to date. We continue to expect commercial revenue to grow by more than 20% for the year. Gross margin was 53.7%, a decline of 40 basis points compared to last year. Primarily reflecting the impact of tariffs. Tariffs and related costs reduced gross profit by about $4 million in the quarter. SG&A was $55.3 million or 45.1% of total revenues, compared to 43.3% last year. Higher store level compensation including medical benefits and higher minimum wage requirements, timing of marketing expenses, and general inflationary pressures contributed to the increase. Pretax income of $10.7 million was $2.4 million below last year's $13.1 million. Tariffs and associated costs reduced pretax income by about $4 million. EPS of 62¢ compared to 73¢ last year reflected lower pretax income, a slightly lower income tax rate, and a reduced share count. Although this quarter is the first, to be meaningfully impacted by tariffs, for the first nine months we deliver record revenues and profits resulting in over 24% EPS growth versus last year. We also remain committed to returning capital to shareholders. During the quarter, we returned $13 million through dividends and share repurchases. Bringing our year-to-date total to $26.1 million. We also maintain significant flexibility with about $70 million remaining under our board-approved repurchase authorization. Turning to the balance sheet. At third quarter end, cash and cash equivalents totaled $27.7 million compared to $29 million last year. The company finished the quarter with no borrowing under its revolving credit facility. Inventory at quarter end was $83.3 million. An increase of $12.5 million. The increase was driven by the accelerated purchases to mitigate contemplated changes in tariff rates. As well as the inclusion of tariffs into the cost of inventory. In addition, a portion of the increase was made to support the growth of our commercial segment. We remain comfortable in both the level and composition of our inventory. Which we believe positions us well to meet demand execute our growth strategy for the balance of the year. Turning to the outlook. We are reaffirming our full-year guidance as shared in our in today's press release. At the midpoint of our range, our annual revenue guidance implies about 2% growth in the fourth quarter. As you know, December has historically been the most significant month of the quarter and the year for Build-A-Bear Workshop, Inc. We also continue to expect our commercial segment to grow by more than 20% for the full year. Which implies at least 30% growth in the fourth quarter. Turning to our pretax income guidance. The midpoint implies about $20 million in fourth quarter pretax income. As a reminder, we guided to less than $11 million in tariffs impact for the year. For the first nine months, we recognized about $1 million in the second quarter and roughly $4 million in the third quarter. Which implies a remaining tariff impact of less than $6 million for the last quarter of the year. It is important to note that tariff impact in 2025 reflects only the last seven months of the fiscal year. Additionally, as previously mentioned on our last call, our pretax guidance continues to include approximately $5 million in additional medical and labor costs. Of note, these costs collectively represent a headwind of almost $16 million for the year. In closing, we are pleased with our strong year-to-date performance. As we look ahead our focus remains on executing the company's strategic objectives of expanding the global footprint, accelerating the digital transformation, and leveraging our strong brand equity while delivering consistent value to shareholders through disciplined capital allocation. Finally, I want to extend my sincere thanks to our store and warehouse associates, corporate team members, and valued partners around the world. Their dedication and collaboration were instrumental in delivering a record first nine-month results. As we continue to be on track to achieve our fifth consecutive year of record results. This concludes our prepared remarks. We will now turn the call back over to the operator for questions. Operator? Operator: Thank you. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the queue. One moment while we poll for questions. Our first question is from Eric Beder with SCC Research. Please proceed. Eric Beder: Good morning. Sharon Price John: Hi, Eric. Good morning. Eric Beder: Hi. I'd like to button up on the tariff piece a little bit. So think if tariffs are about $10 million and a little bit of that was in Q2. When we think about next year, you know, what are the opportunities to use this? Because if I sit here and just kind of extrapolate it, so it's kinda, like, about $18 million in tariffs. Impact next year. How should we be thinking about this going forward? And your ability to start mitigating this even further? Voin Todorovic: I'll take that, Eric. Thank you for your question. As we mentioned on our call, yes, this year we had about seven months of tariff expenses. We believe that's gonna be less than $11 million total. For seven months. As we go into next year, even though we are not providing any guidance on 2026 at this point. There is gonna be additional months, you know, clearly, first five months of next year we'll have some tougher comparison because we are gonna be experiencing tariffs. We continue to work and find ways to mitigate some of the challenges that are caused by tariffs. Even as you've seen in our quarter, this in Q4, we had $4 million of negative tariff impact and our profits only declined at a smaller margin. So we continue to do things that are within our control. We are working with our partners in Asia to reduce our cost. We are looking at ways to selectively increase price where we can to mitigate the offset of this additional cost. We are managing things within our control, such as promotions and discounts, and that's part of the reason even in Q3, we are seeing, you know, a lesser negative impact of these tariffs on financials with our strong margin results. So there are things that we continue to do to manage from the margin perspective. As well as we are looking at things from the overall P&L perspective that are within our control to help mitigate some of those things that we are seeing. Now one of the positive things from the tariff perspective is the administration and that's like the Chinese rates will go from 30 to 20%, next year, so that will be a little bit of a benefit compared to the 30% that we had for a big part of this year. Sharon Price John: It's also important to realize that, of our strategic initiatives that we have implemented even prior to the tariff situation have been focused on the diversification of the company. And so as Chris noted in some of his comments, we're growing our store count outside the United States, which, you know, are not. For the large part impacted by the tariff situation. Eric Beder: Great. And I wanna talk about something we've been seeing in our store visits. So one of the things in 2025 has been kind of the I guess, diversification in pricing. In the sense that the mini beans continue to be a great part of the business, and they're about $9 to $10 right now. And on the flip side, we've also seen some higher-priced items expand such as the giant furry friends, and to your point about Glisten, and the Glisten is a limited edition, it's about all remember correctly, it's $100. You know, how where are you seeing kind of the gains from doing these pieces and how is this diversification? Is it bringing in the different customers to the business? And where should we be thinking about that going forward? Thank you. Sharon Price John: Yeah. Eric, I'll start. Yeah. I mean, we've talked about diversification across numerous fronts over the years. And rethinking beyond just what had been the standard approach to Build-A-Bear Workshop, Inc. because the brand equity is, in our opinion, and a research perspective, is bigger than just the location of Build-A-Bear Workshop, Inc. That's one thing. But the second piece of the diversification is not just the global aspect that I mentioned. But, yes, we have an enormous amount of opportunity we believe, from the multigenerational aspect, which I noted in my comments, 40% of our sales are to teens and adults. That often particularly when it is related to, license some of our key licensed products allows us a lot more pricing latitude. And then we have also had partnerships in the where we've been up in that $100 range before, like a Swarovski relationship that we have. But that latitude, both on the lower end and the higher end, does bring in different types of guests. And we reiterated that in that we believe that we have an opportunity to appeal to more people in more places for more products and more occasions. So while we have mini beans at $10, which are meant to be and, in fact, are manifesting themselves as a collectible, so people tend to buy more than one of those. So it's an and an individual is one is a $10 purchase, but the co you usually are buying more than one. But we also continue to offer at the lowest end our birthday treat there. So we have accessibility to consumers. But, you know, it is our offer we believe that it's an important aspect of our brand. To stretch the limits on, you know, what makes sense and what that is still valuable to the consumer. People love Glisten, so we wanted to try our own collectibles, this year, and our own special limited edition, and thus far, so good. Eric Beder: Okay. Good luck on the rest of the holiday season. Sharon Price John: Thanks, Eric. Operator: Our next question is from Greg Gibas with Northland Securities. Please proceed. Greg Gibas: Great. Good morning. Thanks for taking the questions. Wondering if you could speak to your promotional activity in the quarter. Was it something that you leaned into a little bit more? Or I guess maybe how would you say it compared year over year? Voin Todorovic: Well, actually, our promotional activity, we have been managing our discounts and promotional activity much more stringently. And, you know, we are actually seeing lower discount rate in the quarter as we have seen over the last couple of quarters. This is one of those things that we believe it's within our control, and this is one of the ways we are trying to help mitigate the impact of some of these additional costs that are outside of our control. And as a reminder, you know, over many years that we've been with the company, we have done tremendous job of expanding our merchandise margin, managing our margin cost. And being really focused on the experience and driving the overall ticket value versus really trying to drive growth to promotion. Our brand, you know, it's very unique in a way how we are positioned and people are coming to our stores to celebrate their special event. And, you know, we believe, you know, creating the best experience for them, and, you know, upselling and doing things to really enhance that experience is the way for us to both grow the business and deliver strong margin result. This goes in line, you know, as being a destination, and people are coming to celebrate these special events. And over the years, you know, we have we have done, in my opinion, doing a really job managing the margin and expanding over probably a thousand points over the last decade or so. Greg Gibas: Got it. That's very helpful. And I wanted to ask if you could share anything more about trends that you're seeing with mini bean sales and then, I guess, just overall demand with that product line. And I guess, know, progress with kind of new SKU introductions with that product line as well? Sharon Price John: Yeah. Well, we're really excited about mini beans for a number of reasons. And I did share in the comments that we were approaching 3 million in sales. And just in this last quarter, we saw a 60% increase. And we are now, and as I mentioned as well, in the early stages, but we're selling mini beans in different retailers outside of the workshop, but also do a lot of our partners where we have partner-operated relationships. So, you know, it's got the map head of a Build-A-Bear, but it's like a Great Wolf Lodge, for example. They offer so many also outside of the United States and some of our partnerships in Europe. But we see this as it's a we create variety with the mini beans. They are collectible. They are seasonal. We bring out new characters. Some of them are based on our favorites from the Build-A-Bear historical collection. We also bring out what we call takedowns of some of the seasonal products that we're doing, and people like to buy those together. But we're also just recently created things with partners. So we're starting to have mini beans with some of our licenses. Which has been extremely successful and very exciting. So Sanrio, as an example, which we mentioned a number of times, the prepared remarks, with Hello Kitty and Friends, just again a tremendous multidimensional partnership for us. Whether that's us creating seasonal products with them or mini beans with them or even new locations. With that partnership. It's been wonderful, and they have such great fans, and the fan base overlap tremendously with Build-A-Bear. So it makes a lot of sense. But we see mini beans as just, you know, it's a proof point in many ways of how we can extend beyond the make-your-own plush. And while we will never remove the destination aspect from the centerpiece in the heart of our company, it how people are often introduced to our brand, and it's where that halo effect comes from. It is important for us to recognize that there is potential beyond that. Greg Gibas: Yep. That's good to hear. Thanks very much, Sharon. And congrats on the Black Friday. Sharon Price John: Thank you. Operator: Our next question is from Steve Silver with Argus Research. Please proceed. Steve Silver: Thanks, operator, and thanks for taking my questions as well. I had a question about the tie-ins. I know you guys mentioned that you had a presence around the Wicked movie coming out which came out, like, right around Thanksgiving, which may have contributed to the strong results on Black Friday. But I'm just trying to get a sense as to, just broadly speaking, whenever Build-A-Bear Workshop, Inc. is involved with a high-profile movie launch and its high-end kind of thing, whether the sales that those products generate are really more concentrated around the launch of those movies or really what the tail looks like, for how long beyond the launch marketing tends to go, toward these products and how long the contributions extend. Sharon Price John: Yeah. Thank you. Yeah. So this is actually our second year of Wicked. We had Wicked with the original movie and because, you know, we knew as did many of the partners that that would be a two-year event. So successive years. So it's been great because Wicked was more successful than we expected in the first year, so we were able to prepare a little bit better for this year. And while it is, you know, the tremendous partnership, I really can't look at it and say that's the reason why we drove Black Friday or that's the reason why we're seeing the decreases. That our November trend is based on a much broader assortment than that. But, of course, all of these licenses and everything that we do to appeal to different consumer groups for different purposes and even start growth outside the United States is helpful in the achievement of those objectives in Black Friday. In fact, one of the interesting things about Black Friday is I believe, Eric mentioned earlier, is these jumbos. We had a really great we did do a promotion. We just walked through, like, last week, but we don't. But, I mean, clearly, you have to participate in what the consumer expects on a Black Friday, but very limited promotion on that on the in some ways to introduce people to the aspect of these jumbos, and that that was a big success for us for on Black Friday. But the tale to your question of licensed products particularly related to film, I'm gonna apologize upfront. It's so such a wide variety. They're almost like snowflakes. I mean, there isn't that much of a predictability on exactly how the consumer will react. Now we have a lot more information when it's a sequel like we did with Wicked because and that's an unknown entity. So that that one, we expect, you know, we have a little more latitude and those are a little more stretchy. But you literally you know, unless the film's a big hit, if it's an unknown it's you just you try to calculate and manage your risk on that. We do a pretty good job. Steve Silver: Okay. I appreciate the color. And one more if I may. It was a very interesting concept, the idea of expanding, to a second Build-A-Bear Workshop, Inc. location in these initial malls, I think you've mentioned, American Dream and Mall of America. So given the fact that those that would then have a multiple presence in some of these large malls, I'm curious as to whether, that plays into any leverage from Build-A-Bear Workshop, Inc. just in terms of lease terms given the existing presence and the contribution that Build-A-Bear Workshop, Inc. has making to some of these locations. Sharon Price John: Yeah. That's a great question. I mean, obviously, you know, the more revenue you're driving and the more foot traffic you participate or create with any of our great mall partners, you know, it does create another bullet point of communication and possible leverage if you wanna call it that. But, you know, our biggest, I would say, opportunity there is just continuing to work with these partners particularly given that 60, 70, up to 80% depending on how you can think about it or some of our research, of our guests are coming to Build-A-Bear Workshop, Inc. that happens to be in a mall. We're just coming to the mall and, like, stumbling into a Build-A-Bear Workshop, Inc. We that destination-driven marketing and the experience that we provide is now, you know, the hallmark of what most retailers are looking for. You know, we are often credited with being a pioneer in that space, and that's a big asset for us as an organization, as a company. And we realize that, and so do our partners. So, that's probably our largest contribution in many of the discussions that we have with malls is that we believe we're part of the solution, of, people returning to, in-person shopping and mall shopping and at as do our partners. So, which is why we are getting a second location. In two of the biggest, destination-based retail concepts in the United States. Steve Silver: Great. Sounds exciting. And best of luck as well for the rest of the holiday season. Operator: Thank you. As a reminder, it is star one on your keypad if you would like to ask a question. Our next question is from Keegan Cox with D. A. Davidson. Please proceed. Keegan Cox: Good morning. Voin Todorovic: Morning. Keegan Cox: Yeah. I was just curious on what you guys said with respect to the slowdown you saw with the government shutdown. I'm just wondering, did you see a trade down from your customer, like a mix shift towards, you know, lower price point products like mini beans? And then kinda continuing on that theme, how that spend shaped on, you know, kids versus kinda your adult customer. Voin Todorovic: Yeah. So thanks, Keegan, for the question. As you know, as I mentioned in my prepared remarks, definitely, you know, we saw some strength in our business. First, two months of the quarter, then October, you know, we had a little bit of a slowdown in traffic. And, you know, there are a few things that were happening at that time. Know, definitely, there was some noise related by the government shutdown in addition to that, last year, we had an introduction of for us at that time, new license BLUE that performed really well for us and did help drive traffic last year. So that compounded some of the traffic challenges that we were facing this time around. And as we talked about, like, you know, we had, like, a softer finish to the Q3. But, you know, we rebounded in November, and we are seeing some positive momentum. We as Sharon talked about, like, Black Friday in our history. So some of those things, you know, like, it is really difficult to point out, like, specifically what's happening. But, you know, we are seeing growth in mini beans, you know, over 3 million units sold or sorry. Approaching 3 million units sold with that particular property, but in addition to that, we are selling these giants to our consumer, like, in over a $100 price point. So we are getting, like, to a lot of different consumers. And, you know, I don't think that's necessarily impacting us in a negative way. Our dollar per transactions continue to grow, and we are pleased with that. Our conversion is strong. So those are things that we believe are within our control. But, definitely, there are concerns and challenges, you know, when we think from the macro environment and things that we always say, things that are outside of our control, we are trying to mitigate. We are trying to manage, our expenses. And, you know, we still feel good about the guidance that we have provided in the full-year basis to deliver the fifth consecutive record year in our history. Keegan Cox: Got it. And then I listened to just some of your competitor calls and some Black Friday store checks. You know, they mentioned they're taking share and plush, and I saw that in some stores. I know you guys mostly benchmark against yourself. But as we think about the mini beans opportunity, I mean, what interests you about, you know, fulfilling that product in other retailers and taking on that competition? Voin Todorovic: Yeah. So definitely, that one of those areas, you know, that when we think about what's happening with our stores, what's happening with mini beans, as I mentioned that we are approaching 3 million units sold in our stores. And that portion of those sales are also in other retail channels. So we are selling some of that to wholesale accounts that's definitely an area of opportunity for us. And, you know, we believe, you know, there is a little white space as we move forward. But, you know, as we about the overall plush sales and everything, I can comment on how, other people and what their performance is. But, you know, I'll again reiterate, it's a fifth consecutive year of record results for us. So year after year, yeah, we continue to beat revenue goals, margin goals. So you know, we are pleased with the progress that we are making. But, you know, there is still some white space for us as we look to the future, especially in the wholesale channels. Sharon Price John: And I'll just add a little bit to that. I mean, while we're really pleased with our growth from an experiential retail location expansion. I think to 651 locations around the globe now. The expansion into new retail environments that offers up literally thousands of doors that Build-A-Bear Workshop, Inc. would otherwise not have a presence in where it's not necessary to go through the experience that created us. But because that experience is so emotional and so memorable, it creates a halo effect. It's that brand, then the brand equity stretches beyond the workshop walls. And mini beans is an example of that. In that they are people understand that is gonna be a quality product. They think of it as the it has the branded equity with it. So it's not just another plush on the shelf. It's Build-A-Bear Workshop, Inc. So when you think about what is the essence of the competition, well, we believe that the mini beans carry that branded aspect. That would that benefits it in that space, and we are seeing that from the early sales, both, of course, but inside the Build-A-Bear Workshop, Inc., as I noted, but in some of the early stages of outside of the workshop as well. Operator: Thank you. There are no further questions at this time. I would like to turn the conference back over to Sharon Price John for closing remarks. Sharon Price John: Thank you for being on the call today, and we certainly appreciate everyone joining us. To hear our third quarter results and look forward to sharing our fourth quarter results with you next year. In closing, we wish you and your families a very happy holiday and a wonderful New Year. Thank you. Operator: This will conclude today's conference. You may disconnect at this time, and thank you for your participation.
Operator: Good morning, ladies and gentlemen, and welcome to the Hormel Foods Corporation's Fourth Quarter Earnings Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press 0 for the operator. This call is being recorded on Thursday, December 4, 2025. I'd now like to turn the conference over to Jess Blomberg. Please go ahead. Jess Blomberg: Good morning. Welcome to the Hormel Foods Corporation conference call for 2025. We released results this morning before the market opened. If you did not receive a copy of the release, you can find it on our website hormelfoods.com, under the investors section, along with supplemental slide materials. On our call today is Jeff Ettinger, interim chief executive officer, John Ghingo, president, and Paul Keenan, interim chief financial officer and controller. Jeff, John, and Paul will begin by reviewing the company's fiscal 2025 performance, before transitioning into commentary on our outlook for 2026. We will conclude with the Q&A portion of the call. The line will be open for questions following the prepared remarks. As a courtesy to the other analysts, please limit yourself to one question with one follow-up. At the conclusion of this morning's call, a webcast replay will be posted to the Investors section of our website and archived for one year. Before we start this morning, I'd like to reference our safe harbor statement. Some of the comments we make today will be forward-looking, and actual results may differ materially from those expressed in or implied by the statements we will be making. Please refer to our most recent annual report on Form 10-K and quarterly reports on Form 10-Q, which can be accessed on our investor website under the Investors section. Additionally, please note we will be discussing certain non-GAAP financial measures this morning. Management believes that doing so provides investors with a better understanding of the company's underlying operating performance. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Further information about our non-GAAP financial measures, including our comparability items and reconciliations, are detailed in our press release, which can be accessed on our website. I will now turn the call over to Jeff Ettinger. Jeff Ettinger: Thank you, Jess, and good morning, everyone. Today, we'll briefly review our fiscal 2025 results then shift our focus to the strategic priorities and outlook for fiscal 2026. I'll begin with a few reflections on the year and our path forward. Paul will provide additional detail on key drivers from 2025, and then John will share our vision for 2026 and the actions we're taking to deliver consistent growth. I'll conclude with our fiscal 2026 outlook before we move on to Q&A. Paul Keenan: Fiscal 2025 was a challenging year. Candidly, we fell significantly short of our earnings goal. In navigating a dynamic consumer environment, elevated input costs, and some unexpected setbacks, our bottom-line performance was disappointing. On the other hand, net sales exceeded $12 billion, representing 2% organic growth over the prior year, and supported by gains across all three segments. We delivered four consecutive quarters of year-over-year organic net sales growth. This demonstrates the strength of our protein-forward portfolio. In the retail segment, our leading brands continue to hold number one or number two share positions in over 40 categories. Brands such as Jennie-O, Applegate, Holy Guacamole, and Spam contributed strong growth for the year. Importantly, the Planters brand grew net sales year over year, despite first-half pressures arising from last year's production disruption. Collectively, these brands represent a wide range of consumer preferences, diverse value propositions, and eating occasions. Profitability was pressured across the retail segment, and this decline is reflected in our segment margins. Input cost pressures driven primarily by heightened commodity costs had a challenging impact across our broad retail portfolio in 2025. The food service segment continued to outperform the broader industry by leveraging our direct sales team, operator-driven innovation, and diverse channel presence. Our top-line strength was wide-ranging across many brands and categories, including the Jennie-O Turkey portfolio, fire-braised meats, Café H globally inspired proteins, branded pepperoni, and branded bacon. These products all showcase the premium protein-centric offering that operators desire. The broader industry, however, experienced traffic declines and did not grow as expected. This, coupled with higher input costs, tempered the food service segment's 2025 results. The international segment's results highlight the importance of having a balanced portfolio, as some geographies outperformed while others lagged. Our China business was the biggest contributor to the international segment's top-line performance in fiscal 2025, and it achieved strong bottom-line performance as well. Our branded export business saw strong top-line performance, though commodity input costs and trade disruptions weighed on profits. The Brazil market was challenged for us this year and negatively impacted the international segment's ability to deliver on our growth objectives. At the total company level, our transform and modernize initiative played a critical role in offsetting a portion of the margin pressures we faced in 2025. We advanced many strategic pathways under the program, including expanding our distribution network, closing or reallocating product from multiple facilities, and advancing our data and process maturity. Much of the work we completed is laying the foundation for growth in future years. Late in fiscal 2025, we completed an extensive review of all administrative expenses. We made the decision to reduce some of our corporate positions and layers within the organization. This effort resulted in the reduction of approximately 250 corporate and sales positions, representing around 9% of this group. We also addressed the ongoing cost of benefits by making changes to certain programs. While these decisions are never easy, we believe these actions were both needed and responsible. We will also take the opportunity to allocate some savings from this work to reinvest in other areas, such as new capabilities and enhanced support of our growing brands. We believe we are coming out of fiscal 2025 with a conviction to win and in a position to grow. Paul Keenan will now provide a deeper look at our full year and fourth-quarter financial performance. But first, I'd like to introduce Paul to our investor community and congratulate him on his new position. Paul stepped into the role of interim chief financial officer on October 27, and he brings more than thirty years of experience at Hormel Foods Corporation, including his ongoing role as corporate controller. He is a deeply respected leader with a strong command of our business. I am confident you'll find Paul's insights valuable, and I look forward to you engaging with him more closely. With that, I'll turn the call over to Paul. Paul Keenan: Thank you, Jeff. Good morning, everyone. I'm looking forward to connecting with many of you over the coming months. Let's take a closer look at our results. As Jeff mentioned, net sales exceeded $12 billion for the full year of fiscal 2025. Top-line strength continued in the fourth quarter, as total company organic net sales grew 2% compared to the prior year. Profit was challenged this year, and value-added growth was more than offset by year-over-year margin pressures related to higher commodity input costs, supply chain impacts of avian illnesses, and some discrete items, each of which I'll dive deeper into. As previously shared, persistent inflation in key commodity inputs exceeded our expectations and remained elevated compared to prior year levels. Specifically, we experienced over 500 basis points of raw material cost inflation during the fourth quarter alone. For the fiscal year, pork bellies increased approximately 25%. The pork cutout rose about 10%, and pork trim increased approximately 20%. Beef remained a significant inflationary pressure across the industry throughout the year. With respect to Turkey, as you'll recall, early in fiscal 2025, we were impacted by avian illnesses across our Turkey supply chain and the broader industry. Decreasing Turkey supply in the industry had the compounding impact of higher commodity prices. In the fourth quarter, we saw the return of HPAI cases, especially across the Midwest. Collectively, these developments caused challenges during fiscal 2025, and we anticipate continued Turkey supply constraints through 2026. As we previously discussed, we took pricing actions at various times during fiscal 2025. However, due to the timing of some cost inflation, we could not fully offset the margin impacts within the fiscal year. In addition, two unfortunate events took place during the fourth quarter: a chicken product recall and a fire at our Little Rock facility. Taken together, these events represented approximately 3¢ of negative EPS impacts in fiscal 2025. The benefits from our transform and modernize initiative helped to offset some of these margin pressures in fiscal 2025. We ended the year having delivered benefits within our stated range and are proud of the capabilities this growth initiative has generated for our company. As we move to SG&A, marketing and advertising spend was lower compared to last year. This was a decision to prioritize efficiency in a challenging cost environment. Importantly, although we reduced spending, we remain focused on leveraging more targeted programs to support our brands. Other adjusted SG&A expenses increased during the year, driven in part by higher employee and external expenses. As we previewed in our fourth-quarter business update, we recorded noncash impairment charges in both our international and retail segments as part of our year-end financial closing process. The international impairment totaled $164 million and was related to a minority investment in Indonesia, an investment that remains both valuable and strategically important to us. Our retail segment impairments were $71 million, primarily related to our snack nuts business. We remain confident that our investment thesis is intact, and we are still excited about the snack nuts category and the protein diversification within our portfolio. Operating income for fiscal 2025 was $719 million, and adjusted operating income was just over $1 billion. Operating margin was 5.9%, and adjusted operating margin was 8.4%. The effective tax rate for fiscal 2025 was 28%, which was impacted by our fourth-quarter minority investment impairment. For the full year, diluted EPS was 87¢, and adjusted diluted EPS was $1.37. For the fourth quarter, we recognized a diluted loss per share of $0.10. Adjusted diluted EPS was 32¢. We recognize these results are well below our initial expectations for the year, but as Jeff mentioned, we have laid a solid foundation for a return to growth in fiscal 2026. I'd like to touch on a few other financial priorities for the fiscal year. We closed the year in a strong financial position with ample liquidity and a conservative level of debt. Cash flow from operations was $805 million in fiscal 2025, and inventories at fiscal year-end were $1.7 billion, an increase of $171 million from the beginning of the year. Capital expenditures were $311 million in fiscal 2025. We invested in high-priority businesses with capacity expansions for Hormel Firebraise and Applegate products. Our investments also advanced data and technology, people safety, and animal welfare. Finally, we invested capital in our Xinjiang, China facility to support growth. In fiscal 2025, we returned a record $633 million to our shareholders in the form of dividends, including our 389th consecutive quarterly dividend. We recently announced an increase to our quarterly dividend of 1%, raising the implied annualized rate to $1.17 per share for fiscal 2026, making Hormel Foods Corporation one of the distinguished dividend aristocrats with sixty consecutive years of dividend increases. Finally, this year marked our second safest year on record following a historic achievement in 2024. I'm incredibly proud of our team members for their commitment to people safety, keeping it front and center every day, and making it a core part of how we operate. And with that more detailed context on our results, I'll turn the call over to John to walk through our strategic focus areas for fiscal 2026. John Ghingo: Thank you, Paul. In fiscal 2025, our protein-centric portfolio demonstrated strength with consumers. We leave the year ready to build off our top line by leaning into our portfolio of winning brands and products. Protein demand isn't a passing trend; it's a sustained growing priority for so many different consumer groups. Hormel Foods Corporation is excited to lead the way in delivering real protein solutions for everyday occasions. As we turn the page to 2026, we have every reason to be confident. We are focused on winning in attractive consumption spaces by positioning our brands and innovation where they have the most significant opportunities and prioritizing our resources to fuel growth. Hormel Foods Corporation holds a truly unique position in the food industry, an advantage we've built over many years. We have a balanced protein-centric portfolio with broad capabilities to create value and win with proteins. This, coupled with our extensive reach across retail and food service channels, provides a strategic advantage that we believe is compelling and unmatched in today's industry. We've evolved from a meat company into a consumer-focused company. But unlike other consumer food companies, we are the consumer company that wins with protein. We deliver winning protein solutions for breakfast, lunch, dinner, and every snack in between. At home or away from home, animal-based or plant-based, whether you're cooking or someone's cooking for you, Hormel Foods Corporation is ready to provide great-tasting solutions aligned with some of the most enduring consumer trends in the food industry: ease and convenience, flavor experiences, and the growing desire for more protein. Today, I'll share three focus areas that will guide us in 2026. The first focus is consumer obsession. We already have a strong foundational understanding of our consumers and operators. But in 2026, we are taking that a step further. We are actively listening, learning, and anticipating to better understand the challenges and aspirations of our consumers and operators. All so we can better design solutions and experiences that uniquely meet and even exceed their needs for food occasions. We have great examples of how we have already put this framework into action. Take our Bacon platform as an example. We spent many hours in the kitchens of our consumers and operators understanding their pain points. We uncovered a clear insight: People love bacon and want to consume it more often, but they want it to be as effortless as possible to prepare. This insight led us to innovations that make bacon easy in any kitchen. In operators' kitchens, we've brought them our high-quality quick prep bacon one platform. And now we are introducing the next generation of easy for our operator partners with precooked and preportioned sandwich-ready bacon. In the home kitchen, we've climbed to the number one position in the convenient bacon category through our preportioned ready-to-heat microwave-ready platform. And we are now building distribution on the next iteration of making bacon easy at home with our Oven Ready Bacon platform, an innovation that all but eliminates the cleanup with a disposable oven tray. Grounded in real consumer insights, we're making sure bacon is accessible and easy for all. Through deep engagement with consumers, we've uncovered another key challenge. Finding better-for-you, convenient, and versatile meal options is harder than it should be. We've listened closely to those who struggle with this tension. And as leaders in protein, we have been able to provide a range of easy meal solutions made possible by our leading portfolio in ground turkey. Our Jennie-O marketing program presents and offers varied meal solutions that are rooted in meeting consumers' mealtime needs for lean, satisfying protein options that are easy to plug into daily life. And we see plenty of opportunities to do even more to aid consumers during mealtimes with our leading Jennie-O brands and relevant turkey products in the future. These successes show how our consumer obsession can drive real marketplace leadership, and this is only the beginning. Throughout the year, you can expect to see these insights come to life in bold, tangible ways as we continue to execute and accelerate growth by looking at the world through the eyes of our consumers and operators. Building on these consumer insights, our second focus is taking our brands beyond bounds by breaking out of their traditional categories and unlocking new growth. We are stretching our brands to their full potential by leveraging their protein advantage and unlocking big wide-open marketplace opportunities. Protein can play an even broader role throughout the day, across different occasions and channels, and we are stepping into these growth opportunities with our protein-centric portfolio. Take our SPAM brand as an example. Our team saw an opportunity to take SPAM into new formats beyond the can. Inspired by global food culture, we reimagined new occasions for the brand, introducing a sushi-style format now featured in sushi departments nationwide. This innovation taps into new consumers sourcing from the large and growing sushi category. SPAM's success in this product format isn't just a domestic success. By the end of fiscal 2025, over 100 million SPAM Musubis have been sold in Japan alone, an incredible milestone made just three years after the launch. Chicken is another attractive growth space with increasing consumer opportunity. And as a protein-centric consumer company, we are thinking bigger. Our innovative mindset and strong extendable brands allow us to follow consumer demand and deliver the experiences they crave. For Applegate, that means leveraging chicken to penetrate on-trend categories like quick prep breakfast and easy dinner, with better-for-you options such as frozen chicken breakfast sausage and lightly breaded chicken tenders for later in the day. In food service, we're building on the success of our Flash 180 platform. Beyond the chicken breast, we're tapping into the growing demand for chicken tenders and chicken sandwiches by providing operators with a customizable solution that simplifies their back-of-the-house operations. These moves show how we're not just following trends; we're fueling them, expanding our reach, and unlocking new growth opportunities. The third focus is becoming future-ready. Rooted in some basic principles so we can focus on our company premise of nourishing protein solutions. We are simplifying our company, and we are renovating ourselves. Portfolio reshaping is a priority. We are focused on strategic categories and brands with long-term growth potential and have made deliberate decisions to simplify. We recently announced plans to move the Justin's business into a strategic partnership to enable its best path forward. We also recently exited certain private label product lines, and we announced the closure of a nonstrategic stock operation to simplify our supply chain. For internal renovation, we are committed to advancing our data, technology, people, and processes. One exciting example is how we are utilizing AI to accelerate and improve our marketing. For Skippy, our team leveraged generative AI to create over 25 high-quality, seasonally relevant pieces of content in a single day, a game-changer for creating impactful content at scale. These assets are now powering engagement through the critical holiday season. This is only the beginning of how we're leveraging AI to boost efficiency and unlock creativity across our brands. Beyond marketing and innovation, we're implementing AI-enabled tools like O9 to streamline processes such as integrated business planning, transforming how we plan and make decisions every day. Enhanced data access, cutting-edge technology, and modernized workflows are reinventing nearly every aspect of our business, across all aspects of our supply chain to cross-functional collaboration, and all the way to the physical and digital shelf. This includes new tools leveraging data and analytics for areas such as pricing, revenue growth management, real-time portfolio management, and assortment optimization decisions. The focus areas I described are underway now. Though we understand our efforts must translate to margin expansion and sustainable profitable growth, we believe this strategic path sets us apart in the marketplace by better meeting the needs of our consumers and operators with our unique and potent protein-centric portfolio. We have the opportunity to deliver consistent profitable growth. With that, I will turn the call back over to Jeff to click into our 2026 outlook and assumptions. Jeff Ettinger: We said on our third-quarter call that our goal is to return to the algorithm of 2% to 3% organic net sales growth and 5% to 7% operating income growth. These goals are intentionally ambitious but are grounded in the strength of our portfolio and take the broader food industry environment into consideration. We are providing fiscal 2026 guidance with a slightly wider range than our growth algorithm. This approach accounts for the dynamic current environment and supports our flexibility to navigate near-term volatility while remaining firmly focused on the strategic priorities John just outlined. Let's turn now to our guidance and the key assumptions behind it. In fiscal 2026, we expect organic net sales growth of 1% to 4%. As John discussed, we think our protein-centric portfolio coupled with our demonstrated strength and presence in both retail and food service puts us in an advantaged strategic position going forward. We already saw momentum on the top line in fiscal 2025 and plan to build on this momentum in fiscal 2026 through enhanced marketing support. In fact, a number of these campaigns are already underway, as the holidays are a key season for many of our strategic brands. Our guidance also accounts for pricing actions across our portfolio. The steep increases in input costs in '25 precipitated two waves of pricing actions on many products, and the realization of the second wave will allow us to restore more balance with these inflated costs. In fiscal 2026, we expect adjusted operating income growth of 4% to 10%, and adjusted earnings per share to be in the range of $1.43 to $1.51 per share. Regarding key input cost assumptions in our outlook, we expect pork input costs to decline compared to fiscal 2025, but still remain above the five-year average. Beef costs remain high and are expected to be a headwind throughout fiscal 2026, and nut costs are anticipated to be elevated from the prior year as well. We also expect to see stronger turkey markets in fiscal 2026. Gross margin expansion is expected to be driven by a variety of levers, including mix improvements, the wraparound pricing benefits that I just mentioned, and productivity from our transform and modernize initiative. I want to be clear about our intentions with regard to the transform and modernize initiative. Our efforts will continue in fiscal 2026. However, we do not plan to report T&M savings separately going forward. We believe its financial benefits will be spread, supporting our enhanced marketing programs, offsetting some of the continued inflationary pressure, and allowing us to expand margins. And this is all accounted for in the range of our guidance. Regarding SG&A, as I shared in my opening remarks, our recently announced corporate restructuring, designed to support strategic priorities and long-term growth, is expected to result in savings in non-advertising spending in fiscal 2026. We expect each of our segments to deliver both top-line and segment profit growth in fiscal 2026, and for further segment guidance information, please refer to our supplemental slides on our Investor Relations website. From a cadence standpoint, we expect Q1 earnings to decline compared to the prior year, mainly due to the timing of the impacts of pricing, commodity input costs, and some lingering impacts from our fourth quarter. We believe our full-year guidance range is achievable and realistic. It demonstrates the value of our balanced protein-centric portfolio and positions us for sustainable long-term growth. With that, I will turn the call over to the operator to begin our Q&A portion of the call. And we look forward to your questions. Operator: Ladies and gentlemen, we will now begin the question and answer session. Touch-tone phone. You will hear a prompt that your hand has been raised. If you would like to withdraw from the polling process, please press star then the number 2. If you are using a speakerphone, please make sure to lift your handset before pressing any keys. Your first question comes from the line of Michael Lavery from Piper Sandler. Please go ahead. Michael Lavery: Thank you. Good morning. You touched on some of the cost expectations and how the T&M initiatives would be continuing and some of the other administrative savings. But could you maybe just unpack guidance a little bit further and give us some of the key puts and takes to keep in mind and just how to think about, you know, peeling that onion a little bit further. Jeff Ettinger: Sure, Michael. Thank you very much. This is Jeff Ettinger answering. So we'll start on the top line where we said we expect organic net sales growth of 1% to 4%. We already have substantial momentum on the top line, with all four quarters last year generating top-line growth and driven by all three segments, and we expect that kind of momentum to continue. As John described, we think our protein-centric portfolio coupled with our presence in both retail and food service puts us in an advantaged strategic position. In terms of other specifics that will help the top line in fiscal 2026, we'll be benefiting from the pricing actions that have already taken place, and then we also will have enhanced marketing support, some of which kind of roll in in Q1 or at the very beginning of Q2, already supporting many of our key brands. When it comes to the bottom line, we've guided to adjusted operating income growth of 4% to 10% with the midpoint of a 7% growth in fiscal 2026. We have taken several steps to help our bottom-line performance catch up with our top-line momentum. So first of all, there is that pricing flow-through, which will better match up with costs as the year goes on. Secondly, we expect to drive mix improvement, and the marketing focus will help us to do that. Third, we do expect continued benefits from the T&M program. Fourth, we have the savings from the work, and I'm sure we'll be able to provide more details about that in further questions on the call here this morning. And then lastly, we do expect some relief from pork costs, particularly in the second half of the year, although we're still facing some headwinds in beef and nut costs. So overall, I mean, I guess our theme is we believe our guidance is realistic and achievable and demonstrates the value of our balanced protein-centric portfolio. Michael Lavery: That's helpful. Great color. And can I just add a follow-up on portfolio reshaping you touched on in the prepared remarks and gave a couple of examples? It sounds like is that more of a starting point and that you would be doing a bit more review there? Or how would you sort of assess maybe some of what you've just announced versus what may still be to come? John Ghingo: Hi, Michael. This is John. I'll take that question. So thank you. Yep. Portfolio reshaping certainly is an ongoing effort for us, and it's a strategic one. We continue to look at strategic categories and brands and making sure we're building our portfolio around our growth ambitions and, also, importantly, looking at how do we simplify our operations. Really, all of it is about positioning Hormel Foods Corporation for sustainable long-term growth. So if you think about simplifying operations, that includes exiting nonstrategic businesses and ensuring we have the best owner for our brands and product lines. You know, the example I mentioned earlier around Justin's, Justin's is a wonderful brand, but a better fit in the hands of the strategic partnership that we've created. Given its overall size, the opportunity it has for growth in confections, which is a nonstrategic category for us, was an opportunity that we saw. So I would say overall, you know, our actions reflect a deliberate strategy around portfolio shaping, all intended to streamline and position our company for sustainable profitable growth and allowing us to really focus on that premise I mentioned, which is nourishing protein solutions. Michael Lavery: Okay. Great. Thanks so much. Operator: Your next question comes from the line of Tom Palmer from JPMorgan. Please go ahead. Tom Palmer: Good morning and thanks for the question. Jeff, in the prepared remarks, you said you expect stronger Turkey markets in your guidance. I just wanted to clarify around that since there are several Turkey products you sell, including ground turkey, where there was some pricing midyear and then deli meat. What are you assuming in the outlook for whole bird pricing? Spot prices are obviously up quite a bit, but I think you still have contracting to finalize over the coming quarter. So I think at times, you know, you guys have indicated it might be too early to embed much change in guidance until you start to capture it in contracts. John Ghingo: Okay. So this is John. Tom, I'll jump in on that one and just talk turkey a little bit. I'll kind of pull back overall on Turkey in general for us and kind of, you know, come down to some of the areas you're touching on. So, you know, first, Turkey continues to be a very important business for us, very important for the consumer. And in particular, our focus around value-added turkey, ground turkey continues to be a winning formula for us. From a consumer demand standpoint, ground turkey in particular is a great option for consumers, very versatile, plugs in very well to everyday life, food experiences, different meal experiences. So in terms of creating value in a strained consumer environment, we love our ground turkey business. Second, I'll comment that there certainly has been some volatility in the markets and the industry. You'll recall that in 2025, we saw a run-up in costs in the first half of the year around Turkey and our supply chain. We said we needed to take price. We did that. We implemented pricing actions in the back half based on that inflation that we saw. We actually weathered that pricing well on our ground turkey business, driving both top-line growth, market share improvements, and profit recovery. So we're managing the volatility well, I would say, coming from a position of strength with Jennie-O. As we support the brand well, serve our customers well is absolutely critical. That being said, you know, the markets have continued to fluctuate. Certainly, that does impact our pricing. And coming to your point around whole birds in particular, I would say, you know, our guidance or expectations for the year include somewhat elevated whole bird prices throughout the year, although I will point out to your question, it's early, and very little is settled at this point in terms of the market. We still need to see sell-through from this holiday season as one factor in that. So you know, that's the position of where we're at now. And, again, from an overall standpoint, you know, we love the turkey business. Consumers looking for lean protein. Our ground turkey business continues to be a winning business for us that we're gonna drive. Tom Palmer: Great. Thanks for that. And then maybe this question will catch you off guard, but I wonder if you might share a bit of the expected savings from your restructuring work. Jeff Ettinger: Yeah. Hi. This is Jeff. I didn't answer your last question, so I owe you this one. Right? So as we talked about, we made the difficult but responsible decision to reduce expenses, ultimately resulting in a 250-position workforce reduction, which is about 9% of our corporate and sales group. Significantly, the other aspect of this that we focused on was really making sure we had the right structure going forward. We were able to reduce layers in many areas, and we also targeted expenses, including certain benefit programs. This work has resulted in meaningful savings and will free up capacity for growth objectives and our company initiatives. We designed the program to deliver gross savings in the range of two to three times our expected cost to implement. And we expect that the payback timing will be quick within the first twelve months, although in terms of quarterly cadence, it doesn't really kick in till the beginning of the calendar year, so the first two periods of Q1 really don't have this benefit. I also want to point out that you won't see all of this flow through as a direct reduction in SG&A because some of these gross savings are being reinvested in people and in brands and technology. Some of the benefit actually gets reflected in the cost of goods instead of SG&A. And some will cover incentive resets. Let me also pass over to Paul to give you a little more specific for modeling purposes. Paul Keenan: Yeah. Great. Thanks, Jeff. All in, the work we've done for SG&A has allowed us to anticipate adjusted SG&A as a percent of net sales comparable to the prior year, inclusive of meaningful step-up in marketing and advertising investments. Maintaining prior year rates of spending, reallocating resources to what will drive our brands and company forward in the best way is an important lever to our growth story for fiscal 2026 and beyond. Tom Palmer: Great. Thanks for the details. Operator: Your next question comes from the line of Ben Theurer from Barclays. Please ask your question. Ben Theurer: Hi, good morning and thank you very much for taking my question. A lot to digest literally, but I wanted to go back into some of the comments and the outlook more particularly as it relates to Planters. So obviously, you've picked some decisions within the nut business on the private label side, but just wanted to understand where you are in terms of the journey of recovering on Planters of what you've lost in terms of where are you in shelf space, where are you on the profit side, just to understand how we should think about the cadence into fiscal 2026 of further delivering from the Planters business? That would be my first question. John Ghingo: Great. Great, Ben. Good morning. I'll take it. It's John. Yeah. Planters continues to be a very important brand for us in our portfolio, and we are very bullish overall on Planters going forward. Last quarter, I mentioned that we had started growing Planters again. And now I am very pleased to say that we are fully back in growth mode behind Planters. And I mean that both in the near term as well as in the potential we see for Planters in the longer term. So when I talk about the near term, we are clearly delivering the gains we expected to see in the marketplace. I'm pleased to report that in the latest thirteen weeks of consumption data, we've seen Planters plus 12% in dollar consumption and plus 6% in volume consumption versus prior year. This is largely, to your point, driven by distribution gains. Distribution is up 13% versus prior year in the latest thirteen weeks, and base sales are up over 10%. So the specific question around distribution, our distribution recovery is just about complete at this point. We are nearly all the way back to where we were prior to the supply disruption, and we are gaining share in the growing snack nut category. I also mentioned last quarter that our top-line momentum is good. Our consumer recovery is on track, but our profit recovery has been somewhat hampered. You know, that continues primarily driven by mix shifts related to consumer trading out of cashews. You may recall that last year, cashews saw significant price increases that were precipitated by commodity inflation. We love the fact that we have a brand and an equity with the Planters franchise that's big enough to keep all those consumers in the franchise as they trade among nut types, but that does drive some mix implications for us from a profitability standpoint. So as we go forward, you know, we'll continue to build on that top-line momentum. We are gonna begin lapping that cashew pricing in 2026. And, you know, we are adjusting our go-to-market plans to take advantage of our broad portfolio to drive more favorable mix, and we continue to focus on, you know, our three-part plan that we've talked about before, attracting consumers to the brand, stepped-up communications and advertising, strong in-store promotions, increased focus on our exciting innovation that's proven to be highly incremental to the brand and the category, and we just continue to love Planters as a snacking platform as consumers are migrating to snacks with substance, snacks with protein, we love the fact that we have this leading brand in that space. Ben Theurer: Perfect. And then second, I mean, obviously, you've done a lot. We had some impairment charges within your international business, which you've highlighted was Indonesia-related. But within international, you called out the dynamics in Brazil, the challenges down there. So we know it was a venture. It's a relatively small business. But given some of the initiatives you're doing in terms of portfolio review, we've seen the Justin's thing. I mean, there's a lot just going on. So how should we think about that venture in Brazil? Is that still part of you want to be there, or is that something you would be open to put up for sale to literally have an even cleaner story maybe on the international business with more of a focus in Southeast Asia, Asia, and not so much with a venture as well in Brazil that has been causing, I guess, more headache than smiles? So just your take on Brazil, that would be appreciated. John Ghingo: Yeah. Sure, Ben. It's John. I'll take that one too. Look. I would say, you know, just a couple of general comments about our international business. You know, number one, our China business does continue to perform very well for us. That is a strategic priority. It's a focus. Two, we have seen good success on our branded export business, you know, headlined by Global SPAM. That continues to do very well for us. To the questions around, you know, what's held us back, certainly, you know, there are parts of the export business in terms of more commodity-type products that have been more of a struggle recently. And then Brazil, for sure, has been a drag, you know, in terms of our overall performance. To come to your question around portfolio, certainly, you know, my earlier comments where everything is under review, we do continue to look at our portfolio in total for what makes sense, what doesn't. And we'll continue that process as we go through 2026. Ben Theurer: Thank you. Perfect. Thanks, John. Operator: Your next question comes from the line of Heather Jones from Heather Jones Research. Please go ahead. Heather Jones: Good morning and thanks for the questions. I guess I wanted to start with the assumptions on raw material input costs. Specifically pork. So it seems like the recovery and productivity for the industry from disease is trending above expectations, and we're set up for decent supply growth in '26. So it's just trying to get a sense of you said above the five-year average, but below '25. But I was just wondering if you could give us a little more detail as far as, like, how you're thinking about the year-on-year decline in raw materials, particularly given how much bellies and trim have already retrenched from the summer highs? Paul Keenan: Yeah. Thanks, Heather. This is Paul. You know, the first quarter has begun. Pork, shrimp, beef remain a headwind year over year, like you mentioned. Yeah. I'm starting to see some year-over-year relief in bellies. We have announced also targeting pricing actions to address the markets. In food service, there's no changes to our pricing. You know, we do have beef and nut headwinds as we look at the full year of fiscal 2026 in our guidance. And then to your point, you know, improving pork benefits in half two is kind of what we've modeled internally. Jeff Ettinger: If I could add, Heather, this is Jeff. Just kind of further response to your question. You know, there's modeling for the whole year that we need to do. But one of the things I think we've realized over the last three to four months is we really need to be more real-time responsive to changes in the market. So in response to this heightened market volatility, we're refining some of our processes to drive greater agility in forecasting and managing commodity risk. You know, one example would be we're gonna couple our external forecasting sources with some of our real-time internal knowledge about factors affecting the commodity market. So, you know, we can predict what we think will happen in H2 and how much recovery there is, but we need to be better at it than reacting to what really goes on. Heather Jones: That's helpful. Thank you. My second question is just you have a number of tailwinds going into '26, whether it be potentially lower raw material costs in pork, the turkey markets, the lapping of, you know, nonrecurring things. And you mentioned the headwinds of beef and nuts, and you're gonna raise your advertising spend. Well, just wondering as you were putting together your guidance and all, just if you could give us a sense of how much the consumer environment factored into your outlook? Like, are you assuming a still tough consumer all the way through '26? So just how are you thinking about food service traffic and just know it's a really big question, but just trying to get a better sense on how you're thinking about demand. Jeff Ettinger: Well, it's so big, Heather. It's gonna take two of us to answer. It's all starting in Jeff, and then Jonathan will talk about the consumer. I do want to give a little more color to all of you on the call today about cadence. So we do expect Q1 earnings to be pressured still compared to last year, and we're actually looking at probably 2 to 4¢ below year ago. As a realistic range because we still have spillover effects on the bottom line. In terms of the pricing actions, they're not all fully implemented in Q1. In terms of the commodity input costs, as you correctly point out, they started to come down, but they do remain elevated. We have some turkey supply issues still from the turkey illness issues. As I mentioned a minute ago, we have the timing of the SG&A benefit, which will help us through the year, but not particularly in Q1. So although we expect Q1 earnings to be pressured compared to last year, we then are confident in our growth guide for the remainder of the year. But it does pull down the full year in terms of how that factors in. On the consumer side, John? John Ghingo: Yeah. So thanks, Heather. I'll talk a little bit. I mean, I think the consumer environment, I would still say the consumer is quite strained. You know, feeling the cumulative effects of inflation, feeling some of the uncertainty in the macro environment, consumer sentiment remains quite low. So as we look out to 2026, I mean, we are factoring that into our guidance, meaning we expect the consumer to continue to exhibit value-seeking behavior throughout the year. We believe our portfolio is well-positioned to provide value in a number of different ways. From a food service perspective, aligned with external forecasts, we expect flat to little growth in the food service industry in total. But, again, we love our solutions-based portfolio. We love our food service model. In terms of the channel diversification we have across small and large, across different types of channels, across commercial and noncommercial. So we love our channel resilience. We love our direct sales force. We love the types of solutions we provide to operators who value our partnership even in difficult times when traffic is down. So we feel like we have a good set of answers to the challenging environment, but we are modeled and forecasting a continued, you know, difficult environment from a consumer standpoint throughout 2026. Heather Jones: Very helpful. Thank you so much. Operator: Your next question comes from the line of Pooran Sharma from Stephens. Please go ahead. Pooran Sharma: Thanks for the question. I was just wondering if maybe you could give us a sense of kind of how much you're planning to invest back in the business. I know in terms of T&M, and I know you're walking away from given T&M targets going forward, but what you had given in the past was $75 million in FY '24 and then $100 to $150 million in FY '25. I was just wondering if you're able to give us a sense of how much of that you know, you were planning to you had invested back into the business or just give us a sense of how much reinvestment you're planning to drive back into the business? Jeff Ettinger: Yeah. Thanks for the question, Pooran. I think, again, I'll this is Jeff, and I'll start, and John will conclude on your question. So I do want to point out on T&M. So this is the final year of our current program. Doesn't mean we've made any permanent decisions about where we go from here. And it really has played a critical role and delivered significant value to the company. We have continued efforts scheduled for this year, a number of specific projects, but we have found that breaking out the financial benefits separately seems like it hasn't been particularly helpful, and in some cases, has caused confusion. So we're not providing that breakout, but we do expect to see financial benefits in 2026, and they'll kind of be spread between the marketing enhancement that you're asking about. We're also gonna use some to offset continued inflationary pressure. And then, hopefully, to allow us to expand margins. And I'll hand it over to John then. John Ghingo: Yes. Good morning, Pooran. So in terms of how we're thinking about that reinvestment behind our brands, you know, we're spending largely in a concentrated way behind our focus brands. You know, there's a couple of points to that. One is think about our brands like Planters, SPAM, Jennie-O, as well as critical innovation that we know is important in the market to deliver that value for consumers right now. Driving our investments behind those brands is one of the levers we have to drive positive mix into 2026 and create some of that margin momentum. Second, I will say on those businesses, we do have a very good handle and analytics around return on investment behind those marketing investments. And most importantly at this moment is it's absolutely critical that we support our brands through the pricing. You know, we know that the consumer is strained. We know that we've taken multiple waves of pricing that we've talked about. It's inflation-justified pricing. It's needed. But the consumer is strained. And so our ability to support our brands well through those pricing actions is actually, for us, proven to be the recipe for success to successfully implement those pricing actions and to be able to continue the category and brand momentum we want to see. So that's how we're thinking about our stepped-up investment into 2026. Pooran Sharma: Great. Great. Appreciate the color there. On the follow-up, was maybe just hoping to dive into Cadence just a tad bit further. Appreciate the color you just gave on 1Q. And just thinking about 2Q through 4Q, and the recovery, in FY '26, is it more of a gradual recovery where you're gonna see a sequential recovery quarter to quarter from February to 4Q? Or is it more of kind of like a step up in the back half and a little bit of recovery in 2Q? If you're able to just provide any color around that would be helpful. Thank you. Jeff Ettinger: Sure. Thanks, Pooran. This is Jeff again. Yeah. We do expect after the first quarter challenges to see an acceleration of benefit. Realistically, as you get to Q4, you're now against a quarter that, as we talked about, had 3¢ of one-time incidents. And so, you know, that clearly should be a more beneficial quarter. So the middle ones will be more modest increases, and then the Q4 should be more substantial. Pooran Sharma: Okay. Thank you very much. Operator: Your next question comes from the line of Leah Jordan from Goldman Sachs. Please go ahead. Leah Jordan: I just wanted to go back and dig in a little bit more on Heather's second question. Given the fact that you're planning for revenue growth in each of your segments next year. Just seeing if you could talk more about the drivers between price and volume for each segment. I mean, we've got some pricing in retail, but there's maybe some lower costs that will come through in the back half, and we've got the quicker pass-through on foodservice. So just how should we think about those elements in the mix of a more challenged consumer environment? Paul Keenan: Hey. Good morning, Leah. This is Paul. So on the segment detail guide, all in for fiscal 2026, we expect retail to have modest declines in volume with low single-digit increases in net sales. Foodservice, low single digits. Increases in volume with net sales in the mid-single digits. And then international also expecting low single-digit increases in volume with high single-digit increases in net sales. And as Jeff has stated, segment profit growth by all three segments, for the course of the year. Leah Jordan: Okay. Great. Thank you. And then maybe just some comments around the competitive overall across your categories in retail. I mean, are you seeing from peers as you start to put through some targeted pricing in some areas? And then, but you're also kind of planning for incremental brand investments as well. So just the competitive environment overall. Thank you. John Ghingo: Yeah. Sure. I can take that. This is John. Good morning, Leah. So you know, from a retail perspective, we do feel very good about the top-line momentum we're seeing across the retail business despite what is a choppy and competitive environment and that strained consumer backdrop. When you look at the drivers underneath that consumer performance, you can see in the scanner data our flagship and rising brands continue to perform well. In the latest thirteen weeks, they were up 3.7% last year. That carried our total Hormel Foods Corporation portfolio to over 1% consumption growth in the latest thirteen weeks. You know, some of the standout performers, you know, Jennie-O, Grand Turkey, where we're up double digits, we're certainly, you know, pacing ahead of the competition. Planters back to double-digit growth, also pacing ahead of the competition. We're seeing good strong growth in our rising Mexican brands. Holy Guacamole and Ardes grew 75% respectively. Applegate continues to grow. So we like our portfolio. We like the momentum we have on retail. We have taken, as we've talked about, you know, multiple waves of pricing action. In the last quarter call, we talked about that we had announced a wave of pricing that we were gonna monitor if we needed additional pricing as we got deeper into the quarter and saw the markets continue to rise. We did, in fact, announce another wave of pricing which largely will benefit us in the second quarter. To your point around, you know, how do we maintain that momentum? How do we feel competitively? We're gonna continue to invest in our brands. We're gonna continue to invest behind core brands as well as our innovation to weather that competitively. And all in all, you know, we certainly see competitive activity in some of the categories, you know, that is aggressive. But we feel like we have, you know, good differentiated positions. We know where our growth is needed to come from, and we're going to continue to invest in those spots. Leah Jordan: Very helpful. Thank you. Operator: Your next question comes from the line of Max Gumport from BNP Paribas. Please go ahead. Max Gumport: Hey, thanks for the question. I was hoping for an update on tariffs, particularly if there are any expenses particularly such as those associated with cashews? That you incurred in FY 2025 that might not repeat in FY 2026? Due to recent exemption? And then if so, if you could quantify that impact for us. Paul Keenan: Yeah, Max. This is Paul. Thanks for the question. Overall, a message on tariffs, really, we feel that we're fairly insulated. Obviously, the global environment remains dynamic, and it's ever-changing. For '26, the range that we think that we'll have on tariffs is $25 to $35 million. And it's mainly related to supplies in steel and aluminum. Obviously, we were watching cashews until the recent announcement of the removal of reciprocal tariffs. We haven't really quantified that exact amount that we had in '25. To give you a range on the twenty-sixth question. Max Gumport: Okay. I think that $25 to $35 million, is that roughly in line with the total tariffs that you saw on your P&L in '25, though? I think you had quantified a 1 to 2¢ impact, I believe, in the '25. Paul Keenan: Yep. So for a full-year basis, that is correct. Max Gumport: Okay. Great. Then that takes me to my second question, which would be it feels like there's plenty of discrete items you have in fiscal year 2026 that will be a help to your profit growth. So you mentioned admin savings. I think you said it was two to three times the cost to implement, which I think is $20 to $25 million the cost to implement. Correct me if that's wrong, but if that's right, that would be maybe at the midpoint roughly $60 million in savings. And not all of that is gonna flow to the bottom line. Some of it gets invested, but let's assume half flows to the bottom line. That's $30 million in profit growth. You've got the chicken recalls that you're lapping, the fire at the Little Rock facility that you're lapping. So that's another $20 million or so in profit growth. So now we're at $50 million of profit growth. Your guidance is for $40 to $100 million. And, you know, you've also got a benefit coming from T&M, again, some of which gets reinvested, but some of which flows to the bottom line. And then whole bird turkey pricing. So I was hoping just to get a bit more color on sort of what's what am I missing? What's dragging you down? Is it other forms of inflation that can't be and nuts? Just one just, you know, given these discrete factors, I'm trying to get a better sense for what might be holding you back and sort of keeping the low end of the range at 4%. Thank you very much. Jeff Ettinger: Okay. Alright. I'll start, Max. This is Jeff. I mean, you're correct that the $20 to $25 million number in terms of the one-time cost is what we've reported. And so your math of the two to three times, you know, works in that regard, and you correctly pointed out that that ends up being, you know, the total available savings, but then we are going to be reinvesting parts of it in certain areas. I think a couple of other factors that we probably could point out to you that might mitigate your math a little bit. You know, one, I'll remind you again about Q1. So, you know, we start out the year in somewhat of a hole. So you know, the implied rest of the year is quite a bit higher than 7% then. And so that does factor in some of the advantages that you're citing. Secondly, I mean, I think the other thing that maybe models miss that we've talked about in the past is in the pricing area that while we're in reasonably good position to be, you know, current to the cost on the food service side with some lag, in retail, it's a more complex decision. And there are cases where, okay, if we're yes. The costs are up this much, but if we price to that same equivalent amount, it's gonna really harm the long-term future of the brand. There are times where we've chosen not to do that. And so some of the math factoring into how we think 2026 plays out has that factored in as well. Max Gumport: Got it. Thanks very much. Appreciate the color. Operator: Your next question comes from the line of Rupesh Parikh from Oppenheimer. Please go ahead. Erica Eilah: Good morning. This is Erica Eilah on for Rupesh. Thanks for taking our questions. So I wanted to dive a little bit deeper into gross margin. So obviously, under pressure here in Q4 because of some of those discrete items. But maybe you could just walk us through some of the high-level puts and takes how you're thinking about gross margins for the year, maybe and in terms of cadence, how we should think about the recovery there? Paul Keenan: So when you think about the gross margins for the year, I think, you know, obviously, we've got you know, in '25, like you mentioned, we obviously had impacted by the commodity inflation with 500 bps year over year in Q4 alone. The chicken product recall in the Little Rock fire obviously drove that as well. You know, Planters' top line is performing well, but as we said last quarter, we're balanced with mixed dynamics on profitability. So those are really the margin dynamics in '25. As we look in '26, we obviously got gross margin expansion with mix improvements. A lot of pricing flow through over the course of the year in different ways that John already described on the call here, and then we've got T&M savings going forward as well. In the final year of the transform and modernize project. Erica Eilah: Okay. Thanks for the call. And then just on inventory, so I think inventory was up, you know, about 11% in the quarter. Just curious how you're feeling about the health of your inventory from here? Paul Keenan: Yep. No. Great question, Erica. Overall, we feel very comfortable with our inventory levels. And as you know, they are up year over year, but they actually went down in the fourth quarter. The biggest driver of that increase in inventory is the commodity markets that are boosting the balances. And then we made strategic decisions on pounds to increase where the center store business for the colder months and weather events. And lapping last year, we also had the Planters issue in the Suffolk plant, so we've got a replenishment there. But overall, we feel very comfortable with where inventory levels are today. Erica Eilah: Very helpful. Thank you. Operator: Your last question comes from the line of Yasmeen DeWandi from Bank of America. Please go ahead. Yasmeen DeWandi: Hey, guys. Good morning. Thanks for the question. Can I just ask on Turkey specifically? So we know that Turkey was a $0.25 headwind to fiscal 2023. And then roughly a $0.15 headwind to fiscal '24. Could you just help us bridge the $0.25 impact, so what was full-year Turkey headwind or a tailwind to earnings in '25? John Ghingo: So, good morning, Yasmeen. Just to give you a little bit of color on Turkey. So I mean, in general, we saw a lot of, I'll say, increased cost in Turkey in 2025. You know, we were able to land on our ground turkey business the pricing we needed to cover that. In terms of, you know, how that played out for the year, those first-half pressures really hit us quite hard. And we were able to, you know, balance that back in the second half and offset those first-half headwinds with the improved results in the back half. In terms of whole birds, they did come in somewhat better than expected compared to our original outlook from fiscal 2025. But it was, you know, obviously a very, I'll call it, volatile year on Turkey. And we weathered it quite well from a competitive standpoint and the recovery in the back half of the year. You know, all in all, it was a benefit in 2025. Yasmeen DeWandi: Okay. Great. That's helpful. Thank you. And then on raw materials inflation, you had said last earnings that, I think 3Q was roughly 400 bps. How much was it in 4Q? And how should we think about it in '26 on a quarterly basis given there's typically some seasonality there? Paul Keenan: Yep. Thanks, Yasmeen, for your question. In quarter four, it was a 500 basis points of raw material cost inflation during the fourth quarter. So the second part of the question, direct you to Jess and having more internal discussions there. Operator: There are no further questions at this time. We have no further questions at this time. So I'll turn the call back to Jeff Ettinger for closing comments. Sir, please go ahead. Jeff Ettinger: Thank you very much. Since we're already running over, I'll I just want to express my thanks to everyone for taking the time to follow us today. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.
Operator: Greetings, and welcome to the Dollar General Corporation Q3 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. A question and answer session will follow the formal presentation. We ask that you please limit yourselves to one question and then return to the queue. If anyone should require operator assistance, please press 0 on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Kevin Walker, Vice President, Investor Relations. Kevin, please go ahead. Kevin Walker: Thank you, and good morning, everyone. On the call with me today are Todd Vasos, our CEO, and Donnie Lau, our CFO. Our earnings release issued today can be found on our website at investors.dollargeneral.com under News and Events. Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our financial guidance, long-term financial framework, strategy, initiatives, plans, goals, priorities, opportunities, expectations, or beliefs about future matters, and other statements that are not limited to historical fact. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include, but are not limited to, those identified in our earnings release issued this morning, under Risk Factors in our 2024 Form 10-Ks filed on 03/21/2025, and any later filed periodic report, and in the comments that are made on this call. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General Corporation disclaims any obligation to update or revise any information discussed in this call unless required by law. At the end of our prepared remarks, we will open the call up for your questions. To allow us to address as many questions as possible in the queue, please limit yourself to one question. Now it is my pleasure to turn the call over to Todd. Todd Vasos: Thank you, Kevin, and welcome to everyone joining our call. We are pleased with our third quarter results, including another quarter of balanced sales growth as well as strong earnings results that significantly exceeded our expectations. I want to thank our team for their ongoing commitment to serving our customers, communities, and each other. Our mission of serving others informs everything we do at Dollar General Corporation, and our efforts are resonating with customers as we continue to enhance our value and convenience proposition. For today's call, I'll begin by recapping some of the highlights of our third quarter performance as well as sharing our latest observations on the consumer environment. After that, Donnie will share the details of our financial performance as well as our updated financial outlook for fiscal 2025. I'll then wrap up the call with an update on some of our key growth-driving initiatives, including our real estate plans for 2026. Turning to our third quarter performance, net sales increased 4.6% to $10.6 billion in Q3 compared to net sales of $10.2 billion in last year's third quarter. We grew market share in both dollars and units in highly consumable product sales once again during the quarter, in addition to growing market share in non-consumable product sales. This market share growth is a testament to our improved execution, compelling offering, and broadening appeal with a wide range of customers. Same-store sales increased 2.5% during the quarter, driven by customer traffic. The average basket size was essentially flat. Within the basket, an increase in average unit retail price per item was offset by fewer items on average. This traffic and basket composition is consistent with what we have historically observed when our core customer feels more pressured on their spending, as they come in more often but have smaller basket sizes. For the third consecutive quarter, we delivered broad-based category sales growth with positive comp sales in each of our consumables, seasonal, home, and apparel categories. Notably, the comp sales increase in non-consumable sales once again outpaced a solid increase in consumable sales. From a monthly cadence perspective, all three periods were positive, led by August. September was the softest period of the quarter as we lapped significant hurricane activity in the prior year before rebounding to higher levels in the month of October. Despite the delay in SNAP payments in early November, we are pleased with our strong sales performance to begin quarter four. Overall, we are pleased with our top-line results in Q3, which we believe demonstrate the important role we play in providing value to customers in our community. To that end, we're pleased to see growth once again in our total customer count, with disproportionate growth coming from higher-income households. We remain focused on executing our proven playbook to retain a substantial portion of these customers, and with our unique combination of value and convenience, we believe we are well-positioned to increase market share with customers across all income brackets. With that in mind, we continue to be pleased with our pricing position, which remains within our targeted range of three to four percentage points on average for mass retailers. We also continue to see a substantial offering of more than 2,000 SKUs at or below the $1 price point as an important component of the value offering for our customers. For example, our value offering, which is comprised of more than 500 rotating SKUs at the $1 price point, was once again our strongest performing set in the quarter, with same-store sales growth of 7.6%. With nearly 21,000 stores located within five miles of 75% of the US population, along with our robust and growing digital presence, we are proud of our unique position as America's neighborhood general store. We remain committed to serving our customers with the low prices they expect on the products they need, and as we help them save time and money every day. Overall, we're proud of our Q3 results and the significant progress we've made this year in improving our operating and financial performance. As we continue to invest in the growth and development of our teams, we are seeing lower year-over-year turnover in all levels of our in-store positions, which is also contributing to our improved execution and financial results. The progress we've made further supports our confidence in our long-term financial framework, and we are excited about the opportunities ahead. Before I turn the call over for our financial update, I want to take the opportunity to congratulate Emily Taylor on her promotion to Chief Operating Officer. During her time at Dollar General Corporation, she has been a strong leader who has consistently enhanced the customer experience both in-store and through our innovative digital offering. She and her teams have elevated the Dollar General and Pop Shelf brands while also improving operational efficiency, and we are excited to expand her responsibilities moving forward. I'm confident she is the right leader for this position and look forward to working with her in this new role. I'm also excited to welcome Donnie Lau as our new CFO. We are thrilled to have him back at Dollar General Corporation and look forward to working with him to further accelerate our progress and drive sustainable growth over the long term. With that, I'll now turn the call over to Donnie. Donnie Lau: Thank you, Todd, and good morning, everyone. After almost two and a half years away, I'm excited to be back at Dollar General Corporation, and I look forward to connecting with many of you in the months ahead. While I've only been back a short time, it's clear there are substantial opportunities for growth and value creation. I'm especially excited about the progress we're making against key initiatives, which is contributing to strong operational and financial results. I look forward to working with the team to advance our strategic priorities as we look to build on our momentum, drive long-term sustainable growth, and deliver strong returns on invested capital. I'll now cover our Q3 results. Since Todd has taken you through the top-line results for the quarter, my comments will cover some of the other important financial details. Unless we specifically note otherwise, all comparisons are year-over-year, all references to EPS refer to diluted earnings per share, and all years noted refer to the corresponding fiscal year. Gross profit as a percentage of sales was 29.9% in Q3, an increase of 107 basis points. This increase was primarily attributable to higher inventory markups and lower shrink, partially offset by an increased LIFO provision. Our ongoing efforts to reduce shrink once again contributed to strong operating margin expansion in Q3, as we delivered a 90 basis point improvement in shrink versus the prior year. Notably, shrink continues to improve at a much higher and faster rate compared to the expectations contemplated in our long-term financial framework, and we expect continued improvement over time. Turning to SG&A, which as a percentage of sales was 25.9%, an increase of 25 basis points. The primary expenses that were a higher percentage of sales in the quarter include incentive compensation, repairs and maintenance, and utilities, partially offset by a decrease in hurricane-related costs. Moving down the income statement, operating profit for the third quarter increased 31.5% to $425.9 million. As a percentage of sales, operating profit increased 82 basis points to 4%. Net interest expense for the quarter decreased to $55.9 million compared to $67.8 million in last year's third quarter. Our effective tax rate for the quarter was 23.6%, compared to 23.2% in the prior year. Finally, EPS for the quarter increased 43.8% to $1.28, which exceeded the high end of our internal expectations. Turning now to our balance sheet and cash flow, we have made significant progress in strengthening our financial position. Merchandise inventories were $6.7 billion at the end of Q3, a decrease of $465 million or 6.5% compared to the prior year, a decrease of 8.2% on an average per store basis. The team continues to do a terrific job reducing inventory while driving sales and improving in-stock levels. Overall, we're pleased with our inventory position as we enter the important holiday shopping season. Importantly, we believe there is an opportunity to further reduce and optimize our inventory position, and we expect continued progress as we move ahead. Year-to-date through Q3, we generated significant cash flow from operations of $2.8 billion, which represents an increase of 28%. As previously communicated, we redeemed $600 million of senior notes during the quarter, well ahead of their scheduled April 2027 maturity, further strengthening our balance sheet and reducing future interest expense. We also paid a dividend of 59¢ per common share outstanding during the quarter, for a total payment of approximately $130 million. Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in the business, including our existing store base, as well as other high-return growth opportunities such as new store expansion, remodels, and other strategic initiatives. Next, we seek to return cash to shareholders through a quarterly dividend payment and, when appropriate, share repurchase. And while our leverage ratio remains above our goal of less than three times adjusted debt to adjusted EBITDAR, we are making significant progress towards reaching our target level in support of our commitment to middle BBB ratings by S&P and Moody's. Moving to an update on our financial outlook for fiscal 2025, our update primarily reflects our Q3 outperformance and improved outlook for Q4, while also considering the potential for continued uncertainty, particularly in consumer behavior. With that in mind, we now expect the following for 2025: net sales growth of approximately 4.7% to 4.9%, same-store sales growth of approximately 2.5% to 2.7%, and EPS in the range of $6.30 to $6.50. Our EPS guidance continues to assume an effective tax rate of approximately 23.5% and that we will not repurchase shares under the existing share repurchase program. Now, I want to provide some additional context around our expectations. With regards to gross margin, we anticipate shrink will be a continued tailwind in Q4, though to a much lesser extent than Q3 as we begin to lap the improvements we made toward the end of last year. We also now expect capital spending to be towards the low end of our previously stated range of $1.3 billion to $1.4 billion. This includes our continued expectations to execute approximately 4,885 real estate projects in 2025, including 575 new store openings in the United States and up to 15 in Mexico, 2,000 project renovate remodels, 2,250 project elevate remodels, and 45 relocations. Finally, as a result of our strong cash and liquidity position, we plan to redeem an additional $550 million of our senior notes earlier than their November 2027 maturity. Our guidance contemplates about $9 million of incremental expense in Q4 in connection with this repayment. In closing, we are pleased with our third quarter results and updated financial outlook for fiscal 2025. While we plan to speak more to our 2026 outlook on our Q4 call in March, we are confident in our long-term financial framework and we are very pleased to be ahead of schedule on our progress. Importantly, we are working to further strengthen and accelerate where we see opportunity our path to achieving these goals. We look forward to sharing our continued progress as we move ahead. Overall, we are confident in our business model, remain focused on delivering profitable sales growth, high returns on invested capital, strong operating cash flow, and long-term shareholder value. With that, I'll now turn the call back over to Todd. Todd Vasos: Thank you, Donnie. I'll take the next few minutes to provide updates on three of our most important initiatives as we look to further advance our progress toward achieving our short and long-term goals. Starting with real estate, where we continue to enhance and extend our unique combination of value and convenience to new communities across the country. These efforts remain focused on driving sales and market share growth by expanding our unique real estate footprint while also enhancing our mature store base. We opened 196 new stores in Q3, primarily in our 8,500 square foot store format in rural markets. Importantly, we continue to accelerate our efforts, and through the first 10 periods of the year, have substantially completed our planned new store openings for fiscal 2025. Outside the US, we've opened seven new stores in Mexico this year, bringing us to a total of 15 at the end of Q3. We continue to test and learn in these stores and remain excited about the opportunity to serve these communities. We also continue to make substantial progress with our remodel initiatives. As a reminder, in addition to our traditional remodel program, which we call Project Renovate, we previously introduced a new incremental remodel program called Project Elevate. This initiative is designed to further grow sales and market share in portions of our mature store base that are not yet old enough to be part of our full remodel pipeline. These projects include physical asset investments as well as merchandising optimization, product adjacency adjustments, and category refreshes, all of which impact approximately 80% of the total store. We completed 651 Project Elevate remodels in Q3 and an additional 524 Project Renovate remodels during the quarter. While we have not yet reached the one-year anniversary of the first stores in the program, we are on track to deliver an average first-year annualized sales comp lift of approximately 3% in Project Elevate stores, and we continue to expect comp sales lifts of approximately 6% for Project Renovate stores. Importantly, we continue to see significant improvements in customer satisfaction in these stores upon completion of the remodel. These results have given us confidence to make Project Elevate a key component of our real estate strategy as we move forward. Looking ahead to 2026, we are uniquely positioned to serve an underserved customer in rural America, where approximately 80% of our current store base serves towns of 20,000 or fewer people. We plan to build on that strength in 2026 with plans to execute approximately 4,730 real estate projects in total, including 450 new store openings in the US, 2,000 Project Renovate remodels, 2,250 Project Elevate remodels, and 20 relocations. We plan to open approximately 10 additional stores in Mexico. With regards to new stores, as a reminder, we monitor several metrics of our portfolio, including performance against pro forma sales expectations, new store productivity compared to our mature store base, annualization which overall has remained consistent and predictable, cash payback which we expect in approximately two years, and a new store return which we expect to be in the range of approximately 16% to 17% on average in 2026. Overall, our new store projects continue to deliver healthy returns despite higher occupancy and operating costs. Importantly, we're committed to mitigating these cost pressures where possible and continue to see significant runway for new store expansion, with approximately 11,000 opportunities for Dollar General Corporation stores in the US. While we've always said that for a variety of reasons, we don't expect to capture every opportunity, we're excited about our ability to significantly grow our footprint in the years to come. We anticipate that the majority of our new stores next year will be in one of our 8,500 square foot formats and will be predominantly in rural communities. Nearly all of our relocations are planned for one of our 8,500 or 9,500 square foot stores. As a reminder, these larger footprint stores provide additional opportunities to serve our customers, including expanded cooler offerings and more health and beauty products. While we currently offer fresh produce in approximately 7,000 stores, we anticipate bringing this offering to more than 200 additional stores in 2026. We are excited about our real estate plans for next year and believe these projects will continue to deepen our connection with our current customers while better positioning us to attract new customers as well. Collectively, we believe these projects will further solidify Dollar General Corporation as the essential partner in communities in rural America, both in our physical store locations as well as with an expanding digital reach, all while strengthening our foundation to drive long-term sustainable growth. The next area I want to discuss is our digital initiative, which serves as an important complement to our expansive store footprint. As we continue to deploy and leverage technology to further enhance convenience and access for our customers, our digital capabilities include an engaging mobile app and website that continues to be very popular with our customers and have expanded our delivery capabilities while growing our DG media network. We have significantly expanded the reach of our delivery options available to customers. Our DoorDash partnership, which now services more than 18,000 stores, continues to drive significant incrementality and sales growth. As a reminder, we partnered with DoorDash to launch our own same-day delivery offering through our Dollar General Corporation digital solutions late last year. We believe DG delivery can drive great customer loyalty within our digital platform while ultimately accelerating growth and increasing market share. We significantly increased the penetration of this offering in Q3, and now DG delivery is available through our app and website in more than 17,000 stores. Most recently, we entered a partnership with Uber Eats to further expand the reach of our delivery capabilities as we provide value and convenience to customers on their platform. We are now live in more than 17,000 stores with Uber as well. Collectively, these delivery options have significantly enhanced the convenience proposition for our customers, with more than 75% of our orders delivered in one hour or less, while also extending our value offering to a wide range of new customers. We are seeing larger basket sizes than the average in-store transaction and a very strong repeat visit rate from customers on our delivery platform. Looking ahead, we have ample opportunity to further drive incremental sales growth through a variety of customer experience enhancements and increased customer awareness. As we see continued growth in our digital properties, one of the most significant components of our digital initiative is our DG media network, which enables a more personalized experience for our unique customer base while delivering a higher return on ad spend for our partners. We are continuing to drive significant year-over-year growth in retail media volume as partners seek access to our unique customer base. Our digital advertising business continues to see double-digit growth in 2025, driven by new DG media network capabilities on our site and within our app. We believe we are still in the early stages of the potential financial contribution from this initiative. The DG media network remains an important contributor to our long-term growth framework, and we're excited about its potential. Over time, we believe we can leverage our digital initiative to increase market share and drive profitable sales growth while further evolving our relationship with our customers and driving greater customer loyalty within the digital platform. The final initiative I want to discuss is our non-consumable growth strategy. As a reminder, we are focused on a few key drivers in our non-consumable categories over the next three years. These include brand partnerships, a revamped treasure hunt experience, and reallocation of space within our home category. During Q3, we were pleased to deliver positive same-store sales growth in each of our three non-consumable categories for the third consecutive quarter. This growth was led by our two largest non-consumable categories, seasonal and home, each of which delivered comp sales growth of approximately 4% in the quarter. Our Pop Shelf stores delivered another quarter of strong same-store sales growth in Q3. Our new store layout continues to perform well, and we continue to take lessons from Pop Shelf and apply that to our non-consumable approach in our Dollar General Corporation stores as we further enhance that offering for customers. We believe our non-consumable sales growth, both in Dollar General Corporation and 20% of our holiday sets priced at $1 and more than 70% at $3 or below, we are excited about our ability to serve customers across all income brackets during this important time of the year. In turn, we believe we are well-positioned to continue driving sales and market growth in these categories while also further increasing our gross margin. In closing, I want to reiterate that we're pleased with our performance, proud of our progress, and excited about the opportunities that lie ahead of us at Dollar General Corporation. We are laser-focused on furthering these efforts and accelerating our progress toward our goals over the short and long term. As we move through our busy holiday season, I want to again thank our approximately 195,000 employees for their commitment and dedication to fulfilling our mission of serving others. With that, operator, I'd now like to open the lines for questions. Operator: Certainly. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you'd like to remove your question from the queue. As a reminder, we ask you to please limit yourselves to one question then return to the queue. Our first question is coming from Rupesh Parikh from Oppenheimer. Your line is now live. Rupesh Parikh: Good morning, and thanks for taking my question, and welcome back, Donnie. So I have a two-part question just on gross margin. So for Q4, it would be helpful to understand some of the puts and takes there you see on the gross margin line. And then from a longer-term perspective, we've seen significant progress this year on the gross margin front, including shrink. Just curious about your overall confidence in being able to deliver the next round of improvement, whether it's from retail media, mix shifts, etcetera, and on the damages front. Donnie Lau: Yeah. Maybe I'll kick it off and then hand off the second part of your question to Todd. But thanks, Rupesh. Good to connect with you again. Maybe I'll just start with Q3 gross margin. I'm especially pleased, right, that we delivered 107 basis points of expansion, and that's on top of 137 basis points in Q2. And from a Q3 perspective, that's also despite a 79 basis point headwind from LIFO. And so while we're very pleased to see continued benefit from some of our other key focus areas like lower damages, reduction in markdowns, and some of the other initiatives that Todd's gonna speak about, I think the outperformance and shrink was notable during the quarter. And so the way I think about it, Rupesh, is we're really building momentum on our key initiatives. The team's really doing a nice job in terms of balancing price and managing mix. We do expect another quarter of gross margin expansion in Q4. We expect to see continued improvement in shrink, as I alluded to in the prepared remarks, to a lesser extent versus Q3. And that's because we really are lapping outsized or, you know, more improvement in Q4 2024 to the tune of about 68 basis points. We're also lapping a discrete item from the prior year really associated with the optimization of our portfolio. And we also expect continued benefit from growth in private label and non-consumables and, you know, continued improvement in damages as well as supply chain efficiencies. The one headwind we'll note is just LIFO. Although we do expect to partially offset that with pricing through continued managing mix as well. And so, again, overall, on the gross margin line, let's say, I believe there's more tailwinds than headwinds, which is nice to see. And feel really good about the momentum we're seeing and building on this front. Todd Vasos: Yeah. And Rupesh, thanks for the question as well. As I think about the long-term gross margin opportunities, I feel very good. Actually, shrink improvement so far is actually giving us, myself and our team here, even more confidence in delivering on that long-term model on our gross margin line. If you think about it, you know, when I think about where we're at today with shrink, as Donnie indicated, the great thing about our shrink benefits so far is while we did take self-checkout out, which has been a nice contributor, the stores that never had self-checkout, about 6,500 of them, have seen very substantial decreases in shrink and increases in gross margin. So what that does, it gives us a lot of confidence that there's probably more gross margin opportunities than we even thought in that long-term model. So stay tuned for that as we go forward. And then, as Donnie indicated, boy, we still have a lot of great opportunities ahead. When you think of damages, we're just starting that journey. We've seen some nice damage clawbacks over the last couple of quarters, but we see even more without giving you any guidance for '26 yet. Even more as we move into next year and beyond. So, stay tuned there. I think you'll see us execute against that very similarly to how we executed very strongly against our shrink initiatives. And then lastly, mix and media network. Mix continues to be a good guy and will continue to be. All of the work the team has done, the merchants, our operators, our supply chain, on our non-consumable initiatives really has moved the mix number for us. And as you know, those hold a lot stronger gross margins, not only in our home, seasonal, and apparel categories, but also our HBA categories, which have outsized gross margin. So feel very good about the long-term prospects of that. And then lastly, our media network. We're in the second inning. We're just starting the media network piece. And I would tell you that we're off to a great start. Double-digit increases again this quarter. And as I look out to the long-term model, we see a lot of opportunity there as well. So stay tuned. We feel strong. We feel good about where we are. And very good about that long-term model. Operator: Thank you. Next question is coming from Zihan Ma from Bernstein. Your line is now live. Zihan Ma: Thank you for taking my question. I have a two-part one on real estate. So a short-term one, I think, Todd, you mentioned that the remodels are generating about, like, the 3% to 6% sales lift, which I believe are at the lower end of the previous ranges you've given. So can you just talk about is there additional upside? What are some of the near-term dynamics you're seeing there? And then longer term, given some of the changes in your competitive landscape with Family Dollar no longer really in the picture, drugstores closing, how does that change your view on your real estate opportunities and the growth rate you're willing to pursue? Thank you. Todd Vasos: Yeah. Sure. You know, we're really happy with where the remodel program is. As you know, we really are just in year one. We haven't even cycled a full year yet of Project Elevate. And that's given us what we've seen so far has given us a lot of confidence. Matter of fact, as you heard in my prepared remarks, we're gonna do another 2,250 of those next year. So, you know, hitting right around 3% right now, but we're just getting started. So as we look to even enhance this program as we go into next year, we'll continue to look at ways to ensure we even get a better comp out of it. But 3% is very strong and is well within our guidance and our guidelines here to continue to move forward. It's a strong, strong return at 3%. And then on Project Renovate at six, again, we're just getting going good there. We've been doing, obviously, these projects for many, many years. As we continue to rationalize our SKU base, our coolers, we see real opportunity to continue to drive long-term sales growth in these, albeit probably closer to six than the 8% that we had seen in the past. But, again, I'll take a 6% comp any day of the week with the investments that we're putting forward on these. So again, gives us a lot of confidence to do another 2,000 of those next year. So, really feel good about each of those. But, you know, we're retailers. We're never satisfied with the comps that we put out, and we're gonna continue to push even harder. And then long-term on your second part of the question, I would tell you we still feel very good. We got 11,000 opportunities in the Continental United States to put a Dollar General Corporation store in. Obviously, as we said, we won't get all those. But your question pointed to the reason we're bullish on getting a lot of these is that, you know, our competition today is really not opening a lot of stores. And for that, we don't feel compelled to have to rush to open a lot of stores. So we believe that the right mix right now, 450 stores still very strong for the year. The right mix of remodel and new, we believe, is the right thing. Taking care of that mature store base as we go forward is also strong. But with still close to 17% returns on new stores, we feel very bullish about what the future looks like with that 11,000 opportunities. And when we feel it's appropriate, we have the opportunity and the capacity to step it up from there. Operator: Thank you. Next question is coming from Matthew Boss from JPMorgan. Your line is now live. Matthew Boss: Thanks, and congrats on a nice quarter. So maybe two-part questions. Todd, first, how would you assess the current health of your low to middle-income customer, maybe leveraging your latest survey work? And what's the traffic versus interplay that you've historically seen in a similar economic backdrop? And then for Donnie, if you could maybe just touch on any puts and takes to consider as it relates to next year, just relative to the target to return earnings growth to 10% at 2% to 3% comps and tying in the moderated real estate plan for next year. Todd Vasos: Okay, Matt. Yeah. Thank you. I'll start out. Yeah. You know, as we exited Q3, I would tell you that that low middle-end consumer continues to be stretched. She is definitely being very mindful of where she shops and what she shops for, making trade-offs at the shelf in many instances. The great thing about Dollar General Corporation is that we offer extreme value here with a very convenient place to shop. And that is obviously resonating with the consumer with a 2.5% comp for the quarter. And I believe most notably, much different, by the way, than our competitors have put out there, a 2.5% traffic number. And if you think about it, when you think about traffic, we've always said here, traffic is the real measuring point. Right? Because that's the sustainability of the comp as we go forward. And we can leverage that additional traffic that we're seeing into long-term sustainable growth here at Dollar General Corporation. So stay tuned for that. We know how to also go after these customers. We've already started that retention program to ensure that we continue to keep the new ones that we're seeing into the brand, both from the middle and the high end. And then lastly, on that low-end consumer, you think about where we sit in price, we feel very good about our everyday price. Very good positioning there. A solid and balanced promotional cadence, which is always important for that low-end consumer. But the most important that she continues to tell us through our survey work, Matt, is that we've got over 2,000 SKUs at a dollar or less every day inside of our stores. And matter of fact, the team did a great job this year leveraging that low-end consumer work with our holiday performance. And as you think about holiday this year, we have 20% of our SKUs at a dollar. We have 70% of the entire mix of holiday at $3 or less. So it's gonna resonate pretty well. And I will tell you that we're off to a very nice start here in Q4. Donnie Lau: Yep. And then in terms of your question on 2026 and long-term framework, Matt, yeah, we'll plan to provide more formal guidance on our Q4 earnings call in March. But overall, based on where I sit today, I do think it's fair to say that we're tracking towards the timelines contemplated in our long-term financial framework. And if you just take a step back at a high level, we all feel really good about our ability to deliver against the long-term financial framework targets. I'm especially excited about the progress we're already making against some of the key targets. And so, you know, the way I think about it, Matt, is this is given all the great work the team's accomplished around our back-to-basic strategy, yeah, we've essentially stabilized the core. Right? And the business is once again on really strong footing. Obviously, a lot of work to do still, particularly around sustainability, but we're now able to execute better in certain, what I'll call, value drivers. And the great news is we're making great progress across many of these drivers. And think that was reflected, right, in our strong Q3 operational and financial results. And so when you add it all up, to me, we really are building momentum across many aspects of the business. We're ahead of schedule versus some of our initial targets that we laid out, and, you know, we'll continue to accelerate where we see opportunity. So overall, I think there's a lot of reasons to be optimistic as we move ahead. Operator: Thank you. Next question today is coming from Seth Sigman from Barclays. Your line is now live. Seth Sigman: Thanks. Good morning, everyone. My question is on digital and the incrementality that you mentioned. Can you talk about the value proposition? What is appealing about your offering for the consumer for delivery today? And if you can, maybe frame the contribution to total comps growth from delivery? How is that starting to help? And then just taking a step back, how does this change the economics of the business over time? Obviously, it's an important part of the long-term margin story, and so I think it'd be helpful to sort of lay that out. Thanks so much. Todd Vasos: Yeah. I'll take the first part. I'll let Donnie talk briefly on the economics. But Seth, we're very proud of where we are in our digital journey. Again, as we talked about our media network being in the very early innings, the second inning, I would tell you our digital journey in totality is probably just in the second inning. So really just starting our journey. But I would tell you that we're off to a really nice start. It was a very nice contributor again this quarter. But as I step back and think about our digital piece and what it looks like, you know, when you think about the proposition for our core customer and quite frankly for the customer just in general, what we're seeing early on is still very high incrementality rates of shoppers in the digital program. Over 70% incrementality on how we're measuring it, which is a very, very strong piece. Getting new customers, we're seeing much larger basket sizes through our digital properties, which really does again show that it's a different type of customer than our core. But also that we're starting to see more signs of a stock-up versus what we normally see inside of our brick and mortar of a fill-in. So, you know, we feel good about that incrementality piece. Good about the extra piece. Our real opportunity here is to continue to deliver to rural America. I think that's our value proposition at this point. And I believe we are off to a great start there. And by the way, we have a unique opportunity. We own Rural America out there across the United States. And today, even in the second inning that we're in, over 70% of our orders that are done are delivered to an individual's front door in an hour or less, even in Rural America. And that is a strong proposition that no one's been able to touch. And we'll continue to foster that and look at ways to even gain momentum across those properties. Donnie Lau: Yep. As Todd alluded to, we're especially pleased with the incrementality. I think the other way to think about that is we're introducing, right, new customers to the Dollar General Corporation brand. Right? And the great news is, you know, as they engage with us, they engage more across our digital properties, right, which makes the DG media network even more attractive to our brand partners, which is fantastic. And so what I'm really excited about is, you know, we're seeing good growth here. It is sales and profit accretive, which is obviously fantastic to see. Operator: Thank you. Next question is coming from Michael Lasser from UBS. Your line is now live. Michael Lasser: Good morning. Thank you so much for taking my question. Donnie, welcome back. My question is on the comp. You've now settled into a few quarters in a row of 2% comp. Is this as good as it's gonna get? And does this provide enough margin of safety looking forward to next year when SNAP could become a headwind, and other factors that are gonna be at play in the overall environment? If that's the case, might you have to become more promotional, do more things like offer $5 off of $25 basket in order to drive the comp, and you'll have to sacrifice some margin in order to drive the top line. Thank you very much. Todd Vasos: Thank you, Michael. I'll start it out and have Donnie wrap that up. But, you know, we feel great about the 2.5% comp. As I indicated in the earlier question, you know, the comp was strong at 2.5. We've been well over two now, a few quarters in a row. And as I think about Q4, we feel very good about the numbers we put out for full-year guidance. That would also portray a stronger comp in Q4. And as I think about the composition, it's so important, Michael. You know that. You've been with us on this journey for quite a while now, many years. And anytime we can turn a 2.5% comp into a 2.5% ticket, I'm sorry, traffic number, that is a very strong showing. And it bodes well for what the future holds in comp. We're retailers. We're never satisfied with where we are. And I would tell you that we strive to determine even higher numbers. But the great thing about, you know, how I look at this business is that we always look for sustainability, not a, you know, a quick win on the comp side. And I believe that's how we've put this together and what we're seeing, you know, as we go forward. And then lastly, I would also tell you that, you know, from a promotional cadence perspective and what we see in the future, we believe we're uniquely positioned today and rightfully positioned. We don't see that changing. At least in the near term. In the next year, we don't see a need to be more promotional. We think the way we have approached this with a great everyday price, a good balance of promotional cadence opportunities that we already have in place, and, again, that very, very important $1 price point that we continue to offer the consumer puts us in a real unique position to drive comps. Donnie Lau: Yeah. And the only thing I'd add too, Michael, is, you know, I also have a, you know, we have a lot of confidence, right, in the 2% to 3% growth over the time period that we've outlined in the long-term framework. I think the great news is we're able to deliver against our long-term framework targets within this range. And I think the other thing to point out is new stores and the remodels, they're expected to contribute about 150 to 200 basis points of that. Right? And then on top of that, you layer in the growth we're seeing in new customers, trade-in higher income, the playbook we have to retain them. I'll tell you, overall, we feel really good about our plans to build on our sales momentum, balance of year and beyond. And then we touched on this earlier too, but on the margin line, overall, I tell you, I think we have more tailwinds than headwinds as we move into 2026 and beyond. Operator: Thank you. Next question is coming from Simeon Gutman from Morgan Stanley. Your line is now live. Simeon Gutman: Hey, everyone. Hi, Todd, Donnie. My question is on getting back to 6% plus margins. Can you think about the construct? Should there be linearity to it? It sounds like media will be a big piece of it, but maybe not in the immediate year or so? Or is that the wrong way to think about it? Donnie Lau: Yeah. Maybe I'll let Todd touch a little more on the media network. I think we touched on that earlier. But, you know, at a high level on the margin side, Simeon, I'll tell you, feel really good here also in terms of our ability to deliver against that margin target. You know? We talked, we touched on this a little bit, but there are a lot of drivers we have in place that we expect will contribute to margin expansion over time. I do want to note that while the focus is on the op margin line, right, gross profit obviously expected to be the more meaningful contributor to margin expansion over this time period. Within gross margin, we do continue to expect shrink and damages will contribute at least, right, a 120 basis point expansion. We talked about this, but the great news is shrink is already improving at a faster and higher rate than we were initially anticipating. A lot of reasons to think we can deliver continued improvement over time on that front. In terms of damages, right, they're trending in line with our expectations. Overall, really pleased with that progress. On the DG media network, as Todd alluded to, kind of early days, we do think it's gonna be a meaningful contributor over time. The great news is we're just beginning to really build momentum against our initiative here. And just remember, there's a lot of other drivers in place that we expect to contribute as well, whether it's, you know, further reductions in kind of markdown risk and greater efficiencies across the supply chain, continued growth in the non-consumables business. We're seeing good growth coming out of private brands. And so overall, I'd tell you, I just feel really good about our ability to drive continued gross margin expansion as we move ahead. Todd Vasos: Yeah. And Simeon, I would tell you that, as we do believe the media network as we go into the outer years of our long-term framework, will be a substantial contributor. And the reason that we feel that way is we already are seeing nice large double-digit gains quarter over quarter or year over year. And I would tell you that as we pick up momentum on our native MyDG digital platform, as those start to grow even more, what we start to see there is more first-party accounts, which then translates and we're able to monetize that with our vendor partners. They see a lot of value in that because, again, uniquely positioned here because we own the data for lower-end to middle-end consumers in rural America, where it is very difficult if not almost impossible for anyone else to have replicated what we know about that customer and then how we monetize that over the long term. And for us, we believe that uniquely positions us to be able to deliver on that long-term framework as it relates to the media network. Donnie Lau: Yep. And then just quickly too, Simeon, just, you know, we haven't really touched on this, but in terms of SG&A, right, just as a reminder, the goal here is really to minimize the deleverage. And I think we're really well-positioned to deliver against this target as well. You know, just briefly as a reminder for this year, we do expect outsized incentive comp of approximately $200 million this year. So that should benefit next year as we, I think it's fair to expect for us to plan for a more normalized rate there. But in addition, right, the accelerated remodel program is expected to mitigate future arm in the expense. In the meantime, do expect to drive additional efficiencies through more work simplification efforts. And so, overall, we feel really good about our efforts on the SG&A front as well. And the one thing we really haven't spoken about at all is really AI. Right? And I do think this provides a potential opportunity to maybe drive greater efficiencies and more sales as we move ahead. You know, in fact, we recently hired a new head of AI to accelerate our efforts here. And, you know, in the meantime, in the background, we are laying the foundation to enable AI scale, right, with our IT modernization efforts and, importantly, what I would say is these additional efficiencies and potential opportunities for more sales growth that are associated with AI aren't captured in the framework today. Operator: Thank you. Next question is coming from John Heinbockel from Guggenheim Partners. Your line is now live. John Heinbockel: Hey. Hey, Todd. Two related questions. Where do you think the greatest opportunity is on labor productivity? Because I don't think financially electronic shelf labels work in the dollar store setting or correct me if I'm wrong with that. And then secondly, do you think you can get shrink down to 1% or so without adversely impacting sales? Right? There has to be a natural floor that you don't wanna go below? Todd Vasos: Yeah. John, thanks for the questions. Yes. I would tell you, I'll start. When you think about the shrink numbers, you know, we feel good about where we're headed here. You know, we had set our sights on, you know, around the 2019 levels of shrink. We felt really good about that. We are recalibrating to a better number because we're seeing even more opportunity. And I think you're leaning toward, and I think, importantly, for me to point out is that our SKU rationalization efforts have really produced some of this outsized shrink opportunity on the good side that we've seen so far, and it should be the gift that keeps on giving because we believe that as we move into '26, stay tuned as we talk about '26 when we come out with our fourth-quarter results. But rest assured that SKU rationalization and just inventory in totality will still be very top of mind in 2026. And with that, we believe that there's an opportunity for even lower shrink numbers as we go forward. That's why I mentioned earlier that I feel that in that long-term framework, we can benefit probably from even better shrink than we had first anticipated. If nothing else gives us great assurances that we can deliver on that long-term framework. But stay tuned. A lot of time ahead of us. But we feel good about that. Operator: Thank you. Next question is coming from Scot Ciccarelli from Truist Security. Your line is now live. Scot Ciccarelli: Good morning, guys. Thanks for the time. And, Todd, I think you started to touch a little bit on this, but you've had almost two straight years of inventory declines. Obviously, there's a major working capital benefit. But I have a two-part question. One, can you guys size the positive margin impact that the lower inventory levels have had on both markdown activity and shrink? And then two, at what point do you need to start rebuilding your inventory levels? Thanks. Todd Vasos: Yeah. I'll take that. We're not gonna quantify it, but I would tell you that what we've seen is, and you mentioned it, we've intentionally gone out with SKU reduction. We've reduced over 2,500 everyday SKUs over the past couple of years. We've got more to go. And I would tell you that any good retailer does this over time. We don't believe there's a need to rebuild current inventory levels. We believe we're, in many categories, at optimal levels, but we also believe there's a lot of categories that we can still optimize. And what we'll be going after in '26 and beyond. So stay tuned and should benefit us on the shrink line and most importantly on the damage line as we go forward. The great thing I think we can all agree upon at this point is all those efforts have not hit us on the top line. And matter of fact, we've continued to produce fill rates that are at some of our highest levels that we've seen in years here for the consumer. And, obviously, you see the 2.5 comp this quarter and the traffic number. And that traffic number is a real good indication that she has a lot of confidence to continue to come into Dollar General Corporation and find what she needs. So we feel good about where we are. We don't believe for a moment that we're finished and more to come. We think that this is a real opportunity for us and a strong opportunity on that gross margin line, even more so as Donnie indicated than we even had first contemplated in that long-term model. Operator: Thank you. Next question is coming from Chuck Grom from Gordon Haskett. Your line is now live. Chuck Grom: Hey, Todd. Welcome back, Donnie. I have two questions. Just one near term, one long term. On the near term, Todd, can you just amplify on the strong start to November and the more positive outlook for the fourth quarter? How much of that's traffic-driven? Have you seen any improvement in ticket? And then longer term, there's a lot of concerns out there about Amazon and Walmart Plus. Can you talk about some of the key tenants of your competitive moat in the role, like rent and me, the rural landscape, and how you can compete more effectively? Todd Vasos: Yeah. Chuck. Thanks for the question. Yeah. I would tell you, while we're not gonna give you a ton of color on Q4, I would tell you we are off to a good start, a great start quite frankly. Very good about that. Even in the face of some of those SNAP benefit holdbacks due to the government shutdown. I'll give you a little color around that, which I think is important. Because SNAP, as we go into the next year, you know, may have some headwinds to it. But we still see OB three as a complete in totality a tailwind for us. And here's one reason on the SNAP side, is what we saw was the consumer still needed to feed her family. She still has to do that. And she used cash as a tender with us during the shutdown time where she didn't get her benefit. And then as those benefits flowed in, we also then got the SNAP benefit on the second part of the month. So it quite frankly was a net positive for us as we move through November. And not only in those areas, but she also bought a lot of the non-consumable categories. And holiday is off to a really good start as well. So feel bullish, but always keep in mind a lot of quarter still left ahead of us with the important Christmas holiday selling season upon us at this point. But, we feel, as Donnie indicated, we have a fair amount of momentum heading into that holiday season and into next year. And then lastly, your question around our competitive moat. I'd tell you, we feel good about the competitive moat. We have spent years, Chuck, and many, many dollars, as you know, not only building but strengthening that competitive moat in rural America. And with 80% of our stores in those small towns across America, very, very difficult to replicate. Whether it be brick and mortar or whether it be on a digital basis. And, again, we didn't sit back. We moved swiftly once we saw that our core consumer was starting to venture into her digital journey. We've always said our core customer, she's a fast follower. She'll get there. And she's starting to move that way. So we moved that way. And the great thing is we moved that way with a lot of intentionality. And that intentionality was really centered around rural America and being able to deliver that customer in an hour or less. Where no one else can touch that at this point. We feel that's a very strong competitive moat, and we'll continue to do that but also build on our ability to have a very strong and sustainable brick and mortar business as well as that digital business as we go forward. Operator: Thank you. Our final question today is coming from Spencer Hannes from Wolfe Research. Your line is now live. Spencer Hannes: Good morning. Thanks for the question. Just wanted to circle back on the remodel program. The updated list you provided us with was helpful. I'm just curious what you think the tailwind could be in year two if there's any tailwind coming. And then just in terms of the price gaps, you called out that 3% to 4% gap versus math. Have you seen any change there in how you guys are coming in from a pricing standpoint versus these other guys out there? Todd Vasos: Yeah. I'll take those. You know, I would tell you on the pricing piece that we feel very good about where we are, as I indicated earlier. Not only our everyday price still falling within the bounds that our core customer looks to us to be able to provide her, but also around those promotional cadence. You know, our TPR program, temporary price reduction program, and our ad program all deliver solidly to our core consumer. And it's evident by those traffic numbers that we're seeing. And then lastly, I keep emphasizing this because it is such an important component to the low-end consumer. And that's at that dollar price point is so, so important to that consumer. And with that, gives her a halo effect on price in totality within the Dollar General Corporation organization. So I would tell you that our price perception numbers through what we see in our consumer data is on the increase, while others may not be. And we feel very strong about that positioning as we go forward. And then our programs around our new store programs, our remodel programs, we again feel very strong about where we're headed. In the long and the long-term possibilities that those hold, including our Pop Shelf in Mexico banners. We feel good. We're in test and learn mode on those two. But we're seeing very nice sales gains. The customer is resonating with each of those brands. But more to come there as well. Operator: Thank you. We've reached the end of our question and answer session. Ladies and gentlemen, that does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator: Good day, everyone, and welcome to Genesco Third Quarter Fiscal 2026 Conference Call. Just a reminder, today's call is being recorded. I'll now turn the call over to Jason Ware, Vice President of Finance and Investor Relations. Please go ahead, sir. Jason Ware: Good morning, everyone, and thank you for joining us to discuss our third quarter fiscal 2026 results. Participants on the call expect to make forward-looking statements reflecting our expectations as of today. But actual results could be different. Genesco refers you to this morning's earnings release and the company's SEC filings, including its most recent 10-Ks and 10-Q filings, for some of the factors that could cause differences from the expectations reflected in the forward-looking statements made today. Participants also expect to refer to certain adjusted financial measures during the call. All non-GAAP financial measures are reconciled to their GAAP counterparts in the attachments to this morning's press release and in schedules available on the company's website in the Quarterly Results section. We have also posted a presentation summarizing our results here as well. With me on the call today is Mimi Eckel Vaughn, Board Chair, President, and Chief Executive Officer, and Sandra Harris, Senior Vice President, Finance, and Chief Financial Officer. I'd like to turn the call over to Mimi. Thanks, Jason. Good morning, everyone. Mimi Eckel Vaughn: And thank you for joining us on our third quarter earnings call. We delivered solid performance versus last year in this important back-to-school quarter led by Journeys, which achieved 6% comp growth and more than a 50% increase in operating income. This significant improvement in profitability was partially offset by the anticipated exit of licenses in Genesco Brands Group, the impact of tariffs, and more than expected gross margin pressure at Schuh as the UK market faced heightened promotional activity. Against this backdrop, we delivered our fifth consecutive quarter of positive comp sales growth overall and third quarter results within our expectations, albeit at the lower end, reflecting both the strength and resilience of our portfolio in a dynamic consumer environment. Total comparable sales increased 3% with store comps up a noteworthy 5%, coupled with a modest decline in e-commerce comp, which faced tougher comparisons against last year's double-digit gains. These results reflect our investment in the store channel and the strength of our in-store experience supported by well-executed assortments and engaged teams that continue to drive conversion. The consumer environment continues to reflect customers shopping when there's a reason and pulling back when there's not. This pattern became much more pronounced for our category during back-to-school this year, which is factoring into our view of the fourth quarter. In the third quarter, demand was even stronger than we expected during the heart of back-to-school, and then traffic and purchase intent softened considerably and more than we expected in the weeks following with an especially challenging October. Customers are searching for must-have items and newness and freshness to drive their purchases. Importantly, when you have what our customer wants, they are willing to pay up for what they want, but they are conserving on footwear shopping in non-peak times and passing altogether on products not in high demand. We saw this same pattern in the first few weeks of November. Encouragingly, as we moved through November with colder weather and as we approached the holidays, overall performance picked up. Early results from Black Friday and Cyber Monday were positive, reaffirming we have the right brands and styles to satisfy what this discriminating customer is looking for. Before I dive deeper into the business, I'd like to highlight the progress and the key strategic initiatives we launched during the quarter that will drive growth and profitability going forward. First, Journeys continues executing against its strategic plan to accelerate growth, delivering its fifth consecutive quarter of positive comp growth along with almost 200 basis points of operating margin expansion. Notably, Journeys' mid-single-digit comp was on top of double-digit comps for the third quarter last year, and at a time when footwear industry trends have been challenging. These results underscore the meaningful market share gains we've captured this year as the next wave of Journeys' transformative initiatives gain meaningful traction. Second, part of this next wave of initiatives is building awareness of the Journeys brand with the wider customer base we're targeting. The Life on Loud brand campaign launched in September has already surpassed 70 million social views and continues to grow as we shift investment toward impactful brand-building campaigns to drive new customer growth and traffic. Third, we formed the newly created Journeys Global Retail Group under Andy Gray's leadership, uniting Journeys, Schuh, and Little Burgundy. These three banners are the destination retailers for the young, style-led female across their respective markets. We see clear opportunities bringing these retail businesses together as we strengthen market positioning with this customer and drive greater growth serving her in collaboration with our brand partners. This new structure will facilitate further progress as we shift our attention with even greater urgency to improving Schuh's performance. Next, we're truly excited about Johnston and Murphy's introduction of legendary quarterback Peyton Manning as its new brand ambassador and face of the brand. The launch of this new partnership generated an immediate double-digit traffic increase following the campaign's debut online and in our stores in early October. And finally, while the wind-down of the Levi's license is causing meaningful one-time headwinds in Genesco Brands Group this year, we are thrilled with and preparing for growth with the fall 2026 footwear launch for the iconic denim and authentically American Wrangler brand. Now for more Q3 color and initiatives for each business. Starting with Journeys. August led Q3 for Journeys with a record back-to-school and strong double-digit comp growth on top of double-digit gains last year. When the customer came out to shop for back-to-school, Journeys was a key destination. Store performance remained robust with Q3 store comps tracking in line with the first half of the year, driven by higher conversion and transaction size and contribution from our 4.0 store remodels. Journeys' product offering remains diversified across athletic, casual, and canvas as we strive to represent all brands in demand by our youth consumer. While we saw growth from both athletic and casual brands in Q3, athletic was the more dominant category with low profile and running-inspired styles resonating. We are currently seeing our customer gravitating to athletic styles on a more year-round basis. Boot sales were also positive in Q3 but driven by specific brands. Now turning to Schuh. The UK retail environment remains very challenging. Currently, the UK footwear customer is focused either on must-have items with much less interest in the rest of the assortment or is looking for a deal to spur a purchase. As a result, Schuh's overall comps took a step back for the quarter as gains in store conversion and average transaction size were not enough to offset the traffic declines. We increased our promotional activity even more than expected during the quarter both to match our competitors' promotional stance and to motivate demand as well as to manage inventories appropriately. We are taking proactive steps to strengthen the business and position Schuh for renewed growth. In the near term in Q4, focused on course correcting through several actions, including assortment updates, our past, present, and future holiday campaign, targeted social marketing, AI-driven e-commerce content, and stronger in-store conversions via the new ATV program. Even with these steps, we still expect headwinds in a challenged UK marketplace that we will have to navigate through. Into next year, the newly formed Journeys Global Retail Group is working to unlock greater product access and growth. Through this and by leveraging other elements of the Journeys playbook, we are implementing a holistic plan to dramatically improve operating performance. This ranges from sharpening Schuh's customer value proposition to building Schuh brand awareness and also includes fleet optimization. Turning now to our branded business. At Johnston and Murphy in Q3, overall sales increased year over year reflecting growth in the wholesale channel. The decline in overall comps was driven in large part by softer e-commerce trends as we shifted spend from performance marketing early in the quarter to brand awareness including the launch of our new brand ambassador in early October. Gross margins were pressured due to channel mix with a greater percentage of wholesale sales as well as tariff headwinds in the wholesale channel ahead of price increases. After success with J&M's strategic repositioning into a more casual, comfortable, multi-category lifestyle brand, we've been working hard to deliver more newness and distinctive product in response to comp headwinds. During the quarter, we introduced newness across both footwear and apparel supported by increased innovation like the x plus footwear collection, updated fabric, and design details, and redesigned programs like the quarter zip offering. While we were pleased overall with the performance of these new introductions, especially in apparel and accessories, we have work to do to drive more robust sales across the balance of the assortment. Accelerating brand awareness and acquiring new customers have been J&M's other areas of focus. And we made major strides here with the Peyton Manning launch in October. Mimi Eckel Vaughn: While it's still early, the campaign generated strong media coverage and immediate double-digit traffic gains which translated into improved comp trends and new customer acquisition. We look forward to ongoing collaboration with Peyton. And finally, we're investing in J&M store remodels and new store openings with impactful results. And now early in Q4, have inflected to a net store increase to drive growth going forward. Rounding out the branded business, the impact of tariffs, which affects this business the most, and the continued liquidation of licenses we're exiting substantially pressured both Genesco Brands Group gross margins and our overall performance during the quarter. We look forward to completing the liquidation by the end of the year and moving past this headwind. And now let me briefly recap the exciting progress fueling Journeys' strategic growth plan. Our strategy focuses on Journeys as the destination for the style-led teen, especially the teen girl. As no other concept goes across athletic casual and canvas footwear. This is how we are differentiated and the white space we identified to build on the traditional strengths of Journeys to serve a wider teen audience interested in style and trend that's six to seven times larger than the market we've historically served. As a reminder, we're executing across four key areas. First, product elevation and diversification. We're driving product elevation and diversified footwear leadership with best-in-class and more premium footwear brands. This work is achieving great impact as we saw an increase in third-quarter average transaction volume on top of significant growth last year. As we strive to represent all brands in our customers' closet, we launched Nike in November, with an assortment of premium styles that is just right for our team. The Nike addition added newness to Journeys offering and generated true excitement and energy in our business and with our people. We look forward to building further on this partnership. Second, investing in the Journeys brand. We're building momentum through a refreshed style-led positioning aimed at expanding awareness with this broader teen audience. I've talked about the launch of Life on Loud brand awareness campaign, we reimagined an iconic late nineties music video as well as created unique experiential moments like our Gus Dapperton pop-up event in our New York City 14th Street store. Beyond the Nike launch, we also executed brand activations, including a customization tour with UGG. We held an in-store concert with Puma and Lynn Lapid and launched a partnership with Converse to bring first-of-its-kind hologram advertising to malls across the US. Third, elevating the customer experience, especially in stores. We've accelerated the rollout of our new 4.0 store format and elevated setting to attract new customers and call attention to our more premium offering. Which continues to deliver more than a 25% sales lift and strong new customer acquisition. We expect to end the year with more than 80 stores in this new format, with more to follow next year. And finally, investing in our people. We've been investing in a stronger team at retail engaged in better selling behaviors and stepped-up customer engagement, which has helped drive high single-digit store comps over the last twelve months. Journeys is well-positioned for Q4 and the holiday season with a strong offering and campaigns that are clearly resonating with our target customer. The brand's consistent comp growth, profitability improvement, and expanding omnichannel engagement give us confidence as we close the year and continue building on this momentum into next year. We're excited about the road ahead, and the tremendous value Journeys can unlock. Now turning to our outlook. While we're encouraged by the read from November, particularly during Black Friday and Cyber Monday, there are some factors causing us to update our view on the remainder of the year. To start, we have materially changed our sales and margin projections for Schuh, to reflect the ongoing difficult UK market and performance. We have also moderated the growth assumptions for our other businesses based on the footwear, consumer traffic, and spending patterns we've witnessed on non-peak shopping days. While we are able to partially mitigate the impact on profitability, through reductions in expenses, it isn't enough to offset the overall reduction in sales and even more so the margin pressure at Schuh. Therefore, we are adjusting our full-year EPS guidance. While we are disappointed to be lowering our overall outlook, our updated view doesn't change the fact that Journeys remains on track to deliver an outstanding year with comps projected to increase mid-single digits and operating income that almost doubles. Sandra will take you through the more detailed guidance assumptions. Before I turn the call over, I'd like to thank our teams for their tremendous efforts to evolve our business with a deep understanding of what our customer wants and for their incredible execution which is essential to delivering the important holiday season and a strong finish to fiscal 2026, which we will build upon in the year to come. And now, Sandra, over to you. Thanks, Mimi. I'll now walk through the details of the third quarter and provide an update on our outlook for the full year. Starting with revenue, total revenue for the quarter was $616 million, up 3% compared to last year. Driven by overall comparable sales growth of 3%. Reflecting positive 6% comps at Journeys and 2% lower comps at Schuh and J&M. Store comps increased 5% while direct comps declined 3% on top of 15% growth last year. A favorable exchange rate in the UK and strong wholesale volume helped offset an overall smaller store base. Gross margin for the quarter was 46.8%, down 100 basis points from last year. The primary drivers were product liquidations in Genesco Brands Group, tariff cost increases ahead of price adjustments, margin pressure at Schuh due to the promotional environment in the UK, and higher wholesale mix at Johnston and Murphy. While we expected lower margins from the exit of Life licenses at Genesco Brand Group, we again pulled forward liquidation sales. Which lifted revenue and gross profit, but at lower gross margins. We expect to be largely through this inventory by year-end which should support gross margin improvement next year. Overall, SG&A expense was 44.7% of sales, leveraging 140 basis points year over year. The improvement reflects broad-based cost reduction efforts with nearly every SG&A line showing leverage. The most meaningful savings came from rent expense, as we continue to optimize the store fleet and freight reductions. Mimi Eckel Vaughn: Importantly, we achieved this leverage while increasing marketing investment to support growth. All banners delivered expense leverage other than Schuh which deleveraged with the lower store comp. Adjusted operating income for the quarter was $12.9 million above last year's $10.3 million, resulting in adjusted diluted earnings per share of $0.79 compared to $0.61 in the same period last year. The growth was driven by the sales increase and expense leverage and was partially offset by the gross margin pressure already highlighted. Turning to the balance sheet and capital allocation. Free cash flow for the quarter improved nearly $5 million year over year. Inventory was up 7% compared to last year in part because strong sell-through of key new styles in the third quarter last year left us with tighter inventory levels heading into the holiday season. Our inventory is clean, and we're taking actions in the quarter to rightsize our inventory at Schuh. Capital expenditures totaled $18 million focused on store remodels, new stores, digital investments, and customer experience enhancements. We ended the quarter with 1,245 stores, having opened four and closed 12. Our Journeys 4.0 stores continue to deliver exceptional performance across all key metrics, comps, traffic, conversion, and average transaction size. We now have 76 Journeys 4.0 locations and expect more than 80 by year-end. And their consistent outperformance reinforces our confidence in the concept as we continue to expand the rollout. We did not repurchase any shares in the quarter, but as a reminder, we did repurchase approximately 600,000 shares in the first quarter, approximately 5% of shares outstanding, leaving $29.8 million remaining under our current share repurchase authorization. Now turning to guidance. We now expect to deliver full-year adjusted earnings per share of approximately $0.95 reflecting a higher tax rate of 34%. At our previously assumed tax rate of 29%, adjusted earnings per share would be above a dollar. The key drivers of the revised outlook are greater pressure on Schuh sales and margins due to the challenging UK consumer environment, more conservative sales assumptions across the portfolio, reflecting the heightened volatility in consumer spending we've seen recently including tougher year-over-year comparisons in the Journeys e-commerce channel. And lower SG&A consistent with our disciplined cost control throughout the year which helps offset but cannot fully absorb the incremental margin pressure at Schuh combined with a more modest top line. Our full-year assumptions now reflect total revenue growth of about 2% comparable sales growth of about 3%, We continue to expect mid-single-digit comp growth at Journeys for the full year. Gross margin down approximately 100 basis points year over year reflecting deleverage year to date and continued margin pressure, primarily at Schuh into Q4. 100 basis points as a percent of sales driven by continued cost actions and store optimization efforts. Capital expenditures of $55 million to $65 million supporting growth initiatives, including the Journeys 4.0 remodel program, other new and refreshed stores, and ongoing digital investments. We continue to expect positive free cash flow for the full year. Average shares outstanding of approximately 10.6 million and an adjusted tax rate of about 34%. Impacted by deduction limitations tied to lower Schuh profitability. While the external environment is affecting our near-term performance, we remain encouraged by the progress of our strategic initiatives and confident in the areas within our control. We remain focused on disciplined execution and flexibility while continuing to invest strategically to position Genesco for sustainable long-term value creation. And now I'll turn the call back to Mimi for her closing comments. Thanks, Sandra. Before we open for questions, let me provide context on fiscal 2026 and our path forward. This year has been defined by strong momentum at Journeys, offset by headwinds elsewhere. Looking ahead, we're well-positioned for growth. Journeys will build on its proven momentum as we continue executing our strategic plan. And through our new Journeys Global Retail Group structure, we're applying our successful retail playbook to materially improve Schuh's performance. Our branded businesses are expected to see gross margin rate benefits from a full year of price increases and lapping the license exits even though tariff pressures will persist. The consumer remains selective, but we have the right strategies, teams, and brand portfolio to navigate this environment. We're building a stronger, more resilient Genesco positioned to deliver sustainable long-term value. Thank you again for joining us today, and we will now open up for questions. Operator: Thank you. We'll now be conducting a question and answer session. Like to ask a question at this time, you may press star 1 from your telephone keypad. A confirmation tone will indicate your line is in the question queue. Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please for our first question. Thank you. And the first question comes from the line of Mitch Kummetz with Seaport Research. Please proceed with your questions. Yes. Thanks for taking my questions. I think I've got three of them. Let me start on Journeys and the outlook for the fourth quarter because you guys have lowered your sales outlook for Journeys for the year. And if my math is, you know, close to being right, that implies maybe sort of flat to down. Low single-digit sales for Journeys in the fourth quarter. I'm wondering if that's essentially what you're thinking. And I'm wondering if you expect Journeys to how you expect Journeys to comp in the quarter? Are you kind of looking for sort of a flat to slightly positive comp for Journeys in Q4? And then I have two others. Mimi Eckel Vaughn: Great. Thanks for your question, Mitch, and thanks for joining us this morning. In terms of Journeys outlook, I will just take us back to last year where Journeys had really a very strong back half of the year. I think it was a plus 11 comp and then a plus 14 comp. And so when we look to the fourth quarter, one of the things we called out today is that we have seen that during the non-peak shopping times, the consumer is pulling back. And we saw that we had a very strong back-to-school. We had a record back-to-school sold through a lot of the terrific product that we're carrying, and then we saw the consumer pull back in the week following. And so as we think to the fourth quarter, we have gone through a non-period at the beginning of November, and we're mindful of the non-peak period in January. But we're optimistic for robust sales for Journeys during the time when the consumer is gonna come out to shop. And so when you look on a stacked comp basis over the last couple of years, we are expecting positive comps for Journeys in the fourth quarter. If you take the stack and you moderate just a bit, then that is really where we end up coming out. If you look specifically at how we're thinking about the sales moderation, we're thinking about very strong store growth, as we've seen all year. But we're moderating the e-commerce comp because we're going against such strong comparisons, and we saw that also in the third quarter. In general, we are, you know, again, optimistic for positive comps for Journeys. We have closed some stores, and so that ends up impacting the overall sales number. But in fact, Journeys is more productive in the stores that we are running, and we are using initiatives like the 4.0 to make the strong stories even stronger. And so net-net, when all is said and done, we expect a stronger portfolio and stack comps that are in line with where we were in the third quarter. Mitch Kummetz: And maybe just as a follow-up to that, maybe in the on prior calls, I think you called out the lift that you've gotten from the 4.0 stores. Can you say what that was in the third quarter? Mimi Eckel Vaughn: Sure. We continue to see about the same level of performance out of the 4.0, just really strong overall performance. Even during the non-peak periods, our 4.0 stores performed at a higher level than the rest of our store fleet. So we know that that initiative is really helping to both attract new customers and to, you know, elevate the environment where we see higher transaction size and higher conversion altogether. We have just anniversaried the initial opening of the 4.0 stores. We had about 10 open by the end of the year last year. We expect that we're gonna have more than 80 open by the end of the year this year. We've accelerated through the course of the year what we can see what we believe we can do as far as, you know, having more remodels because we like so much the impact that it's having on our business. Again, we're mindful of the very strong comparisons to last year in Journeys, but we feel very good about our product assortment and all the other initiatives that I talked about on the call in terms of attracting new customers and really, attracting that wider group of young customers, particularly that teen girl to what we have at Journeys these days. Mitch Kummetz: And then, I wanted to clarify something. In the press release, I think it's you, Mimi, that are quoted saying that given the improvement in the sales trend for Black Friday, Cyber Monday, that that could to a positive start to the fourth quarter. That suggests to me that sales are up were up in November. I just wanna maybe see if that was actually the case and if Journeys was positive comp in November. I know there are a lot of non-peak shopping days in November before you get to Black Friday. So I was curious if Journeys was positive comp in November. And how do you expect the balance of the quarter to play out? I mean, between now and Christmas, there's a lot of peak shopping days. Do you expect, you know, December to be positive comp per and then things to really kind of fall off in January. Is that sort of the trajectory that you're expecting? Mimi Eckel Vaughn: Yeah. So we were positive with Journeys comps in November. We saw a strengthening into the holiday. We had a record Black Friday on top of a record Black Friday last year. And so when there is a reason to come out and shop, our customer is shopping. And the exciting thing that I would call out, Mitch, is that we were doing a lot of full-price selling. We were not promotional over the Black Friday weekend. If you walk the malls, if you walked the shopping districts, you saw that our athletic competition was highly, highly promotional. They've been promotional for some time, but they accelerated the messaging around promotional activity. And so a customer who is getting squeezed is and looking for a deal had plenty of opportunities to get deals at our competition, but we saw very nice full-price selling. We saw higher average transaction value over the Black Friday weekend. We saw robust sales online as well. And so here again, when the customer comes out to shop, feel like we're gonna get our fair share and then some. In particular, when we think about the shopping days going forward, we are expecting that we will have a very positive holiday. Our assortment is better than it's ever been. We've added Nike, most recently just to appeal further to our team customer. We are mindful of the fact that after the holiday with a consumer that is conserving to spend during the holiday and who's paying up what they really wanna have. That in January that, we would expect to see the pullback that we saw after back-to-school after holiday in January. Mitch Kummetz: And then maybe just one last one for me because you mentioned Nike. Can you say how many doors I mean, my understanding is that it went into the 4.0 doors and online. But can you say how many doors you launched Nike in and kinda what your plan is in terms of moving forward with Nike in terms of bringing it into new doors, or maybe broadening the assortment? Mimi Eckel Vaughn: Sure. We are excited about this partnership with Nike, and we have carried Nike in Journeys before, but it has been some it's been some time. And like any of our brands, Mitch, we don't start in all of our stores. We do start in a handful of doors. I've talked in the past about new brands that we've introduced. It might be 50 doors. It might be 100 doors. You know, 200 would be a lot of doors for us to introduce a brand into because we wanna see how it performs. We dropped Nike at Journeys on November 12. So it's been a matter of days that we have been carrying the brand, but we are seriously excited about this because it fits our strategy to offer to our target customer all the brands that they're interested in across our diversified assortment. And Nike is with us because they want to reach the teen customer and they want to reach the teen girl. I mean, that's a very compelling partnership for us. What's really important is that we got top-tier product. You see the Vomeros and the P6000s. But Dunks and Air Force Ones are also an important part of the wardrobe of our team, and so we've got just the right assortment for our team. So, you know, we're gonna start with Nike in the same way that we start with everybody else. It isn't gonna drive huge volume initially. None of the brands that we introduced do, but it's super important in terms of validating Journeys as the place to go for the top brands. We will build and believe that Nike can absolutely move into, you know, one of, certainly our top 10. And, one of, one of our more major brands. Mitch Kummetz: Great. Thanks, and good luck. Mimi Eckel Vaughn: Thank you, Mitch. Operator: Our next questions come from the line of Joseph Vincent Civello with Truist Securities. Please proceed with your questions. Joseph Vincent Civello: Guys. Thanks so much for taking my questions. Can you give any more color on the demand trends between Canvas and Athletic? One is the divergence between the two expanding, and two, how should we be thinking about the innovation pipeline across both for 2026? Mimi Eckel Vaughn: So thanks for joining us this morning, and I'm just gonna talk about fashion trends in general, in Journeys. And, you know, we've talked about fashion broadening and teens embracing more wearing occasions. And so we have a really nice assortment. It's our unique positioning that we've got both the fashion and the fashion athletic and the casual brands. When we look to see during the third quarter, we typically start to sell more boots, and you know, this is the time of year that the customer looks to specific boot brands. We have seen a trend where boots were actually positive. They were good for us in the third quarter, and we expect to be positive in the fourth quarter, but it's very, very brand specific. The other trend that we have seen is that we have seen the consumer moving toward wearing athletic footwear much more year-round. And so we saw growth in our casual brands, as I said, but even more growth in our athletic assortment. And so we are really, you know, really excited about the lifestyle athletic that we are selling. In terms of Canvas, you know, Canvas is not as strongly in demand by our overall customer. It's still an important part of our mix. In terms of the innovation pipeline, between the two going into 2026, we see more innovation on the athletic lifestyle side than we do on the Canvas side. Joseph Vincent Civello: Got it. Very helpful. On the Boots would you say that, you know, there's, like, new innovations that are driving a lot of that growth for those specific brands, or is it better access on your part? Should we think about it as, like, the bigger lever there? Mimi Eckel Vaughn: I would talk a little bit about boots as starting with just fashion. And I'll say that we don't sell fashion boots per se. We're not selling, like, certain looks of boots that tend to be represented by, you know, non-branded offerings. We sell boots that are related to specific brands. Traditional boots have become less of a part of our assortment over the last couple of years. We've seen the customer gravitating toward much lower shafts, more moccasin-like products a lot of fur. It gives the warmth so there's definitely a seasonal switch, but it's been out of taller boots into, you know, shorter boots and into moccasin-type boots in addition to the customer trading into athletic. On the boot front, as I said, it's very brand specific. There are some iconic brands that are in demand right now by the consumer, and so that's been fueling our growth. Joseph Vincent Civello: Got it. And then, one last one for me. Can you just give any more color on, like, the pullback you saw in terms of income demographics or anything like that? Just to help us understand, you know, where we saw things slow. Mimi Eckel Vaughn: Sure. You know, interestingly, we attract a broad demographic group within Journeys. And what we have seen in the past is when the consumer gets squeezed they gravitate to a lower price point product. We're not seeing that at all. We're seeing the consumer stretch up to buy what they want, and paying up. Our average transaction size is up pretty significantly. But they're conserving in between. And so when we look across our demographic cohorts, we certainly see that the higher income customer is more robustly spending but we're seeing that in general, the customer is stretching up to be able to purchase what they want when they have a reason to go out and go shopping. But the pullback really is around conserving their cash for other things that they want to purchase. Joseph Vincent Civello: Got it. Thanks so much again. Mimi Eckel Vaughn: Thank you, Joe. Operator: The next questions are from the line of Mantero Valentino Moreno-Cheek with Jefferies. Please proceed with your questions. Mantero Valentino Moreno-Cheek: Thanks for taking my question today. So you highlighted Journeys' strong comp growth and the new brand launch at Nike. And as you look ahead, are there any major next steps to continue expanding Journeys' brand portfolio? And, also, how should we think about the current momentum and how that shapes growth outlook going forward? Mimi Eckel Vaughn: Good morning, Mantero. In terms of Journeys and the Nike introduction, I think I've talked about several of the brands that we have been introducing in Journeys over the past few months. Brands like HOKA and Saucony as well. And all of these are important in terms of validating Journeys and categories we haven't had historical strength in. And brands that are an important part of our overall mix. So lifestyle running is a really great example of a category that's important. As I said, they don't start as major revenue plays, but they do build into top brands in our portfolio. So the key for us is that we are absolutely pursuing a strategy of more diversification. And more diversification means that when styles or brands or categories get hot, that we're well represented in that. And if you go back over Journeys' history, you'll see that brands rotate in and out of our top assortment that our consumer, our teen customer has an insatiable appetite for something new and something different and something that's next. And so our business model actually is a business model that can stand the test of time with the diversification because we can manage that rotation in and out of the brands that are important to our consumer. And so it's having the right brands, having strong relationships with these brands, building growth plans going forward, and being able to navigate where the consumer takes us and where we take the consumer. In terms of how should we think about Journeys' sales momentum, we're just mindful of the fact that last year was a really strong period for Journeys as we significantly changed the assortment and drove comps well into the double digits. And while we are anniversarying those strong comps quite nicely, there's always a phenomenon where going against strong comps that, you know, we just have to be mindful about the fact that we're anniversarying those stronger comps. I think that as we reset at the end of this year, and we think about all the other initiatives that I talked about to attract new customers in, to grow Journeys' brand awareness, to be able to improve the execution in our stores, to attract new customers to our 4.0, to add new 4.0s, that all of these things are those initiatives and those steps that will allow us to sustain growth for Journeys over many, many quarters to come. And it starts and it ends with the fact that we have a unique value proposition that we serve that style-led team. When you think about competition, within the marketplace, there's lots of competition, but there's no direct competition, and there's no brand out there that has the relationships that we have with our branded vendors and that can bring to bear the diversity of the assortment and the strength and the breadth of the assortment that our customer is seeking. And so that's what we're leaning into, and that's what will drive our growth over many quarters and many years to come. Mantero Valentino Moreno-Cheek: And then on margins, gross margin declined, and that was primarily due to margin pressure at Schuh and then ongoing tariff pressures. And so sorry I missed this. Where do you see the greatest opportunities to improve margin from here? And what are the key levers that you plan to pull to drive margin expansion in the near term and in the long term? Mimi Eckel Vaughn: Thank you. That's a great question. I'll just start with some thoughts and then ask Sandra to weigh in on this. But our margin pressure this year was driven by three major factors. You got two of them. Schuh is one of them. Tariffs is another one of them. But we are also it's our smallest business, but we are exiting a big license with Levi's. We're excited about a we're gonna replace it with Wrangler, but it's gonna take some time to do that. So when you look at our overall gross margin profile, in the quarter, we took a pretty direct hit from product that we're liquidating from Levi's. That's a one-time thing. We won't repeat that. That will be out of our mix. But it was several hundreds of basis points for the division itself and had an impact overall. The second area is tariffs, and we had a really, you know, I'd say unique for a period of time situation in our wholesale business where we had locked in wholesale pricing, last early in the year. And, we needed to honor those prices. And so it's difficult to raise prices even though our goods came in at a higher rate of tariffs. So that squeezed us there. And we will be able to manage pricing over time and do a lot of other take a lot of other actions to manage the product cost. But, over time, we see that we will be able to manage that. And then on Schuh, I mean, it's probably gonna be close to a couple of hundred basis points that we will give up in Schuh. Because the market has been really so promotional. And I think that looking into next year, we're gonna do a lot of things where we're gonna rightsize our inventory, certainly to meet the demand that's in the UK market. We expect that our competition will do that as well. We will absolutely look to strengthen our overall assortment into a deeper and broader set of must-have styles, and I think that's gonna help us as well. It will take a couple of quarters like it took a couple of quarters for us with Journeys to do a lot of the reassortment, but we are optimistic that we can make progress overall with Schuh. We really thought we would have a better back half of the year. We took a lot of the actions that we needed to take to be able to, when sales softened in May and June, get our inventory into the right place. But we have seen, in the soft consumer demand, in the back part of the year this year that our competition is actually promoting to drive sales. We typically promote to clear merchandise, but when it comes to promoting to drive sales, then that's what we've been having to match. And so I think we're looking carefully at the situation. We're just disappointed in the impact that it's gonna have on our business for this year. But we do see that there's opportunity and there's upside into next year on all of these fronts. In Mantero, I'll just add just a little bit of color behind the 100 basis points. About half of that is related to the excess of the licenses. So as we wrap up the exit of those licenses, hopefully by the end of the year, that would be an improvement next year for overall Genesco. And then Schuh makes up the majority of the rest of it. Tariffs have a residual, but I will point out that tariffs will continue to be a headwind into next year. But the majority of the trend this year is really related to the exit of the licenses. Sandra Harris: The challenges we're going to issue, which we may address the actions we're taking. Mantero Valentino Moreno-Cheek: Got it. And then I guess just one more for me. On marketing and ad spend. Those have been pretty topical recently, and I know you noted your Live On Loud campaign and the Peyton Manning, Johnson and Murphy has been performing well. So, I guess, is there anything else to know on these campaigns and how they help drive increased conversion or traffic? Operator: And, also, just how should we think about ad/marketing spend going forward? Mimi Eckel Vaughn: Sure. So we thinking about brand investment and brand marketing, is a very important initiative across all of our businesses. And I'll come back to that. But I want to point out that our teams did an extraordinary job of managing expenses across the quarter and we ended up with 140 basis points of leverage in spite of additional marketing spend. And so the idea really is as we think about shaping our cost structure and managing our cost structure, it's in a way for us to be able to fund the investment in overall marketing. And so, much of the marketing spend we've done in the past has been performance marketing to drive the growth of the digital channel, which has been quite successful. Sandra Harris: Through areas like paid search and direct mail with catalogs but we have been shifting our spend over the last year into these brand into brand marketing and more top of the funnel activities in order to attract new customers. And so, you call that life out loud. You call that Peyton, those are two great examples that we are really thrilled about. And these types of investments will pay off over time. They are aimed at building awareness and attracting into our brand. We think we've got brands. We think we've got great merchandise. But our awareness is a lot lower than we would like it to be. And so these are directly aimed at being able to build and drive awareness. Mantero Valentino Moreno-Cheek: Thank you very much. Thank you. Operator: That concludes our question and answer session. I'll turn the floor back to Mimi for closing comments. Mimi Eckel Vaughn: Thank you for joining us today. Wish everybody a happy holidays and look forward to talking with you when we report earnings and also after the holidays at the ICR conference. Operator: This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation. Have a wonderful day.
Operator: Good day, and thank you for standing by. Welcome to the Science Applications International Corporation fiscal year 2026 Q3 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, we will open up for questions. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would like to hand the call over to your speaker today, Joseph DeNardi, Senior Vice President, Investor Relations and Treasurer. Please go ahead. Joseph DeNardi: Good morning, and thank you for joining Science Applications International Corporation's Third Quarter Fiscal Year 2026 Earnings Call. My name is Joseph DeNardi, Senior Vice President of Investor Relations and Treasurer. Joining me today to discuss our business and financial results are Jim Reagan, our interim Chief Executive Officer, and Prabhu Natarajan, our Chief Financial Officer. Today, we will discuss our results for the 2026 fiscal year that ended October 31, 2025. Please note that we may make forward-looking statements on today's call that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from statements made on this call. I refer you to our SEC filings for a discussion of these risks, including the risk factors section of our annual report on Form 10-K and our quarterly reports on Form 10-Q. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so. In addition, we will discuss non-GAAP financial measures and other metrics, which we believe provide useful information for investors, and both our press release and supplemental financial presentation slides include reconciliations to the most comparable GAAP measures. The non-GAAP measures should be considered in addition to and not a substitute for financial measures in accordance with GAAP. It is now my pleasure to introduce our interim CEO, Jim Reagan. Jim Reagan: Thank you, Joseph. And thank you to everyone for joining our call. Before I begin, I want to take a moment and welcome SilverEdge to Science Applications International Corporation. Having personally spent time with leaders at SilverEdge, I am excited about the value we can create by combining their differentiated technology and commercial go-to-market approach with the breadth of Science Applications International Corporation. Building upon their success at bringing sought-after AI capabilities to life for the intelligence community, I expect strong continued growth as we deploy their incredibly talented people and solutions across the broader Science Applications International Corporation portfolio. This acquisition represents a good example of our ability to invest in differentiated IP capable of solving customer problems. I will begin with a brief review of our third-quarter results and updated outlook but will leave the more detailed walkthrough to Prabhu. I will then discuss my top priorities as interim CEO and the compelling potential to create value for our shareholders while investing to better serve our customers and create opportunities for our employees. Third-quarter revenue of $1.87 billion declined 5.6% year over year and included a roughly one-point headwind related to the government shutdown. Adjusting for this impact, revenue results were modestly ahead of our prior guidance as we have seen encouraging signs of stability across the market in recent months. Adjusted EBITDA of $185 million or a margin of 9.9% was driven by strong program execution. As I highlighted in the earnings release and as I will discuss in more detail, I see meaningful opportunities to further improve margins in the coming years while increasing internal investments to drive profitable growth. Adjusted diluted EPS was $2.58 reflecting our strong margin performance and a favorable tax rate in the quarter. Third-quarter free cash flow of $135 million was strong despite being impacted by the government shutdown which resulted in certain collections moving into our fourth fiscal quarter. Overall, the financial results we reported in the quarter were ahead of our prior guidance but I firmly believe that we can deliver stronger revenue performance over the long term. Since being appointed interim CEO by our board on October 23, my top priority has been to drive increased focus across the company and take decisive action that will position Science Applications International Corporation for long-term shareholder value creation. My prior industry experience and time on the board have allowed me to hit the ground running and I believe the actions we are taking will produce demonstrable results in the coming quarters. Let me provide greater detail and examples around what we are doing and how we are measuring impact. Science Applications International Corporation's legacy of innovation and commitment to US national security is undeniable and represents an incredibly valuable asset for the company. However, in recent years, we have struggled to convert this into revenue and EBITDA growth in line with the market due primarily to below-average business development and capture performance. The changes we have implemented over the past twenty-four months across business development are steps in the right direction and have contributed to our improved book-to-bill year to date. We are committed to building on this progress in three ways. First, sharpening our focus on execution to increase reinvestment in the business; second, more efficiently deploying our financial resources to drive growth; and third, prioritizing yield and bid quality across our business development function. We have discussed in the past that Science Applications International Corporation spends several hundred million dollars annually on indirect functions, including shared services, finance, human resources, marketing, communications, and others. We are implementing efficiencies across this category of spending, including our recent organizational restructuring, and will redeploy savings to fuel growth and improve profitability. We have identified over $100 million in annual spend that we are actively working to reinvest into higher ROI areas across our business and increase margins. This should result in a more efficient Science Applications International Corporation with increased investment directly driving growth and margins approaching 10% in the near term, with additional potential upside in FY '27 as we drive further efficiency across the business. In addition, I see an opportunity to refocus our attention on nearer-term execution and the aspects of our performance which we control. While there is value in aligning to a long-term corporate strategy, this needs to be balanced with a keen focus on executing to and delivering on our near-term commitments. My impression during my first several weeks as interim CEO is that our leaders want and will embrace this shift in priorities. I am challenging leaders across Science Applications International Corporation to focus on execution, make an impact on the business, and deliver results. And I am confident in their ability to step up. Lastly, we have shared with you our focus on increasing business development throughput and have shown strong progress against this having increased submit volumes from $17 billion in FY '24 to $28 billion in FY '25. While I believe this is an appropriate level for a business our size, we must now focus our shift from targeting throughput to prioritizing quality and alignment with the markets where we have the strongest right to win. This will drive improved decision-making, more efficient resource allocation, and a stronger Science Applications International Corporation in the long run. As I look at some of the larger business development pursuits that have not gone our way in recent years, and the lessons learned, there is substantial value to be created from turning up the focus and attention on the core fundamentals of this business. Before turning the call over to Prabhu, I want to take a moment to thank Toni Townes-Whitley, David Ray, Josh Jackson, and Lauren Knausenberger for their contributions and service to Science Applications International Corporation. The recent changes we made were necessary to position the company for longer-term success but required difficult decisions impacting some very high-quality individuals. I also want to acknowledge the tremendous honor it is to lead Science Applications International Corporation, a company with a deep legacy of supporting our country. I look forward to serving in this interim capacity, working with the leadership team to implement the priorities I just outlined, and assisting the board in its search for a permanent CEO. We have begun that process, which is being led by a search committee comprised of board members working in conjunction with a leading external search firm. Our ideal candidate will be someone who shares this company's commitment to serving our nation and our customers and has a proven track record of operating excellence and value creation. I can speak for our board in saying that we see significant opportunity to drive value for our shareholders, greater opportunities for our employees, and improved outcomes for our customers, our nation, and its allies. With that, I will now turn the call over to Prabhu. Prabhu Natarajan: Thank you, Jim, and good morning to those joining our call. I will discuss our business development results in the quarter followed by a review of our updated outlook, including some additional detail regarding the margin improvement efforts that Jim discussed. As you can see on slide four, we delivered 3Q net bookings of $2.2 billion resulting in a book-to-bill in the quarter and on a trailing twelve-month basis of 1.2x. Our 3Q awards included a five-year recompete with the Air Force, with a total contract value of $1.4 billion. And on the new business side, a five-year $413 million contract with the US Army for its open-source intelligence enterprise or OSINT program. In the third quarter, we submitted proposals with a total contract value of approximately $3 billion, bringing our year-to-date submissions to approximately $21 billion. While the government shutdown has slowed our pace of proposal submissions, we expect this to normalize in the near term and continue to target submitting bids totaling over $30 billion in FY '27. The incremental investments we expect to fund out of our cost efficiency efforts will go towards strengthening our solutions and overall bid quality. I will now turn to our updated outlook for FY '26 and FY '27. We are increasing our FY '26 total revenue guidance to reflect the acquisition of SilverEdge and reaffirming our organic revenue growth guidance despite the roughly one-point impact to 3Q revenues from the government shutdown. Our guidance continues to assume a roughly four-point contraction in organic revenue growth in the fourth quarter. We are increasing our guidance for FY '26 adjusted EBITDA margin by 10 basis points due primarily to our strong program performance year to date. We are increasing our FY '26 adjusted diluted earnings per share guidance by $0.04 largely due to the increased earnings and a lower tax rate as we now assume a roughly 10% effective tax rate for the year. We are maintaining our FY '26 free cash flow guidance of greater than $550 million. For FY '27, we are increasing our revenue guidance by approximately one point to include the acquisition of SilverEdge and are reaffirming our organic revenue growth guidance of 0% to 3%. This outlook reflects an assumed contribution from recent new business wins, including TenCap Hope and OSINT. Partially offset by known recompete headwinds of approximately 1% to 2%. As we have discussed, we are in the recompete phase for one of our largest programs, which represents just over 3% of annual revenue, with an expected award in the next few months. A favorable outcome on this would position us well in the 0% to 3% range, while a loss would likely make the lower end of the range more likely based on what we know today. We are increasing FY '27 margin guidance by 20 basis points at the midpoint to a range of 9.7% to 9.9%. The key drivers behind this are the acquisition of SilverEdge, which adds roughly 10 basis points, and the initial 10 basis points impact from cost actions taken to date. Our bias for adjusted EBITDA margins in FY '27 and beyond remains to the upside as we see meaningful opportunities to drive efficiency and improve performance which are not reflected in our updated guidance. As we return to revenue growth in the coming quarters, we anticipate that the efficiency efforts being implemented now will strengthen our ability to increase EBITDA faster than revenue. We are increasing our FY '27 adjusted EPS guidance by $0.50 reflecting the addition of SilverEdge, increased operating margins, and a lower share count. We are maintaining our guidance for FY '27 free cash flow of greater than $600 million or approximately $13.5 per share. As a reminder, FY '26 and FY '27 free cash flow benefits from changes related to section 174 under the One Big Beautiful Bill Act, which results in minimal cash taxes this year and next. Given our strong free cash flow, clear visibility into margin improvement, and a return to revenue growth, we see returning cash to shareholders via our repurchase program as a compelling investment. And now expect to repurchase approximately $500 million in each of FY '26 and FY '27. This $1 billion of total share repurchases represents approximately 25% of our market value. As Jim indicated, we see opportunities to create significant value for shareholders and are acting decisively to execute on our plans. While we appreciate the market's awareness with some of the uncertainty facing our end market, our FY '26 revenue performance, and our leadership transition, we have conviction in our ability to further improve execution, deliver sustained profitable growth, and create long-term shareholder value. Realizing the potential of Science Applications International Corporation requires focus, and a commitment to delivering on what we say. I am confident that we can accomplish this and demonstrate clear progress against this in the coming quarters. I will now turn the call over for Q&A. Operator: Thank you. And as a reminder, to ask a question, you will need to press 11 on your telephone. Wait for your name to be announced. To withdraw your question, please press 11 again. Please stand by while we compile the Q&A roster. One moment for our first question. Gautam Khanna: Our first question will come from the line of Gautam Khanna from TD. Yeah. Thank you. I wanted to ask if you could maybe find what you are seeing in the procurement environment more broadly right now post the shutdown and, you know, with respect to our incoming RFPs, pace of adjudication, and the like. Prabhu Natarajan: Sure. Hey. Good morning, Gautam. Thank you for the question. In big picture, as we alluded to the point in the earnings script, I think we did see a slowdown in submit activity. And a slowdown in the RFPs coming through the door as a result of the shutdown. We do expect that to normalize I would say, over the course of the fourth quarter recognizing that Q4 tends to be the, you know, softest book-to-bill quarter for the industry in general. So I would say it is getting back to normal. I do not think fundamentally if you normalize for the shutdown, it has not materially changed from where it was in the Q2 time frame where award decisions are taking a little bit longer, but the RFP activity has stayed more or less on pace. Gautam Khanna: Gotcha. And I also wanted to ask if there was any residual impact from Doge. I know it has been a while since we have talked about that, but Doge and just the pricing environment broadly. Prabhu Natarajan: Yeah. On the Doge environment, I would say no material changes to what we have disclosed before. We said about 1% of full-year revenues for this year, so that really has not changed. And we also alluded to you know, the broader dose effort, I would say, has morphed into sort of more mini dose reviews inside of the different agencies and the departments based on their funding situation, but that is frankly, a feeling that we are used to navigating historically speaking. So I would say, you know, it has remained fairly stable, I would say. And, you know, so I would say not a lot. And in terms of pricing pressure, you know, our margins were very healthy in Q3. We really have not seen a ton of pricing pressure either via the RFPs that are coming out. We are seeing a little more fixed price in some areas, but I would not call that a trend broadly. But really have not seen a ton of pricing pressure at this point. Gautam Khanna: Thank you. Sure. Operator: Thank you. One moment for our next question. Our next question comes from the line of Sheila Kahyaoglu from Jefferies. Your line is open. Sheila Kahyaoglu: Good morning, guys, and thank you for the time. And congratulations, Jim. Maybe just on SilverEdge as it becomes embedded into the portfolio, you know, how do we think about the opportunity of SilverEdge and integration with Science Applications International Corporation? Jim Reagan: Yeah. Thanks for the question, Sheila. It is good to hear from you. I would tell you after being here for, you know, nine or ten weeks, I am wildly enthusiastic about what SilverEdge is going to be able to do not just as a, you know, a standalone part of our business, but as we integrate it into the portfolio, what it can do to accelerate the differentiation of a lot of the bids that we have. Not just within our intelligence community customers, but more broadly across the whole portfolio. We expect that SilverEdge will be accretive next year. Both on a, it will push our margins up a bit, but also be accretive on EPS. And provide and I think that the broader portfolio of opportunities within our company gives great opportunity not just for us to win more, and deliver better solutions, but also great opportunities for the employees of SilverEdge that are now part of the family. Sheila Kahyaoglu: Great. Thank you so much. And maybe if I could just ask on the civil growth or the civil decline in the quarter, that segment appears to be down 7% year on year. You just provide more detail on those programs? Was it a few specific programs? Or are you seeing across the board? And how do you think about the trajectory over the next few quarters? Prabhu Natarajan: Hi, Sheila. Prabhu here. Thank you for the question. I would say big picture, you know, I think within every quarter, you are going to have a little bit of seasonality that creates a little bit of lumpiness. If you zoomed out a little and looked at the nine months, for the first nine months of the year, our civil business has been roughly flat and margins are up pretty materially. I would say there are no single program-related drivers in the civil business. I would say the nine-month story is probably a better reflection of where that portfolio is rather than the three months. Because the three-month story is always, I think, harder to explain given, you know, changes in compute and store volume, etcetera. So I would just say, think of the nine months as a better reflection. We are in agencies that are seeing some incremental funding, whether that is CBP, DHS, or frankly, the FAA. And I am really proud of what the team is doing on margins. We said a couple of years ago that the mid-12% is probably the trough for this business. That we would expect to get the business back to the 14% range and they are driving hard towards it. They were having to make some hard decisions. But they are doing all the right things we want them to do to get this portfolio back growing again next year also getting margins back up to about 14%. Sheila Kahyaoglu: Great. Thank you. Operator: Thank you. One moment for our next question. Our next question will come from the line of Jonathan Siegman from Stifel. Your line is open. Jonathan Siegman: Hoping you could share thoughts on the Department of War's announced reforms and talk about some of the available options the team has to pivot the business to better align with those aspirations. And then to follow on to that, just I would love to hear from you, Jim. Just given how dynamic the environment is. What drove the decision to change direction of the company now given all the moving pieces? And nice to engage with you again. Thank you. Jim Reagan: Yeah. John, thanks for the question. First, you know, in terms of how the Department of War has been making some announced changes and how it is going to do procurement. We are ready to help the Department of War implement the changes that it needs to make. We welcome the opportunity to see greater speed in the procurement process, which is really their objective. To put the department more on a faster war footing to keep us ready for all adversaries. The use of different contracting vehicles, for example, OTAs, that is something that we have been doing for some time and we are ready to expand the use of those kinds of alternative or innovative contracting vehicles that will provide greater speed, of not just the procurement process, but greater speed of implementing solutions. You know, one of the things that is interesting that we have been hearing is in the interest of speed, you know, 80%, 90% adherence to requirements instead of 100% is becoming acceptable. Now how they are going to implement that, you know, there is a lot of guidance that still needs to be issued, but we are planning on spending a lot of time with our customers to help them implement this in a way that achieves their objectives of speed and efficiency. You also asked about the dynamic environment. We are ready and, you know, I would say that the acquisition of SilverEdge is just one proof point of the things that we are doing to be ready for increased AI content in solutions that our customers are looking for. And we are always looking for ways to continue innovation in our business. The spend our spend on innovation is going to be more clearly mapped to opportunities in the pipeline and what the customers are telling us they are looking for. And then the third thing I think you asked about was why change now? I think that the focus of this business and the marching orders that I have received from our board is to double down our focus on execution not just execution and how we deliver solutions and our program results to customers, but also in listening more carefully to customers so that when we submit a proposal, our likelihood of winning is higher and that our ability to accelerate growth into the next couple of years will be kind of a proof point coming out of that focus. Jonathan Siegman: Thank you for the comments. Operator: Thank you. Thank you, John. One moment for our next question. Our next question will come from the line of Seth Seifman from JPMorgan. Your line is open. Seth Seifman: Hey. Thanks very much, and good morning, everyone. I wonder, Jim, or Prabhu, you know, you mentioned the $100 million of savings that you were looking at. How should we think about how much of that gets diverted toward investment? And, you know, new bids on work that should drive growth and be accretive to margin. How much of it should flow through to the bottom line? And how much of that contributed to the increase in the EBITDA expectation for next year? Jim Reagan: It is a great question, Seth, and thanks for asking it. The way I would take the question that you have asked, the last part of it first. The guidance that we have in for next year reflects the work that we have already done to exit the current fiscal year at a lower cost run rate. It does not next year's number does not include more work that we think we need to do and are undertaking at the beginning of the calendar year. We are launching a new program in January. That will continue the work that we have been doing around the consolidation of our business groups and taking out a lot of the overhead in connection with that. So the amount of reinvestment of the $100 million number that we are talking about will be what does not go to improving margins. So I would call it there. There will be a substantial amount of that $100 million that will go to resources that we need to add to the business around account management, more business development leadership, as well as some improvement that we want to fund in the actual process of developing winning proposals. I hope that that answers your question. Seth Seifman: Yeah. Yeah. Absolutely. That is helpful. And, you know, as a follow-up, you know, I think you talked about business development and execution as areas of improvement. I guess when you look at the portfolio and you think about the core competencies, of Science Applications International Corporation and, you know, the things that really can drive value in the business and the core of what is there. You know, what do you see that you like? Jim Reagan: You know what I see that I like is a lot of very deep understanding of what the customer's pain points are in delivering mission. You know, science is part of our name. And we are a company of strong scientists, strong development, and application integration capability, and people that understand mission. The passion for what we do runs deep in the fifty-seven-year history of our company, and it is something that I am very proud of. So I think so, you know, I have and I have already had some conversations with customers who acknowledge our ability to help them be successful. I think that what we can do better is, as I have said, get a more intense focus on marrying the investments that we make in innovation, the investments that we make in R&D, to the opportunities that our customers are putting in front of us, that we are going to be bidding on in the next twenty-four months. So we are going to improve that as well as doing a little bit better job of listening to our customers tell us not what they need today, on programs that we are executing, but really what are they going to look to us to do tomorrow that is different from what we are doing today? Everything we are capable of doing but in listening to that, they I need them to see our listening showing up in the proposals that we submit. Seth Seifman: Excellent. Great. Thanks very much. Operator: Thanks, Seth. One moment for our next question. Our next question will come from the line of Tobey Sommer from Truist. Your line is open. Tobey Sommer: Thank you. Curious if you and the Board expect the pressure on federal civil spending to largely conclude in 2025 or do you consider this a longer-term headwind that you are planning for? Jim Reagan: I think that there is probably going to be continued pressure on civilian agency budgets. That is just, you know, a fact of life that we see going forward. As the federal budget priorities do put greater emphasis on improving readiness and that will show up in bigger budgets for the DOD. That said, as Prabhu had mentioned a little bit earlier, we believe that we are kind of in the fast current of the civilian agencies. The places we are at are the faster currents of civilian agencies. Spend are. Things like CBP and FAA are the two good examples that Prabhu mentioned earlier. So I feel really good about where we are placed. Within the civilian agency space. But and I am also very pleased at how we are executing there in terms of delivery of results for customers that are reflective of expanding margins. Tobey Sommer: Thank you. And given that response, how do you feel about and think about portfolio shaping to increase the probability of being able to achieve your organic growth margin objectives? Jim Reagan: You know, there are always opportunities to shape the portfolio, and, you know, we have done that a couple of cases in the last, you know, three or four years. And, I am never going to say never. I would not say that there is a target that you can expect to hear us announcing a portfolio shaping move in the next couple of quarters. But we are always looking at opportunities to do that. Prabhu Natarajan: And, Tobey, the only thing I would add to that is that to the extent that you know, we are reviewing the portfolio and looking at areas of the portfolio that are unable to be transformed. In other words, where they tend to be predominantly lower-end services oriented. I think that you will see us actively think about that conversation because I think the capacity to transform is just as important to make sure the portfolio stays fresh. Tobey Sommer: Last question, if I could sneak in a third one in. Given the turbulence in the end markets and budget, of this year potentially going forward in civil. Would you like to toggle the leverage down a bit over time? Or are you going to stick with this leverage target? Because I think the group is down a bit over the last year and a half or so. Prabhu Natarajan: Yeah. Fair question, Tobey. I mean, look. We actively talk about the leverage both inside the company as well as with our board. Three dot o is, you know, sort of a leverage area that we are roughly comfortable with. We try to stress test our assumptions on EBITDA and cash flow. To ensure that we can deliver and stay at that 3.0. We routinely talk about, you know, whether deleveraging is appropriate to do in the environment. I think, I would say, you know, given the M&A market where, you know, I would say, by and large, it still has tended to be a seller's market, it is very hard, I think, to justify, you know, acquiring businesses at, you know, 12, 13, 14 times when we are being traded at eight, nine, 10 times. So I think you will see us stay disciplined on that front. But, frankly, I think we tend to, you know, be in the way we manage our capital. Share repurchases are always market conditions permitting. And where we tend to see, you know, I am going to say a higher return on the buybacks, we will see us deploy capital that way. But where we think that the incremental return from that buyback is, perhaps lower than maybe just levering down, you will see us make that trade. The reality is we have to be nimble and agile. There is no formula to buybacks other than we are trying to generate as much value as we can for our shareholders. And fundamentally, we have incredible visibility into the cash flow. So that is what gives us confidence in the current capital allocation policy. Tobey Sommer: Thank you. Operator: Thank you. One moment for our next question. Our next question will come from the line of Colin Canfield from Cantor. Your line is open. Colin Canfield: Thank you for the question. Going back to maybe the portfolio shaping conversation, can you just maybe talk about how you think about either pairing or adding pieces in terms of the magnitude of portfolio shaping? And then maybe kind of if you want to talk about kind of some of the larger private assets and that round how you think about maybe adding to larger defense and intelligence capabilities versus going after the more some of the more civil exposure. And then just want kind of within that construct, if you can maybe talk about kind of how you think about defense budget growth, not so much the outlays, right? The outlays are baked in, but the defense budget growth over the kind of multiyear period versus the civil budget growth and how you kind of, like, weigh that risk-reward to the upcoming midterms? Thank you. Jim Reagan: Yeah. There is a lot to unpack in that question, Colin. I think the way I would start with is you in your question about portfolio shaping. I think that our appetite for portfolio shaping in terms of magnitude it is going to be more focused on it could anything that we do is going to be more focused on what opportunities got unlocked because we are refocusing the business in other areas. And or, you know, maybe taking out, you know, an area of the business that causes conflict in our ability to grow in other parts. It is hard for me to put a dollar figure on that at this point. And I will ask Prabhu to also pile on with any thoughts that he has got. But in just in terms of where the defense budget is going, I think that the stated objectives and the ways that the current Department of War has articulated what it needs to be ready for. For the next, you know, three or four years. Is really going to put some upward pressure on the DOD budget. If you think about the budget, as a percentage of GDP, it really, you know, even at the targets that have been announced, it really is not too far out of line with what you have seen in the last hundred years. So it might feel like it is a big increase, but in terms of the needs that the department has today to increase readiness for where it sees the potential conflicts going over the next five. I think that there is going to be plenty of opportunity for us and our industry to be growing their businesses as a result. Prabhu Natarajan: Thank you, Jim. That was perfect. On the first part of the question, Colin, on PE-owned assets, I mean, look. I think, you know, we have to demonstrate that we can organically grow this business. As Jim said, the focus is tuck-ins that can help us accelerate our growth rate. At this point, our cup runneth over in terms of M&A, and so I think we are just going to be astute in terms of what we are focused on there, and we are not looking at scale-based M&A at this point. On the DOD budget, the only thing I would add is, you know, base budget, you know, flat to slightly up. And then we are going to need some reconciliation money to get closer to that $1 trillion. And how frequently that happens over this year and the next year. Is going to drive, I think, the health of the defense budgets. I think to Jim's earlier comment, I think which currents you are part of whether that is FET SIB or DOD, is going to be a really important consideration, and we appreciate the fact that the Department of War has given priority areas out there, whether they are tech areas or mission areas. And we are just ensuring that the portfolio is as well aligned to those areas as we can possibly be over the next couple of years. But, that is our prognosis. Our guidance for next year assumes that things do not change dramatically to the upside or the downside. Things are going to be stable. More stable than they have been this year. Colin Canfield: Got it. Got it. And then in terms of the civil budget growth, how do you kind of think about FY 2027's comparison to, call it, FY 2019? Right, where it was initial kind of deficit hawk focus, taking a backseat to defense hawks. And then in order to get kind of key policy objectives done, the Defense Hawks working with kind of, you know, across the aisle to drive dollar-for-dollar deals of discretionary defense and nondefense spending. So maybe just kind of a little bit on how you think about the multiyear civil budget growth outlook and how that is shaping where you are kind of approaching the savings plan? Thank you. Prabhu Natarajan: Yeah. Appreciate the question, and it is a complex one to be sure. And I am going to leave some folks that are way better qualified to answer it. I think our baseline assumption is that civil budgets will continue to be pressured. And your level of pressure is going to be dependent on what baseline you use to compare. If you compared it to the 19 baseline versus the 24, 25 baseline, you may get to a slightly different place. But our assumption is nothing changes in the near term. But civil budgets will be pressured, you know, recognizing that there is a real need for modernization within the civilian agencies. But I think in this environment, we just do not see a ton of opportunity for real budget growth. And whether the one-for-one happens that is going to be a function of things that are way out of our control, and we are just going to monitor it and see where it goes. But our assumption for next year is budgets will remain pressured. We are telling our teams internally that assume things will remain hard for the next twelve to eighteen months on the budget front, and how can you consistently deliver good performance and on-contract growth. To me, it is going to be very much a blocking and tackling exercise. Because there are elements of this conversation that are beyond our ability to control, and the message coming into this call was to focus on what we can control as an enterprise. Colin Canfield: Got it. Thank you for the color, and welcome back, Jim. Jim Reagan: Thank you very much, Colin. Operator: Thank you. And with that, this concludes the question and answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
Operator: Good morning and welcome to Wiley's Second Quarter and Fiscal 2026 Earnings Call. As a reminder, this conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. At this time, I'd like to introduce Wiley's Vice President of Investor Relations, Brian Campbell. Please go ahead. Brian Campbell: Good morning, everyone. On the call with me today are Matthew Kissner, President and CEO, Craig Albright, Executive Vice President and CFO, and Jay Flynn, Executive Vice President and General Manager of Research and Learning. Note that our comments and responses reflect management views as of today and will include forward-looking statements. Actual results may differ materially from those statements. The company does not undertake any obligation to update them to reflect subsequent events. Also, John Wiley & Sons, Inc. provides non-GAAP measures as a supplement to evaluate underlying operating profitability and performance trends. These measures do not have standardized meanings prescribed by US GAAP, and therefore, may not be comparable to similar measures used by other companies, nor should they be viewed as alternatives to measures under GAAP. We will refer to non-GAAP metrics on the call, and variances are on a year-over-year basis and will exclude divested assets and the impact of currency. Additional information is included in our filings with the SEC. A copy of this presentation and transcript will be available at investors.wiley.com. I'll now turn the call over to Matthew Kissner. Thank you, Brian. Hello, everyone, and welcome to our Q2 earnings update. Matthew Kissner: Before I get into results, which were highlighted by strength and momentum in research and AI, but also declines in learning, let me briefly touch on our agenda. I'll start by outlining what's happening in learning and how we're addressing it. Next, I want to address the questions we've gotten from prospective investors about the unique durability and resilience of the research business and the positive role AI is playing. As you will see, we believe AI is an accelerator for our research core. Building on this, investors naturally want to learn more about our AI growth strategy. So we're going to spend a little time this morning addressing those topics in more detail. I'll also talk about how we're executing on our full-year commitments and walk through our overall growth drivers. Craig will review our performance, operational excellence, and margin expansion initiatives as well as our outlook for the year. Now on to our purpose, which is to unleash the power of science. It means transforming trusted scientific knowledge into practical tools and intelligence that solve real problems. We're moving with urgency to integrate scientific research into new technologies to revolutionize R&D across corporate, academic, and government markets. It's a paradigm shift and we're at the center of it. Never has the trust and accuracy of information mattered more. Our customers range from Nobel laureates to early career researchers, from Fortune 500 innovation teams to government research bodies, all relying on us to ensure scientific excellence and turn scientific knowledge into competitive advantage. Let's turn to the quarter. We saw a mixed revenue picture, with strong growth in research and good momentum in AI, offset by market challenges in our learning segment. I'll dive into learning in more detail on the next slide. Research publishing delivered strong 7% growth on worldwide demand to publish, read, and license. Volume remains at record levels worldwide. We executed another AI licensing project for an existing LLM customer this quarter, putting us close to $100 million of AI training revenue in less than two years. Our corporate expansion is accelerating with new subscription customers and a strong pipeline. We continue to advance our strategic partnership with AWS, Anthropic, and Perplexity, and added Mistral AI during the quarter. We delivered strong earnings growth as we continually address our overall cost base, reduce our corporate expenses, and drive disciplined capital allocation. Our Q2 adjusted operating margin was up 250 basis points to 18.8%. We increased our share repurchases by 69% this quarter to $21 million. We see our shares trading well below our assessed true value, which positions buybacks as an efficient use of capital. Through the half, we've returned $73 million to shareholders in buybacks and dividends, and our current yield is around 3.9%. Finally, we expect to drive leverage materially lower this year. Our strong balance sheet is expected to get even stronger. I want to acknowledge our challenges in learning before getting into the positive developments this quarter. Those of you who know me know that I'm not one for spin. Let me just say it's been an unusual year for learning, driven by a set of external factors which began in the first quarter. First, across the industry, we've seen a significant change in inventory management from Amazon. We've seen this before, and it's an abrupt challenge to manage through. Second, consumer spending is soft and professional books are somewhat cyclical. It's the only consumer cyclical part of our business. Third, we've seen enrollment challenges in select Wiley disciplines, namely computer science, down 8% in the fall semester. Computer science has been an important growth area for us, particularly with digital courseware. Fourth, corporate spending and hiring is soft, and that means lower consumption for our personality and team development programs. Many of these factors are macro-related and we'll be watching how these trends play out for the balance of the year. From a mitigation standpoint, we're ruthlessly prioritizing to where we see upside, including inclusive access and other digital offerings and instituting pricing strategies, category optimization, and targeted marketing campaigns. We expect learning declines to moderate in the second half as inventory actions stabilize, although revenue is expected to be down for the full year. Cost actions will help offset any top-line impact. Let's turn to our key strategic priorities and value creators and the execution of our fiscal 2026 commitments. As always, our first objective is to lead in research. It was a strong quarter for research with 7% revenue growth in research publishing and 220 basis points of EBITDA margin improvement. We continue to drive above-market growth in submissions, up 28% and 12%, respectively. Remember that 80% of our volume comes from outside the US, and strong demand is evident across all regions with double-digit submissions growth in China, India, Japan, the UK, Germany, and the US. Higher volumes are leading to both double-digit growth in author-funded open access and compounding growth in our recurring revenue models. Our second commitment is to deliver growth in AI and adjacent markets. We executed another licensing project for LLM training, with $6 million realized in the quarter and $35 million year-to-date. On the innovation side, we're now at 30 plus publisher partners for our Nexus content licensing service, and we're in active discussions with others. As a reminder, this is where we combine our content with that of our publishing partners and license it to AI model and application developers. We also launched our AI gateway, an interoperable content enrichment and delivery platform in partnership with AI ecosystem players like Anthropic and AWS. Our corporate expansion continues with eight customers subscribing to our knowledge feeds with strong interest across multiple verticals. Our third commitment is to drive operational excellence and discipline across the organization. Craig will run through this in more detail. But we've made terrific progress in reducing our corporate costs and improving our research margin. We still have work to do, but we're pleased with our progress so far. Let's talk about our resiliency across economic cycles and AI as a tailwind. What makes research different? First, peer-reviewed publishers set the global standard for scientific excellence, distinguishing solid research from world-changing discoveries. At the center of this ecosystem are Wiley journals, independently rated and widely recognized, forming a lasting competitive moat. Tens of millions of researchers worldwide know and trust these journals, and peer review is at the heart of it. An industry survey found that 94% of the researchers who participated believe peer review is essential for maintaining control and quality in scientific research. Second, peer-reviewed content is a must-have for institutions and increasingly corporations, through both good times and bad. Research is the core of a university. Over 10,000 research universities around the world subscribe to our portfolio of journals. Researchers at these institutions must have unfettered access to these journals, and they get it through multiyear digital licenses. Today, institutional customer retention is above 99%. In addition to universities, R&D-centric corporations are now exploring integrated feeds of this content for their AI models and applications. Third, publishing is essential for a researcher's career and for global recognition of scientific achievement. For example, tenure often requires seven to nine publications, and a strong publication record is key when applying for academic positions. Publishing in a top-tier journal brings international acclaim while also serving as the main way to demonstrate the impact of research and secure additional funding. Fourth, research output is ever-increasing, driven by global R&D spend. Remarkably, article output has grown every year since 1944, with the exception of a slight dip in 1971. Moreover, the rate of research output is expected to accelerate given the increasing importance of science and the rise of AI. Our analysis found that 84% of researchers are now using AI in their work, up from 57% last year. Another study showed a threefold increase in the number of papers by researchers who use AI. Fifth, research evolves constantly. An estimated 14,000 new articles are published daily worldwide, making recency critical for AI. In high-stakes fields like life sciences, AI systems must continuously incorporate the latest findings to remain reliable and effective. Finally, published research is protected under IP copyright law, and its use must be authorized. We've talked about the Anthropic copyright settlement, the largest in US history. Beyond this, approximately 60 copyright lawsuits are currently underway involving AI. Let me run through our key differentiators as we transition to an AI economy. Why do we consider it a long-term tailwind and a growth engine? First, we provide access to much of the world's trusted scientific, technical, and medical content through our own portfolio and that of our publisher partners. We are a big three global publisher at a time when quality and scale matter most. We are further differentiated by our top position in fast-growing knowledge domains, chemistry, material science, oncology, technology and engineering, food science, and finance and economics. We have strong long-standing relationships with researchers, institutions, societies, and funders across the globe. We're the society partner of choice in the industry. And our platforms host nearly 50% of the world's English language journals. We're a first mover with LLM developers in building out AI models and applications. So much so that other publishers want to be part of our licensing network. We're a pioneer in securing strategic partnerships with the world's most advanced AI innovators. The first research publisher to be on the AWS Marketplace and Claude for Life Sciences. Finally, rather than develop and compete through closed platforms, we're partnering with others through a CapEx light and open platform approach. This strategy allows us to leverage existing infrastructure while enabling broader collaboration across the research ecosystem. An open platform accelerates innovation by allowing multiple partners to contribute and build upon shared capabilities, reduces our capital requirements, and creates network effects that benefit all participants, ultimately delivering more value to researchers than any single organization could achieve alone. Let me walk through our three growth factors. Content, platforms, and markets, and the drivers underneath them. As you can see here, some of our drivers are enabled by last trends in our core research business, and some enabled by the use of AI. In content, we're expanding our journal portfolio and brands into fast-growing STM fields, as with our advanced brand. We continue to license our proprietary content and others for LLM models and corporate applications. In platforms, we have our research exchange publishing platform, our AI gateway, and future growth opportunities with data products. I'll talk to the first two in the coming slides. On the third, we see proprietary data as a competitive moat over time as we deeply embed ourselves into the workflows of our corporate customers. For example, we have the most comprehensive spectral database collections in the world for chemists and other researchers. In markets, there are two growth drivers. The first is geographic, where we see a targeted expansion globally as China, India, and Brazil invest to become superpowers in science and technology. China is now the number one source of research output in the world. India and Brazil are showing strong double-digit submissions growth and expansive nationwide agreements. The second growth driver is building a significant presence in high-stakes corporate research, through the use of AI and data analytics. As noted, corporate makes up 80% of total US R&D spend but is only 10% of our revenue base today. Although it's early days, corporate R&D represents a substantial future growth opportunity for us. Let's take a step back and review our content licensing models. We think about the market in two waves. The first is licensing archival content to train large language models. This quarter, we realized $6 million of licensing revenue with an existing LLM customer and $35 million year-to-date compared to approximately $40 million in fiscal 2025. We continued to have active discussions with model developers, although these opportunities remain hard to project. The second wave is in licensing a knowledge feed of our content for vertical-specific AI applications. R&D-intensive corporations are then able to integrate this knowledge into workflows to identify breakthroughs, speed up product development, and lower costs. As noted, we currently have eight customers, including the European Space Agency, Novartis, and Regeneron, among others. We expect this number to ramp up as these vertical applications advance. Today, we're in active discussions with companies ranging from energy to pharma to consumer staples. An example of our corporate strategy is our recent agreement with IQVIA, a leading provider of clinical research services to the life sciences industry. IQVIA will bundle our clinical outcome content with their clinical research capabilities to deliver one-stop solutions for pharmaceutical companies. It's an important example of the corporate R&D opportunity for Wiley as we turn knowledge into real-world impact. During the quarter, we continued to add partners to our Nexus licensing network and launched our AI gateway content enrichment and distribution platform. On Nexus, we generated $16 million of revenue year-to-date, all of it in Q1, and continue to build out our partner network of 30 plus high-impact book and journal publishers with more in the pipeline. Onto our AI gateway, which is complementary with large language models. You can think of this service as a Wiley content repository that can be accessed by an API connector through platforms like AWS Marketplace and Claude for Life Sciences. Users with a subscription can run queries through the connector to retrieve highly relevant information from our platform. Importantly, as these involve retrieval augmented generation, or RAG models, our content supplements the model to provide more accurate trustworthy results, but is not absorbed in the model. Unlike closed ecosystems that require researchers to adopt proprietary tools, Wiley's AI gateway is differentiated for its openness, partnership, and interoperability. We also envision it for other publishers who want to leverage our technology and infrastructure to make their content available for corporate and other AI applications. We're currently in user trials with corporate R&D researchers and academic institutions. I'll turn to our research exchange platform where 65% of our journals are now live. The main point I want to emphasize is that this transformative publishing platform goes beyond efficiency and lowering our cost to publish. It's also about driving incremental revenue growth. As an example, the platform will deliver a best-in-class user experience from submission to acceptance, enabling us to attract new authors, drive more volume, and manage it more efficiently. With AI incorporated across the platform, we will improve submission capture, automate refer and transfer, and improve our turnaround times. As a reminder, about 70% of articles submitted to Wiley are rejected mainly due to improper fit. Through the AI functionality we introduced, we can now transfer these articles to more appropriate journals within our portfolio. We are rapidly scaling delivery of these new features and services. We believe that researchers and other professionals want trusted content that integrates with their own tools and their LLM of choice. And so we're partnering with AI players, remaining agnostic, and carving out our own critical niche. Recently, we added Mistral AI to our base and became the first research publisher to list a full-text agent knowledge base with AWS, enabling AI agents and applications on the AWS Marketplace. We have won new corporate customers through the Marketplace and are in active dialogue with others for our own subscription knowledge feeds. Also note, we are the first research publisher to have our connector featured on Claude. All good momentum. To summarize, I hope you can see why we're fully confident in our research core and excited about the expanding AI opportunities in front of us. I'll now turn the call over to Craig. Craig Albright: Thank you, Matthew, and hello, everyone. My focus is straightforward. Continue to drive discipline across the organization, challenge complexity, and shift our portfolio toward high-margin, high-ROIC business models. We're making real progress on multiple fronts, but we have more work ahead. Turning to our second-quarter results. It was a strong quarter for our research business and a challenging quarter for learning. At the same time, we continued to deliver material margin expansion. Adjusted EBITDA grew 8%, and adjusted operating margin expanded 250 basis points to 18.8%. This reflects disciplined cost management, technology transformation, and AI-driven productivity gains. Themes, I'll expand on in a moment. As well as the benefits of our product profitability actions to shift toward higher-margin businesses. Let me walk through segment performance starting with research. Research delivered 5% growth and a 220 basis point improvement in EBITDA margin to 33.5%. Demonstrating our continued operating performance and cost improvements. Research publishing was particularly strong this quarter, driven by record submissions, solid growth in our recurring revenue models, and 28% growth in author-funded open access. AI revenue in research publishing totaled $5 million of our $6 million licensing project this quarter, reflecting continued demand for AI LLM training. Calendar year 2026 subscription renewals are underway, and while it's still early, renewals are tracking steadily worldwide, including early commitments from large institutional customers, such as the regional consortium in Australia and New Zealand. We'll have a fuller picture in March when the majority of our renewals are complete. Research solutions declined 6% due to lower corporate spending on advertising and recruiting. We expect improvement in the second half driven by strong pipelines in spectral data products for OEMs, and managed advertising and knowledge hub solutions for pharma and healthcare customers. Through the half, research revenue and adjusted EBITDA were up 5% and 8%, respectively, with EBITDA margin improving 60 basis points to 30.9%. Now let's turn to learning. Learning was down 11% in the quarter, driven primarily by headwinds in professional and academic as well as prior year AI revenue of $4 million. Professional declined 16% impacted by retail channel dynamics, particularly with Amazon inventory adjustments and softer consumer spending. Print was the main driver, followed by assessments due to a soft corporate environment. We're responding by reorganizing our editorial focus toward higher-value authors and accelerating our shift toward digital products, where we see stronger demand and better margins. Academic declined 8%, also affected by retail dynamics, and an 8% enrollment decline in undergraduate computer science, which pressured our ZiBooks STEM courseware. That said, our strategic inclusive access program continues to grow revenue by double digits with a healthy pipeline. Through the half, learning revenue was down 10%, with adjusted EBITDA down 12%. Segment EBITDA margin declined 80 basis points to 34.4%. We're taking targeted actions to stabilize revenue and protect margins in the second half, including tighter cost discipline and accelerating product repositioning. Let me turn to operational excellence, which remains central to our margin expansion story. We're driving three major initiatives. First, technology transformation. We're building an AI and data-enabled technology organization, consolidating locations, rationalizing our application footprint, and refocusing our enterprise modernization effort to be more flexible and cost-effective. This is a multiyear transformation that will materially reduce our cost base. Second, ongoing cost discipline. We continue to deliver savings from prior actions while managing expenses tightly. This quarter, unallocated corporate expenses on an adjusted EBITDA basis declined 18% or $8 million, driven by targeted actions in technology, HR, and finance. Research has been a particular success story where we've driven both cost improvements and 220 basis points of margin expansion. Third, AI-driven productivity. We've established an AI center of excellence to automate manual processes and fundamentally change how we work. We're deploying AI agents, building an active user community, and delivering measurable productivity gains. A clear example is our customer service transformation and partnership with sales where we're seeing meaningful efficiency improvements. These efforts are ongoing and will continue to drive margin improvement as we scale them across the organization. Let's turn to our financial position and capital allocation. Free cash flow was a use of $108 million, a 17% or $22 million improvement from the prior year. As always, cash flow is seasonally negative in the first half due to journal subscription timing. We collect the majority of our cash in Q3 and Q4. CapEx was $31 million, compared to $36 million in the prior year. When combined with the capitalized cloud spend reported in cash from operations, total CapEx and cloud investment was $38 million for the half, down from $42 million in the prior year. On capital allocation, we continue to deploy capital strategically. We acquired the high-impact journal, Nanophotonics, which strengthens our physics portfolio and positions us at the forefront of the fast-growing optics and photonics field. We'll continue to opportunistically pursue acquisitions of high-impact journals and collections where we see strategic value and attractive financial returns. Share repurchases were up 69%, to $21 million or $35 million year-to-date, compared to $25 million in the prior year period. With our new 10b5-1 plan, we're now active throughout the year. Our dividend yield is around 3.9% supported by a healthy payout rate and we continue to reinvest in organic growth initiatives. Finally, our leverage continues to improve. Net debt to EBITDA was 2.0 times on a trailing twelve-month basis, down from 2.2 times in the prior year. We expect leverage to decline materially by the end of fiscal year 2026. Turning to our outlook, we're reaffirming guidance for adjusted EBITDA margin, adjusted EPS, and free cash flow, while narrowing our revenue outlook to the lower end of the range. Let me walk through the key metrics. Revenue growth is now expected to be in the low single digits, down from our prior range of low to mid-single digits. Research demand is tracking better than expected, but as discussed, learning will be down for the year. The second-half declines will moderate. We expect AI revenue to be moderately ahead of last year's $40 million. Adjusted EBITDA margin of 25.5% to 26.5%, up from 24% last year. Adjusted EPS of $3.90 to $4.35, up from $3.64 last year. And free cash flow of approximately $200 million driven by EBITDA growth, lower interest payments, and favorable working capital. CapEx is expected to be comparable to last year's total of $77 million. One note on quarterly phasing, we anticipate Q3 will be lighter than typical due to the timing of AI project revenue which creates a year-over-year headwind of approximately $9 million in research. Growth is weighted to Q4 driven by journal renewal timing, customer pipeline conversions, and research solutions and learning. As always, we encourage you to focus on full-year performance as the best measure of our progress. With that, I'll pass the call back to Matthew. Matthew Kissner: Thank you, Craig. Let me briefly review our key takeaways before I open the floor to your questions. We're delivering strong growth and momentum in research, supported by robust demand and the disciplined execution of our strategy. Our leadership position in AI continues apace, with another LLM training agreement in Q2 and increasing momentum for our subscription knowledge feeds in corporate R&D. Our strategic partnerships with AI innovators are starting to yield early results, and we're making good headway with our innovative publishing and aggregation platforms. We're focused on our fundamentals and delivering strong earnings growth, material margin expansion, and cash flow improvement, for reinvestment and return to shareholders. As I said before, continuous improvement is a way of life for us now. Through the half, we returned $73 million of cash to shareholders in dividends and share repurchases. Our balance sheet continues to be a foundational strength as we further reduce our leverage. And finally, we're confident in our long-term direction, driven by our unique right to win in research and transformative opportunities in AI. I want to thank you all for joining us today for your interest and for your investment. And special thanks to our Global Wiley colleagues for all they do to make us a very special company with a very special past and a very meaningful and promising future. I want to wish all of you a happy and healthy holiday season and a momentous New Year. I'll now open the floor to questions. Operator: At this time, I would like you to press star then the number one on your telephone keypad. Your first question comes from Daniel Moore with CJS Securities. Daniel Moore: Thank you. Matthew, Craig, Jay, good morning. Thanks for the questions. Start with the research side. Research revenue grew, you know, 5% ex-currency, driven by OA and mixed model, which is great to see. Does that feel like the right place to be? Just wondering if there could be some incremental upside to that type of growth. Not necessarily next quarter, but over the next, you know, near to midterm. Just given the strong and continuing high double-digit growth that we've seen in article submission over the past few quarters. Brian Campbell: Brian, I do believe that your line may be muted. Ladies and gentlemen, please hold and the conference will resume momentarily. Thank you for your patience. Daniel Moore: It's unmuted. Can you hear us at all? Operator: Yes. You can go ahead. Matthew Kissner: Alright. Great. Thank you. Sorry, Dan. We had a little technical glitch here. Let me begin and then ask Jay to comment. You know, the market typically grows. You know? Fixing. You can hear us now? Can you hear us now, Dan? Daniel Moore: Yes. Okay. Good. Sorry. Matthew Kissner: You know, we think we're gonna be growing at the top of the market growth, if not I think there's a potential to outperform given our strong article roles. I mean, that's a very powerful leading indicator here. So let me ask Jay to maybe add a little color to that. Jay Flynn: Yeah. Hey, Dan. You know, last quarter, we characterized, and I think others in the space characterized it, overall market growth sort of trending between 3-4%. We thought we'd be at the high end of that. And as you saw, 5% in the quarter, 7% for research publishing in the quarter. You know, underpinned by really strong metrics as you talked about. We're cautiously optimistic, but we're just getting into the renewal season now. As you know, we're beginning dialogue and beginning the conversations executing renewals for calendar '26. Obviously, feel good about the performance in Q2 for research and in particular, in research publishing. And, you know, we'll leave it at that for now. But I feel like, you know, at the top end of the market, is a comfortable place for us. And we'll watch how it develops as the renewal season comes in. Daniel Moore: Very helpful. I appreciate the color on AI, not only the license revenue but, you know, the other opportunities. Just maybe a little bit more color around $6 million in revenue that you booked during the quarter. It sounds like it was with an existing LLM customer. Talk about the pipeline of opportunities. Are you seeing customers like that sort of come back for additional sites to the Apple? And I think you said full year, you know, up modestly versus the $40 million, which would imply, you know, something about $5 million in licensing for the back half of the year. Just want to make sure that's correct. Craig Albright: Yes. Good morning, Dan. Craig Albright here. So I think you got the read right. You know, the $6 million deal, we feel really good about. It was majority Wiley content. It was a repeat customer. And, you know, it was a good signal that there continues to be some length in the LLM training model that we've talked about in the past. We have also talked about the fact that this is a bit lumpy. You know, that it's hard to predict exactly when the deals come in. We want to make sure they're the right kind and the right, you know, guardrails kind of put around them, and that's what we continue to do. We guided to moderately up year over year. We have a continuing pipeline that we're working, and I think the way you phrased it is about right. Let me turn it over to Jay and see if he doesn't add anything else. Jay Flynn: Yeah. Thank you. Thank you, Craig. Dan, you've called it right based on what we reported and what we're guiding to. But I think for me, you know, I want to make one additional point, which is that, you know, our commitment both to investors, but also to ourselves is to generate meaningful deep relationships which drive recurring revenue and to continue to come back and learn from these partnerships to drive our own product innovation pipeline. So it's no coincidence that, you know, we're doing training deals, but we're also partnering with AI native companies. It's no coincidence that once we've established those partnerships, we've developed a strategy that relies on openness, that relies on meeting users where they are using the tools that they want, and then using both of those things to go into corporate R&D and to help corporate customers achieve their aims more quickly, cheaper, and with an increasing degree of confidence. So we feel good about all three of those opportunities and as we get through the rest of the year, you know, hope to talk more about all three of them as it relates to fiscal '27. But, you know, we'll keep it at that for now and want to reaffirm your read on where we're guiding to now. Daniel Moore: Understood. Helpful. Switching gears to learning, obviously, it remains challenged. Maybe your best guess for how much of the decline is due to sort of end market demand versus inventory management at large retailers, Amazon specific, in the channel. And I think you said, you know, that headwind should moderate in the back half. But, you know, the absolute any additional color there would be helpful. Matthew Kissner: Yeah. Let me spend a few minutes and then turn it over to Craig and certainly Jay. You know, I spent a week at the Frankfurt Book Fair in October, talked to other publishers, and everybody is seeing the impact of this in, let's call it, change in inventory strategy just because of the importance of Amazon in this business. Our early indications are that that ordering pattern is starting to normalize. And we don't see any change in end-user behavior. In other words, are people reading books? You know? So there's no reason to believe that there's kind of been an abrupt structural change at this point in time. But we are learning and keeping our eyes on this. So, Craig, Jay, anything you want to add to this? Craig Albright: Yeah. No. I think, Matthew, you covered it well. You know, we don't give guidance specifically on segments, you know, Jay highlighted earlier here, you know, that there are some headwinds here in learning. We expect those to normalize, as Matthew said. Still likely to be down for the year. But I think we view it more as cyclical than structural in terms of what we're seeing in terms of the trade business. There are parts of it in terms of enrollments in higher ed where we've got our closer eyes on to see if there's some other shifts going on there that we have to kind of continue to stay focused on more structural. But at this point, I think the majority is leaning towards cyclical. We've seen these kinds of cycles in the past. And we happen to be at the kind of bottom of one of those cycles. But all the indicators are that there should be some normalization and recovery here. Daniel Moore: Helpful. Well, kudos for maintaining the guidance given those, you know, those headwinds that certainly a little bit stronger than, you know, what we thought a couple of quarters ago. Maybe just one or two more. You stepped up the pace of buybacks during the quarter. Free cash flow guide implies something well north of $300 million in free cash flow coming in the back half of the year. Given that and the health of the balance sheet, do you anticipate ramping that pace further as we get, you know, how are you sort of weighing the, you know, accelerated buybacks versus delevering as we look at the back half of the year? Thanks again for all the color. Craig Albright: Great question, Dan. Thank you. As we've said in the past, we have a very disciplined approach to capital allocation. And the opportunity we have certainly with the cash flow guide that we're giving is, yes, that we could continue to use some of that towards share buybacks. We want to maintain between, you know, our growth opportunities internally. We want to make sure that we continue to manage the leverage ratio at the right levels. But we do see opportunities. And I would say in that front, we continue to be opportunistic. You know? We're now in the market every trading day of the year. With our 10b5-1 plans. When the prices are attractive, you know, we have shown already that we are more aggressive in terms of share repurchases. I think we'll continue to look opportunistically going forward as well. But we feel good about the pace we're on with our return to shareholders, and we're going to continue to maintain that discipline. Daniel Moore: Alright. Now I'll circle back on the same follow-up. Thank you. Operator: There are no further questions at this time. I'll now turn the call back over to Mr. Kissner for any closing remarks. Matthew Kissner: Yes. I want to thank you all for joining us. Once again, I want to wish you and your loved ones a healthy and happy holiday season. We thank you for partnering with us on this journey, and we look forward to updating you on our progress at our March call. Have a great holiday. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Hello, and thank you for standing by. My name is Tiffany, I will be your conference operator today. At this time, I would like to welcome everyone to the Donaldson Company Q1 FY2026 Earnings Webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. I would now like to turn the call over to Sarika Dhadwal, Head of Investor Relations. Sarika, please go ahead. Thank you for joining Donaldson Company's first quarter Fiscal 2026 Earnings Conference Call. Sarika Dhadwal: With me today are Todd Carpenter, Chairman, President and CEO; Brad Pogalz, Chief Financial Officer; and Rich Lewis, Chief Operating Officer. This morning, Todd and Brad will provide a summary of our first quarter performance and our outlook for fiscal 2026. During today's call, we will discuss non-GAAP or adjusted results. First quarter 2026 non-GAAP results exclude a pre-tax gain on the sale of fixed assets of $9.3 million and a pre-tax charge of $5 million for restructuring and other charges primarily related to footprint optimization and cost reduction initiatives. A reconciliation of GAAP to non-GAAP metrics is provided within the schedules attached to this morning's press release. Additionally, please keep in mind that any forward-looking statements made during this call are subject to risks and uncertainties, which are described in our press release and SEC filings. With that, I will now turn the call over to Todd. Todd Carpenter: Thanks, Sarika. Good morning, everyone. Donaldson Company's first quarter results were strong, and I'm proud of what our team was able to accomplish: growing sales, operating profit margin, and earnings. We delivered once again on our commitments to all of our stakeholders—our customers, our shareholders, and our employees. We did this through our leadership position in filtration, which was built on decades of solving our customers' most difficult filtration problems with our razor-to-sell razor blades model, our best-in-class technology, which is uniquely powerful because we focus on filtration capabilities and then leverage these technologies across markets. Our ability to help customers meet evolving environmental and operational goals by helping to protect equipment and maintain cleaner work environments and our clear strategic and balanced growth strategy. That is why our success continues. I will start by discussing our first quarter performance, touch briefly on our expectations for fiscal 2026, then Brad will detail our financials. Lastly, I'll provide some closing remarks before opening the call to questions. In the first quarter, we grew sales to an all-time first quarter high of $935 million, a 4% year-over-year increase with growth across many key businesses, including mobile aftermarket, power generation, food and beverage, and disk drive. Expanded operating profit margin to a record 15.5% driven by leverage on higher sales and cost optimization initiatives. Delivered record earnings per share of 94¢, 13% above prior year. Returned $127 million to shareholders through share repurchase and dividends and continued cost optimization initiatives including our footprint optimization laying the foundation for higher future profitability. Now a few highlights by segment. In mobile solutions, our razor-to-sell razor blades model continues to drive through cycle performance. Our aftermarket results are robust. For example, we continue to gain share in the independent channel where sales grew nearly double digits. Have expanded partnerships with customers like Napa. Our distribution centers are performing well, stock availability is at desired levels, and our on-time delivery rates are high. While cyclical headwinds continue, our largest first fit business, off-road, grew for the second consecutive quarter with supportive end market conditions in construction more than offsetting muted conditions in agriculture. In industrial solutions, our power generation business is robust, supported by the current electricity demand super cycle including data center and AI infrastructure build-outs. Our power generation order books are full through the rest of this fiscal year. Dust collection replacement part sales growth was solid, another example of our razor-to-sell razor blade strategy at work as we continue to build out our service and aftermarket capabilities. To that end, this quarter, over half of our total industrial sales were replacement part sales. In life sciences, we're excited by the market share we are gaining in food and beverage where sales grew over 20%. We are winning with key OEMs and channel partners, growing first fit sales, and planting seeds for future replacement part sales. Our disk drive business also grew over 20%, through share gains and supportive market conditions and we are investing in new technologies to support capabilities for HAMR, pronounced HAMR, short for heat-assisted magnetic recording, which will contribute to future growth. Our strong overall results are a testament to the capabilities and agility of the Donaldson team. Our global operations teams, in particular, continue to deliver for our customers, through the changing tariff landscape with a keen focus on efficiency. Our global region-for-region footprint is a strong asset for the company and one of our key competitive advantages. Leveraging this decades-long foundation, we have success offset residual tariff impacts through pricing and optimized supply chain. I am proud of how we are also stepping up and helping our customers mitigate tariff impacts through collaboration, education, and production transfers. To that end, our current annualized estimate for the impact of tariffs is approximately $25 million, down from $35 million previously. We are also building long-term structural efficiencies through our footprint and cost optimization initiatives. We expect to be mostly complete with our current activities by the second half of this fiscal year. Our commitment to serving our customers through any market conditions while maintaining high on-time delivery rates is driving demand and our backlogs are reflective of the confidence our customers have in Donaldson. We are also building for our future through our disc investments in R&D capital expenditures. This quarter, these included continued focused investments in growth areas such as solvent recovery, new disc drive technologies, and air and alternative fuels filtration. Now I'll provide some detail on first quarter sales. Mobile solutions total sales were $598 million, 5% above prior year. Aftermarket sales were $480 million, up 7% driven by strength in both the OE and independent channel. On the first fit side, off-road sales of $95 million increased 6%. Gains in construction offset continued weakness in agriculture. On-road sales of $23 million declined 27% as a result of decreased global truck production. Within mobile solutions, our China business was solid with overall sales up 15% from strength in off-road and aftermarket. This marks the fifth consecutive quarter of growth and we recently won another hydraulics program with a top agriculture equipment manufacturer, another sign that customer trust in Donaldson is building in this massive market. Now on to industrial solutions. Industrial sales were $258 million, flat to prior year. Industrial Filtration Solutions or IFS sales of $216 million grew 2% from continued strength in power generation, particularly in Europe, and dust collection replacement part sales in the US. Aerospace and defense sales were $42 million, a 7% decrease driven by softer defense sales following the completion of a few large projects. In life sciences, sales of $79 million grew 13% year over year as a result of double-digit growth in food and beverage and disk drive, bolstered by project timing in our upstream biotechnology businesses. Given our robust start to the year, and our confidence in delivering on our financial and strategic objectives through the balance of the year, we are increasing our operating margin and EPS outlook. At the midpoint of our updated guidance ranges, we expect record sales of $3.8 billion and sales growth in each of our segments. Operating margin expansion of 80 basis points to a record of 16.5% which puts our incremental margin above 40%. And all-time high earnings per share of $4.03. With that, I will now turn it over to Brad who will provide more details on the financials and our outlook for fiscal 2026. Brad Pogalz: Thanks, Todd. Good morning, everyone. Before getting into the financials, I want to thank the Donaldson team for producing strong first quarter results, giving us confidence in our ability to deliver on our increased profit guidance for the full year. The team continues to display their talent and focus quarter after quarter, and we're excited to build on our momentum. I want to start this morning with a few highlights. Note that my profit comments exclude the impact from the nonrecurring net gain that Sarika referenced earlier. Total sales increased 4%, Operating margin was a first quarter record of 15.5%, up 60 basis points over prior year with an incremental margin over 30%. Adjusted EPS was 94¢, up 13%. And cash conversion was strong at 101% due to improved working capital management. Altogether, a solid quarter for Donaldson Company. Digging deeper into the P&L, our strong first quarter operating margin was driven by expense favorability. Operating expense as a rate of sales improved to 19.9% from 20.7% a year ago. Reflecting leverage on higher sales that was compounded by benefits from the structural cost optimization initiatives launched during the prior fiscal year. Gross margin was 35.4%, down 20 basis points from the prior year and slightly better than our internal expectations. We partially offset increased operating costs with pricing, including pricing related to tariffs as we are successfully mitigating that impact. We still expect gross margin expansion for the full year, with most of the favorability in the second half as our footprint optimization projects come to completion and we benefit from volume leverage that accompanies our typical seasonality. In terms of segment profitability, mobile solutions pretax profit margin was 18.6%, up 30 basis points from prior year. Due to mixed benefits from higher aftermarket sales and leverage on higher sales. Industrial solutions pretax margin was 12.5%, down from 15.9% in 2025 due to an unfavorable sales mix and loss of leverage in operating costs. We expect segment profitability to increase through the balance of the year as sales leverage translates into gross margin and expense rate improvements. 9.2% from a loss of 7.6% a year ago. Strong sales in our higher margin food and beverage and Disk Drive businesses combined with benefits from last year's optimization programs drove the improvement. A quick comment on last year's optimization efforts. We initiated the first and most substantial round of restructuring in life sciences late in the first quarter. And then performed additional rounds over the course of fiscal 2025. Given that cadence, the year-over-year improvement we just recognized in first quarter at a much higher level than what we expect in future quarters over the balance of this fiscal year. Turning to our fiscal 2026 outlook. First on sales. We are reiterating our sales guidance for every business except on-road within mobile solutions. This business represents less than 3% of total company sales. Consequently, the change to the on-road forecast does not have a meaningful impact on our growth expectations for the total company or mobile solutions. We still expect total company sales to increase between 15% including pricing of about 1%. And mobile solution sales are expected to be flat to up 4%. Within mobile solutions, on-road sales are now expected to be flat versus 2025. This compares to our previous estimate of high single-digit growth and the change is driven by the timing of a few key projects that were pushed out beyond this fiscal year. Off-road sales are forecast to be up mid-single digits, due in large part to easier comparisons from sharp declines in agriculture a year ago. We continue to see that end market at trough or near trough levels. Aftermarket sales are projected to grow low single digits. Due to market share gains and vehicle utilization rates. In industrial solutions, sales are forecast to grow between 26%, with a mid-single digit increase in IFS sales are expected to grow across all businesses including in strategically important areas such as aftermarket enabled by services and connectivity. Aerospace and defense sales are projected to be flat after cycling against record levels in the prior year. This forecast also reflects a rebound from the decline in first quarter as the timing of orders can be lumpy in this business. In life sciences, we expect sales growth between 15% continued momentum in food and beverage and disk drive. Through benefits from sales leverage and our improved cost structure, we anticipate full year life sciences profit margin to be mid-single digits. One side note to help with calendarization of this profit. We expect life sciences will be profitable in every quarter. But at a lower level than first quarter. Which benefited from leverage that was due in part to the timing of project sales in our acquired businesses, which we anticipated later in this year. Overall, we are pleased with our profitability expansion in this segment. Given our first quarter performance, and our outlook for the balance of the year, we are increasing our full year operating margin guidance by 10 basis points. To between 16.2% and 16.8%. This includes year-over-year sales growth in all three segments, gross margin expansion, and expense leverage. The midpoint of our guidance range implies an incremental margin of more than 40%. With that, we are also increasing our fiscal 2026 EPS guidance by 3¢. To $3.95 a share to $4.11 per share. Or $4.03 at the midpoint. To help with modeling for the rest of the year, I would like to make a few points on calendarization. As is typical, our sales are weighted towards the back half of the year. Representing about 52% of full year sales due to seasonal dynamics such as holiday timing in the second quarter, and peak activity in our end markets in the back half of the year. Operating profit is even more heavily skewed towards the back half. With about 55% of full year profit being generated between February and July. We'll benefit from higher leverage on the normal step up in second half sales volume. And we also expect abating headwinds from footprint optimization initiatives as those projects complete. Now onto our balance sheet and cash flow outlook. We project cash conversion to be in the range of 85% to 95%. An improvement versus 2025 and consistent with historical averages. Combined with our supportive balance sheet, and low net leverage ratio, which currently sits at 0.7 times, Donaldson has the financial flexibility to thoughtfully invest for our future growth. Our strategic capital allocation priorities are unchanged. First, reinvest back into the company. We are the leader in technology-led filtration. And are committed to maintaining our position. We continue to make R&D investments strategically important high growth, high margin areas. And we also invest in our supply chain and working capital to ensure best-in-class delivery for our customers which is part of the value we provide. Our longer-term efforts are also supported by capital expenditures, which include investments in new products and technologies across all of our segments. Our second capital deployment priority is disciplined M&A. We are actively working through a pipeline of opportunities and discipline is key to our approach as we pursue opportunities that meet our strategic and financial criteria. The value we create comes through reinvestment, and also through the return of cash to our shareholders. As such, our third capital allocation priority is dividends. Speaking to our long-standing commitment to our shareholders, this calendar year is our seventieth in a row of paying dividends. And the thirtieth in a row of increasing our dividend. Maintaining our status, as a proud member of the S&P High Yield Dividend Aristocrat Index. Our fourth priority is share repurchase. For fiscal 2026, we're forecasting a repurchase of 2% to 3% of shares outstanding. Which more than offsets dilution and is in line with our historic levels. To summarize, we are growing Donaldson Company and growing profitably. Taking the midpoints of our top and bottom line guidance ranges, we're projecting 10% earnings growth on 3% sales growth. With incremental operating margin leverage of more than 40%. We have the balance sheet to invest in growth, and we'll do that responsibly. We started the year strong. And I expect to maintain that momentum well beyond fiscal 2026. Now I'll turn the call back to Todd. Todd Carpenter: Thanks, Brad. As we turn the page to our second quarter, Donaldson is in a position of strength. We are maintaining our focus on doing what we do best, solving our customers' complex filtration challenges through our technology-led products and services. With this focus, and through our execution, key investments, and strategic initiatives, I am confident in our ability to create value for all of our stakeholders in the future and we look forward to reporting on our ongoing progress. To close, I want to thank our talented employees around the globe who each day are building our future success. With that, I will now turn the call back to the operator to open the line for questions. 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 star 1 again. Your first question comes from the line of Brian Drab with William Blair. Please go ahead. Brian Drab: Thank you. Good morning, everyone. Good morning. Hello. Sorry if I missed the detail. What was IFS first fit in aftermarket revenue? Fiscal Q1? And then how should we think about first fit and aftermarket contribution to mid-single digit full year growth? And on the aftermarket side, is it still your expectation to increase connected machines by over 30% this year? Brad Pogalz: Brian, this is Brad. I'll start with the numbers. In IFS, both first fit and replacement were up. We didn't go into the details on it. I think, notably, power generation continues to do very well for us in terms of the projects. And a lot of power needs for data center build-outs. So that business continues to do very well, and that's on the new projects and then a little more tepid elsewhere. Todd Carpenter: And relative to this is Todd. In relative to connected solutions, we continue to do well and execute the strategy very well. We do expect to connect between two and three thousand dust collectors this year, and we continue to be on target. Brian Drab: Okay. That's great to hear. And then you would emphasized a little more so last quarter that you know, the team remains in the heavy lift phase of footprint optimization. That being said, are you willing to speak to what you know, structural benefits have been realized to date and, you know, what we should anticipate in terms of pending efficiencies, cost savings, etcetera. As the know, initiatives, you know, conclude the back half of this year into early next year. Brad Pogalz: Sure. This is Brad again, Brian. In terms of structural efficiencies to date, very limited. I think if you look at this morning's report, one notable thing is a gain on sale of $9 million. So we've been moving a lot of product out of facilities. This was related to a plant in the UK that's completed now. So there's two aspects of this work, and the heavy lift has been that kind of final wrap-up. And then the next tranche of work is gonna be, I'd call it, start-up in the new home of this production. So as we ramp up there, it's gonna be teams getting used to this new delivery, new products, that'll happen over the course of this fiscal year, but that's where we talk about more of a building benefit towards the back half of fiscal 2026. Todd Carpenter: And, Brian, Todd, just a little bit more. So I also want to emphasize that we have taken, taken our best shots according to our, all the planning that we have. For those benefits, that you're looking for, and we have put those in the current guide that you're, now in possession of. Brian Drab: Okay. Understood. Appreciate the color. Operator: Your next question comes from the line of Angel Castillo with Morgan Stanley. Please go ahead. Angel Castillo: Hi, good morning, and thanks for taking my question. Wanted to touch on the pricing trends a little bit. You had a 2%, I think, in this quarter, but kept the full year guide around 1%. Can you just talk a little bit more broadly about what you're seeing in terms of pricing dynamics in the market and just how should we think about kind of the full year and ability to potentially have that be what you saw in the first quarter or why that doesn't persist? Rich Lewis: Hi, Angel. This is Rich. Yeah. Just talking about pricing. I would say, in general, if you think about where we're at and I go back to sort of what we're to do principally, which is have fair and balanced relationships commercially with our customers. We are in a fairly normalized pricing cycle after the past few years. And I think what you see in the guide is exactly that. So costs are being managed well. And we are pricing competitively in the market. But, again, more normalized to sort of back pre-COVID type conditions. Angel Castillo: Got it. That's helpful. And then you gave a lot of helpful color on some of the end markets here. I was hoping you could dive a little bit deeper maybe on the regions and what you saw during the quarter. And in particular, I would be interested to kind of hear what you're seeing in terms of November to date and how some of these trends may or may not be kind of progressing given that most of your guides other than onward were essentially unchanged. So just yeah. Just how things are progressing in November. Todd Carpenter: Yeah. Sure. This is Todd. So the best region or the most consistent region right now is Europe. Europe continues to actually strengthen a bit. We saw that within the quarter. From the fourth quarter last year to the first quarter this year. So Europe's doing quite well in a broad-based manner across our businesses. US, we're seeing a bit more careful, within the first quarter, of this year. But still, on solid foundation. Latin America, also, we're being very careful across Latin America. It's got some highs and lows. It's really pretty uneven across Latin America. Asia Pacific is doing okay. Obviously, we had a nice quarter in China based upon the wins that we have and the share gains that we continue to continue to have in China. But we're just trying to be very careful on China. We've had two up quarters in a row but we're still not really ready to call it economic recovery or green shoots or things like that. We'd really prefer to see more data points. All in all, though, we grow in everywhere, in the world. Right now, we're actually executing really well as a company. And I'd say that's the regional summary. Angel Castillo: Helpful. Thank you. Operator: Your next question comes from the line of Adam Farley with Stifel. Please go ahead. Adam Farley: Good morning, everyone. Rich Lewis: Good morning. Adam Farley: We'll start on the mobile aftermarket piece. Really strong growth there. It's good to see. You know, did you win any incremental share gains this quarter? Is this mostly carryover benefit from prior wins? Todd Carpenter: Little bit of both. Look at the OE aftermarket, little bit above. Adam Farley: Sorry. Go ahead, Adam. Adam Farley: I was just gonna say on the OE aftermarket channel side, do you think you're seeing any potential restocking activity? Todd Carpenter: On the independent channel, a little bit of both. Some share gain, some carryover obviously from share gains that we've been talking about in the prior 02/2002, particularly on the OEs, we do see a dip as the OEs really do some balance sheet management, typical behavior. We did start to see that a little bit in October, and so we think it will be on the OE side. The typical behavior for them and we put that within the guide. But it's not anything more than behavior, and we're at culture levels, and we're feeling really good about both the independent and the OE channel, on the replacement parts, and we're actually executing very, very well for our customers. Adam Farley: Okay. That's good to hear. Maybe on the industrial side, what were the primary drivers of the decrementals this quarter? Was it mainly the lower volumes in A and D? Or were there any other maybe one-time items of note? Brad Pogalz: Hi, Adam. Brad here. So the decrementals, it was about flat for the total segment, but definitely pressure in the gross margin from higher operating costs and expense leverage, the pressure on those costs. So it's kind of the combination of those two things. We do expect it to build up from here over the course of the year. The challenge is timing in these businesses, and you touched on it with A and D. This can be a very lumpy business. And when that comes through, that's very good. And obviously, we'll have some fits and starts like we have for probably the last eight quarters in that business. And then project timing on the IFS side. Rich Lewis: Yeah. Adam, this is Rich. The only other thing I would add is we spoke about our footprint optimization work. The vast majority of that sits in that space. And so that work will continue, and we'll see the benefits in the latter part of the year. Adam Farley: Okay. Thank you for taking my questions. Operator: Your next question comes from the line of Brian Drab with William Blair. Please go ahead. Brian Drab: Hey, good morning. Thanks for taking my questions. The first one, just wanted to dig into the industrial outlook a little bit further, you know, up one and a half percent or so in this quarter, but the outlook for stronger growth, so acceleration. And can you just, you know, put some detail around that forecast? Brad Pogalz: Yeah. Brian, this is Brad. So I think part of it is this timing that we mentioned. I mean, defense was particularly challenged in the quarter. There's still some supplier issues that we've been talking about for a while in this business that pushes some of those sales out, also some project timing. Particularly with power gen. I mentioned earlier in this call that had a good quarter, but, obviously, these are big projects, and we have a lot in queue. That we're working to get out. So those are the couple things that build. I mean, it's hard to say exactly the date, and we won't go into quarter by quarter guidance. But like I said in the earlier answer, in industrial, we do expect it to build up from here. In terms of sales volume and profitability. Brian Drab: Okay. And then in the disk drive business, can you talk a little bit about what's driving that in the near term? And you know, what are the what's the long-term secular outlook for that business now? And I know you probably don't want to talk about how significant that is in terms of revenue dollars, but if you could give us any sense for how large that business is now, that would be helpful. Rich Lewis: Yeah. Brian, this is Rich. I'll talk about the outlook and what's driving it. Clearly, our customers in this space continue to evolve their technology. We talked about HAMR in the script. It's the latest technology driving really technical challenges in the filtration space. So we're seeing both share gains and market upturn. A lot of that's being driven by the AI and the cloud-based storage. That's the predominant driver of that. Our expectation is we'll continue to see a lot of strength this year. And we believe that that trend will moderate, but still continue to grow in the coming years. Following that secular trend. Brad Pogalz: Hey, Brian. Brad again. We can triangulate that for you. It's a couple percent of total rep. Couple percent of total Donaldson sales. Brian Drab: Okay. Got it. And by the way, Brad, after like, fifteen years, I do recognize all of your voices really clearly. But it's for the AI, man. Brad Pogalz: Yeah. Yeah. No. I know it's not for me, I guess. Actually, it's been seventeen years. So yeah. Who's this again? Quick question. Last quest yeah. So this is Brian Drab with William Blair. One last quick question. Is data center in general, you know, maybe for your industrial business? I'm thinking, like, Torit dust collectors. You know, is this data center opportunity going to materially impact your business going forward? Like, what are the opportunities in data centers? Rich Lewis: Brian, this is Rich. It you know, this crosses actually both our life science segment and our industrial. And so if you think about these data centers, we're touching them in a lot of ways. They use a lot of power. So it's really good for our power generation business. On the input side. We have a microelectronic business where we're doing chips. These are also being fed into these data centers. Our disk drive business, clearly, we just talked about. And we're also seeing some new opportunities using some of our food and beverage products in the cooling, the water cooling. And so we've seen some pretty nice upticks in demand based on there's a lot of these folks were using air cooling before, they're switching over to a liquid cooling. And that's driving some nice business opportunities for us. So we're coming at it from multi angles. Probably a little bit less so on the dust collection standpoint. That's more of an HVAC play. But for the rest of our business is touching this, in a lot of ways. Brian Drab: Okay. Very interesting. Thanks very much. Operator: Your next question comes from the line of Laurence Alexander with Jefferies. Please go ahead. Laurence Alexander: Good morning. Could you help just with the overall rate of share gains? What the impact is on either the first quarter sales or what you're baking in for the full year? Just to give a sense for how much you're outperforming the end market? Todd Carpenter: Well, just generally, as you look at your models, you know, share gains typically within our more mature markets are more low single-digit type of gains that help us to grow on an annual basis. So if you just kind of think of it that way in our mature markets, in our more immature markets, it could be pretty lumpy or in our project-based businesses, could be lumpy like power generation, obviously. You know, where you have multimillion-dollar projects. But the best way to look at that is in our mature markets, it's a low single-digit type of situation. Laurence Alexander: So I guess if your power gen, for example, were to accelerate over the next couple of years, does that mean the net contribution from share gains is increasing or declining from this year? Todd Carpenter: Increasing. Because our overall power generation business will continue to grow as we look forward. For example, we told you in the script that we are at full capacity for the balance of this fiscal year. Laurence Alexander: And then, I guess, just lastly, just if you look how four, five years, what's your view on kind of how much capacity you might need to add in some in those in those businesses to sort of keep up with their projected data center build-out? Todd Carpenter: If you look back to the last five years of Donaldson Company, and you take a look at our investment levels, our CapEx, etcetera, the new manufacturing facilities that we put, we sit in really strong shape. To position ourselves for when the end markets that have headwinds presented to us today, when they recover, we'll be able to answer. And so we feel as though we sit in really strong position to really take care of our customers. It's one of our guiding principles and that's the way we invested into the corporation. We'll be fine when that recovery happens. And so, overall, plant expansions, etcetera, it'll just be a normal cadence standard work for Donaldson. There won't be typical rushes that other people may experience. We are really happy with where we sit. Laurence Alexander: Thank you. Operator: Your next question comes from the line of Tim Thein with Raymond James. Please go ahead. Tim Thein: Oh, great. Thank you. Good morning. The first question was just on the aftermarket business within mobile and just thinking about this for the balance of the year. You grew nicely against what was the toughest comp from last year. So I know sometimes these things are you run the risk of cutting it too finely. But growth appears that you're expecting it to maybe settle a bit from what you experienced in the first quarter. Can you just is that a fair assumption? And maybe just kind of walk through any assumptions that may be included as to how you're thinking about the balance of the year for that. Todd Carpenter: Tim, that's a fair assumption. And maybe just to be a little bit more granular, when you break up the OE growth versus the channel growth in Q1, I would tell you that the OE growth is low single digits in the independent channel is more double digits. So that kind of shows you the mix. It also speaks to the share gains that we continue to win. But we do think, particularly in the second quarter as is typical every single year, the OEs will balance sheet manage, will go more muted. And then we'll bounce back in our typical secular fashion year over year in the second half. Tim Thein: Okay. And alright. And then the, just on the you know, these four plus 40% incrementals are pretty impressive. In terms of the benefits related to the footprint optimization, is there a way to help us think about what that is yielding as you as we exit the year? You know, kind of a starting off point thinking about next year once these savings are kind of fully in the numbers? Is there any help you can give us on that? Brad Pogalz: Thank you. I guess I hi, Tim. I'd point back to the comments I made about triangulating the full year. I won't break it out into the specifics of this is where exactly that number lands. But if you think about operating profit tilted 55% comes in the second half. And all of the I shouldn't say all of most of that is gross margin expansion. We'll continue to get expense leverage as we go through, but a lot of that is gross margin. And some of that is from the footprint optimization. We will have the natural volume leverage, but we do expect to start to build on the momentum as those projects are complete. Tim Thein: Alright. Thank you, Brad. Appreciate it. Operator: Your next question comes from the line of Rob Mason with Baird. Please go ahead. Rob Mason: Hi, good morning. Good morning, Rob. And congratulations on a good start to the year. Thank you. And just around that, you know, Todd, it's somewhat uncharacteristic or at least recently for you to change guidance or raise guidance after the first quarter. And it looks like maybe I can trace that to the improvement in the margin expectations. As you kind of walked around the world there recently, you used the word careful, a lot as also. So I'm just maybe a little more context on where the confidence is and to go ahead and raise the guidance. Is this all kind of self-help driven margin control there? Is there anything else moving around within the sales outlook you know, within the ranges that you have that did not change, but is anything moving up? Todd Carpenter: Sure. Absolutely, Rob. So, you know, when we take a look at the portfolio, right, we have a strong diversified portfolio of businesses. You know, all the puts and takes. We do have some headwinds in the portfolio, but we are winning share gains. You look at our aftermarket businesses, industrial, our mobile solutions businesses, the way our life sciences business, particularly food and beverage performed, you take the highs. The highs are higher highs than the lows are on the step down. And so consequently, you know, we pride ourselves on being transparent for all of you and helping you understand our company and we felt as though we would do that again this time, rather than hold back, and that's our guiding principle. We feel very good and confident about where we are, to execute the year. And so that's why we did that. Rob Mason: Oh, very good. Well, maybe I'll press you on the transparency. Can you speak to you've talked about your power gen business having a lot of demand, order books full. You also seemingly sound comfortable on where your ability to improve capacity. But can you give us some feel for how that business can grow this year, given it is in kind of a sold-out position? Yeah, with at least within the context of the mid-single digit for IFS. You know, where that may land for this year. Power gen? Todd Carpenter: Yeah. The biggest challenge for us within power generation is because of full capacity utilization is the ramp-up. And, you know, ramp-ups to the level when you see that business really go as hard and as fast forward as it is. Are usually more complicated than just kind of running it as you might imagine. These things are you know, one order could take 40 semi-trucks full of fabricated metal to be shipped somewhere in the world. So it's really that part of it that will determine our overall growth rates. We've baked that into the guide. We've taken our best opportunity to do that. We believe that at this point, that year over year will be kind of mid-single digits on the growth. There is a chance we could have some upside if we execute better. But because those projects are also multimillion-dollar projects, if you have a site not ready at a customer, they could push out delivery into another quarter. As you know, you've been following us a long time and even into a fiscal year. So we've tried to just balance all those macro factors into the guidance that we gave. It's obviously an important component of our story right now. And we're working hard to execute it for our customers. Rob Mason: Oh, that's helpful. Thank you. Operator: That concludes our question and answer session. I will now turn the call back over to Todd Carpenter for closing remarks. Todd Carpenter: That concludes the call today. Thanks to everyone who has participated. We all at Donaldson wish all of you a safe and happy holiday season. And we look forward to reporting our second quarter earnings in about ninety days. Goodbye. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning, and welcome to the REX American Resources Third Quarter 2025 Conference Call. As a reminder, today's call is being recorded. At this time, all participants are on a listen-only mode. A brief question and answer session will follow the formal presentation. I would now like to turn the call over to your host, Mr. Doug Bruggeman, Chief Financial Officer of REX American Resources. Please go ahead. Doug Bruggeman: Good morning, and thank you for joining the REX American Resources Q3 2025 conference call. With me on our call today are Stuart Rose, REX Executive Chairman, and Zafar Rizvi, REX Chief Executive Officer. We'll get to our presentation and comments momentarily, as well as your questions. But first, I will review the Safe Harbor disclosure. In addition to historical facts or statements of current conditions, today's conference call contains forward-looking statements that involve risks and uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect the company's current expectations and beliefs but are not guarantees of future performance. As such, actual results may vary materially from expectations. The risks and uncertainties associated with the forward-looking statements are described in today's news announcement and in the company's filings with the Securities and Exchange Commission, including the company's reports on Form 10-Ks and 10-Q. REX American Resources assumes no obligation to publicly update or revise any forward-looking statements. I'd now like to turn the call over to our Executive Chairman, Stuart Rose. Stuart Rose: Good morning, and thank you again to everyone for joining us. During 2025, REX American Resources continued to demonstrate the strength and operational expertise that has defined our company for over four decades. I'm pleased to report that we are making progress on operational milestones we set out to accomplish and continue to position REX for sustained long-term growth. Our third-quarter results reflect our focus on solidifying our core business of ethanol production. Our strong results during the quarter benefited from supportive ethanol industry dynamics, especially export volumes and strong crush spreads. Our One Earth Energy facility expansion to 200 million gallons per year is continuing and is on track for completion in 2026. This expansion will significantly enhance our production capabilities and operational efficiency, contributing meaningfully to future performance. Additionally, we have begun examining potential benefits we can derive in the near term from 45Z tax credits. We are actively engaged with groups to assess our operations and assign a carbon intensity score to our production operations, which we expect to be below the threshold to begin earning credits. The third quarter demonstrated once again that REX's focus on operational excellence, strategic investments, and disciplined capital allocation continues to deliver superior results. Our net income per share of $0.71 represents strong performance, reflecting our team's excellent execution in managing input costs and timely execution leading to strong margins. Our continuing strong financial results have allowed us to maintain our strong balance sheet, including approximately $335 million in cash, cash equivalents, and short-term investments, even after the to-date spend of approximately $156 million on our capital projects for plant expansion and carbon capture of One Earth Energy. As we have consistently emphasized, our success stems from having great facilities, Corn Belt locations, and most importantly, we feel the most skilled and dedicated team in the industry. Their attention to detail and market awareness continues to set REX apart from our competitors. I want to thank our entire team for their outstanding efforts this quarter and their unwavering commitment to excellence. Now I turn the call over to our CEO, Zafar Rizvi, to discuss our operational achievements and strategic initiatives in greater detail. Zafar Rizvi: Thank you, Stuart. The expansion of ethanol production at the One Earth facility continues to progress steadily and remains on track for completion and in operation in 2026. Alongside this project, we are advancing our evaluation of our carbon intensity score and expect a favorable outcome as we incorporate assessments from multiple independent experts. Regarding the near-term benefits available under the 45Z program, we continue to position the company to capitalize on these opportunities while we await final guidance from the Treasury Department. For our carbon capture and sequestration initiative, the EPA currently estimates that our Class VI injection well permit application will be finalized in June 2026. REX remains in active, constructive communication with the EPA throughout this process. As of the end of the third quarter, we have invested approximately $155.8 million in our carbon capture and ethanol expansion projects. We remain within our revised combined budget range of $220 million to $230 million for both initiatives. I will now turn the call over to Doug Bruggeman to review our financial results. Doug Bruggeman: Thanks, Zafar. During 2025, our ethanol sales volumes reached 78.4 million gallons compared to 75.5 million gallons in Q3 2024. The average selling price for ethanol was $1.73 per gallon during the quarter versus $1.83 in the prior year. Dry distillers grain sales volumes were approximately 160,000 tons for Q3 with an average selling price of $139.93 per ton compared to 170,000 tons and $147.14 per ton in the prior year. Modified distiller grain volumes totaled approximately 21,000 tons with an average selling price of $57.03 per ton. Corn oil sales volumes were approximately 27.4 million pounds during the quarter with an average selling price of $0.60 per pound. This volume was up from the prior year sales by approximately 17% and an increase in average selling price of approximately 36%, leading to an approximately 60% increase in sales revenue for corn oil. Gross profit for the third quarter was $36.1 million compared to $39.7 million in Q3 2024. This primarily reflects lower prices for ethanol and distiller grains. SG&A expenses were approximately $8.2 million for the quarter compared to $8.4 million in Q3 2024. Interest and other income totaled $3.2 million for the quarter compared to $4.6 million in Q3 2024, reflecting lower rates and lower investments. Income before tax and non-controlling interest was approximately $35.5 million compared to $39.5 million in Q3 2024. Net income attributable to REX shareholders was $23.4 million or $0.71 per diluted share compared to $24.5 million or $0.69 per diluted share in Q3 2024. We ended the third quarter with cash, cash equivalents, and short-term investments of $335.5 million. REX continues to maintain its strong financial position with no bank debt. I'll now turn things back over to Zafar. Zafar Rizvi: Thanks, Doug. Our three P's—profit, position, and policy—continue to guide our strategy and execution. This was evident throughout the third quarter. Profit: We have now delivered 21 consecutive quarters of profitability, reflecting the hard work, discipline, and operational excellence demonstrated by our team every day. Position: We believe we are strategically positioning the company for long-term organic growth, reduced carbon intensity, and enhanced value creation. Advancing our carbon sequestration project and core ethanol business will further strengthen our competitive position heading into 2026 and beyond. We also continued active engagement with the EPA regarding our Class VI well permit application. Policy: We're leveraging the near-term opportunities provided by the 45Z credit program to enhance earnings. We expect these benefits to increase as our ethanol production expansion and carbon sequestration facilities come online and additional gallons qualify under the program. The third quarter was exceptionally strong across all key performance measures. Our core ethanol business benefited significantly from sustained robust export demand and reliable corn supplies. Last quarter, U.S. ethanol exports were running approximately 10% ahead of the 2024 pace. By August, the momentum had strengthened with exports 14% higher than the first eight months of 2024, according to the Renewable Fuel Association. We continue to expect 2025 to set a new record for U.S. ethanol exports. Looking ahead, the USDA projects that corn production in South Dakota and Illinois for the 2025/2026 harvest season will be among the highest results in recent years. This would continue to favor our business, driving lower input prices. We are excited about the opportunities ahead as we close out the year and prepare for a successful 2026. We expect the fourth quarter to generate a higher net profit than last year's profitable fourth quarter. As we move into 2026, our strong balance sheet, no debt, and expanding business opportunities position us well for another year of growth and improved performance. Now I would like to open things up for questions. Operator? Operator: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press 1 on your telephone keypad. You may press 2 if you'd 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. One moment please while we poll for questions. Our first question comes from Chris Degner with Water Tower Research. Please proceed with your question. Chris Degner: Thanks for your time, and it looks like a great quarter. Just wanted a couple of questions for you. I'm kind of curious about your thoughts on key hurdles and timing as you look forward to the 45Z tax credit program. And if you can give us any incremental color on when we can expect some more updates on that. Zafar Rizvi: Yes, Chris. As you know, the Treasury has not issued the guidelines so far. We're certainly waiting for the guidelines. Then, also, there is a requirement for the prevailing wages and all those information calculations of CI score. Just want to make sure we have all the facts together, and we are reviewing these facts with different experts. And once we have all those numbers back, we will be able to, you know, next quarter, hopefully, we will be able to explain how much tax credit we will be receiving. But at this time, we are not willing to really give any numbers. Chris Degner: Sure. Thanks. And then if you step back and think about some of the fundamentals of the industry, I'd be curious about your view on the impact of tariffs and crack spreads as you look forward into 2026. And I know it's hard to forecast, but just curious about your view. Zafar Rizvi: I think the tariff, in the beginning, certainly had a huge impact because we were concerned about Mexico and Canada export. You know, Mexico is the largest importer of DDG, and Canada is the largest importer of ethanol. So, hopefully, those relations stay the same. I think that that will be great. But certainly, on the other side, we can see that Europe and several other countries are beginning to buy ethanol due to pressure from the tariff on negotiation and others. So that's why we can see that the ethanol certainly has January to August is approximately 1.4 billion. Compared to last year, 1.2 billion. So certainly, there is a great positive impact on the export of ethanol at this time. But on the other hand, I think we see some of those soybeans or soybean oils are not shipped abroad, or China is not buying. There is some impact on the corn oil prices, which has dropped a little bit, and also there's some concern about the DDG export. So those are the weak sides. We certainly are very happy to see that ethanol export is increasing, and we believe that will continue to increase in 2026. And also, we are very pleased with the, as you know, the corn production in Illinois and South Dakota. It does seem to be all-time high, and we believe that will have a positive impact on our cost of production moving forward. Chris Degner: I have family who are farmers in Iowa, and it's been a good year. So it's Yeah. Thank you for that. If you think through the carbon sequestration project that you're looking at, how's the permitting process going with the pipeline? And is there any key hurdles that you could see through with the Illinois state government? Zafar Rizvi: I think, basically, as you know, there was a moratorium through July 1 for the pipeline. But we understand the ICC, Illinois Commerce Commission, is working on pipelines and all of those requirements, and they already have a couple of public hearings. We believe they are certainly working on it. But at this time, we really have no clear guideline on when they will start taking the application. But the moratorium will be, you know, July 1 is the last day, so we certainly will be able to apply after that, if not earlier. But you probably also know that we have completed all the easements for our six-mile pipeline. That pipeline was really a six-mile pipeline. We built it because we just wanted to be away from the aquifer, the Mahomet Aquifer. And that's the only reason. Otherwise, we did not really need that pipeline. Chris Degner: Oh, okay. Well, thank you for the update, and it looks like a great quarter. I appreciate your time. Zafar Rizvi: Thanks, Chris. Operator: Our next question comes from Mason Born with AWH Capital. Please proceed with your question. Mason Born: Hi, guys. Thanks for the questions. Just a couple for me. Stuart, I guess, in your prepared remarks, you mentioned recognizing benefits under 45Z, and it sounds like you're not yet still sort of assessing where that score is to start and then where it can go from there. But is it fair to say that you believe you're going to be positively generating credits before the indirect land use change occurs on January 1, and that would be an incremental step after that? Or is this still too early to say? Stuart Rose: As Zafar mentioned, we are working diligently on trying to obtain credits this year, but we don't know what the regulations are yet. They have not published them, but we will be prepared depending on what the regulations are. And they have not actually, the land use change is correct, but they have not come out with what qualifies as a carbon intensity score yet. So we cannot guarantee any credits for this year. But we are working on it diligently. Zafar's team, I don't know how many people he has working on it, including outside people, but a lot. And we hope, and I emphasize hope, to achieve credits this year, but we have no way of knowing whether we will or will not at this time. Mason Born: So that's something you could recognize retroactively. Is that your assumption when you're Stuart Rose: That's our hope. Yes. Yes. That's our hope. Mason Born: And then second for me. I know it's early on this as well, but ADM recently entered into an agreement with Google on some of their excess capacity. I know you guys are planning to have plenty of excess capacity in your carbon capture wells, even on one alone, but potentially on all three if you have them operating. Just wondering if you could provide any thoughts there on your thinking and any timeline around, obviously, I assume you get your operation online first, but just any thoughts on potential for partnerships or what that could look like? Stuart Rose: Zafar, you want to answer that? Zafar Rizvi: Yeah. I think, Mason, as you know, we are really trying to concentrate on the well number one first. And certainly, for well number two and three, even for well number one, we will have enough capacity to have the carbon sequestration from third parties. And we have been in contact with several people, and several people have reached out to us recently and even in the past. But we really don't want to make some commitment or contract until the time we have received the Class VI permit, and we have put the pipeline. All of those facts are taken care of. After that, we believe that we will be able to get those contracts in the future. But at this time, we are not negotiating with anyone because we are not there where we are supposed to be at this stage. Mason Born: Great. Thank you. Zafar Rizvi: And, Mason, let me add that one answer to you. You asked about the land use. Yes. Our recent calculation, which we are looking at, as you know, there is land use in this one, and in 2026, there will not be land use. We believe that we are already at a score which can be really, without land use, we will be able to qualify. But we have to still do a lot of calculations to make sure the prevailing wages and other factors and Treasury guidelines are clear. Even I can tell you that even some of those accountants who are reviewing our data and information, they are not even sure if that is gross ethanol or is it net ethanol? That means it's denatured ethanol or undenatured ethanol will qualify. So there are several different ways we are doing all those calculations to make sure that the numbers are correct before we start talking about how many millions of dollars of tax credits we are going to get. Mason Born: That's helpful, and we appreciate your conservatism. So thank you for the details. Operator: We have reached the end of the question and answer session. I'd now like to turn the call back over to Stuart Rose for closing comments. Stuart Rose: Thank you. Our quarter was very good, and we expect next quarter ethanol to outperform last year's fourth quarter. And we're continuing to make further progress, as we just talked about, in capturing 45Z credits. It's a tribute to all our employees, starting with our CEO, Zafar Rizvi, who is recognized by many as, if not the, one of the top CEOs in the ethanol industry, including all of our employees who we consider the best in the industry. I want to thank everyone for listening, and we look forward to talking to you after next quarter. Thank you. Bye. Operator: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
Operator: Good morning, and thank you for joining us for today's Hovnanian Enterprises, Inc. Fiscal 2025 Fourth Quarter Earnings Conference Call. An archive of the webcast will be available after the completion of the call and run for twelve months. This conference is being recorded for rebroadcast and all participants are currently in a listen-only mode. Management will make some opening remarks about the fourth quarter results and then open the line for questions. The company will also be webcasting the slide presentation along with the opening remarks from management. The slides are available on the Investor page of the company's website at www.khov.com. Those listeners who would like to follow along should now log in to the website. I would now like to turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead. Jeff O'Keefe: Thank you, Michelle, and thank you all for participating in this morning's call to review the results for our fourth quarter. All statements on this conference call that are not historical facts should be considered as forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements of the company to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statement. Such forward-looking statements include, but are not limited to, statements related to the company's goals and expectations, respect to its financial results for future financial periods. Although we believe that our plans, intentions, and expectations reflected and are suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions, or expectations will be achieved. By their nature, forward-looking statements speak only as of the date they are made, are not guarantees of future performance or results, and are subject to risks, uncertainties, and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward-looking statements as a result of a variety of factors. Such risks, uncertainties, and other factors are described in detail in the section entitled risk factors and management's discussion analysis, particularly the portion of MD and A entitled safe harbor statement in our annual report on Form 10-K for the fiscal year ended 10/31/2024, and subsequent filings with the Securities and Exchange Commission. Except as required by applicable security laws, we undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, changed circumstances, or any other reason. Joining me today are Ara Hovnanian, Chairman and CEO, Brad O'Connor, CFO, David Mitrisin, Vice President Corporate Controller, and Paul Eberly, Vice President Finance and Treasurer. Now turn the call over to Ara. Ara Hovnanian: Thanks, Jeff. I'll begin by reviewing our fourth quarter results and I'll discuss our strategic positioning in the current housing market. After my remarks, Brad will follow with additional details. And we'll open up the floor for your questions. Let me begin with slide five. Here, we present our fourth quarter guidance alongside our actual results. Despite persistent political and economic uncertainty at home and abroad, our team delivered results meeting or beating our guidance across each of these key metrics. Beginning at the top of the slide, our revenues reached $818 million surpassing the midpoint of our guidance. Adjusted gross margin came in at 16.3% for the quarter, near the high end of our guidance. SG&A was 11.2% near the lower end of our guidance. Income from unconsolidated joint ventures totaled $13 million slightly above our expectations. Adjusted EBITDA for the quarter was $89 million also exceeding our guidance range and adjusted pretax income was $49 million, close to the midpoint of our guidance. On Slide six, we show the fourth quarter results compared to last year. The year-over-year comparisons are challenging to say the least. In almost all metrics. Given that '24 was an excellent year for us and the environment became much more challenging in '25. In the upper left-hand portion of the slide, our total revenues declined by 17% year over year primarily driven by a 13% reduction in deliveries and the absence of a significant land sale that occurred in the fourth quarter of last year. Moving to the adjusted gross margin, we saw a year-over-year decline primarily driven by higher incentives offered to support affordability. Our focus on pace over price and our short-term strategy to move through lower margin lots are laying the foundation for stronger performance when the market stabilizes and as we open communities with our newer land acquisition that factored in higher incentives while still achieving normal return metrics. In the fourth quarter of this year, incentives accounted for 12.2% of the average sales price. The majority of this cost was attributed to mortgage rate buy downs an essential tool for unlocking affordability at the moment and driving demand. This represents an increase of basis points from the '25 up 370 basis points compared to a year ago and higher by 920 basis points versus fiscal twenty two before the mortgage rate spike began affecting margins on our deliveries. Were it not for the considerable cost of making homes affordable, through mortgage rate buy downs, our gross margins would actually be quite robust. Moving to the bottom left, you'll notice that our total interest expense ratio increased compared to last year. This is mainly due to other interest related to a few large communities in planning where interest is expensed immediately rather than capitalized. These communities were on our balance sheet before land banking hence the increased interest. Moving to the bottom right-hand section of the slide, importantly, while our profitability stayed within guidance, it was certainly a big reduction from last year's strong performance. These results are consistent with our strategy of moving through older vintage lots selling our QMIs, prioritizing sales pace over price, and clearing our balance sheet to make way for new land contracts which are projected to carry significantly higher margins and returns. Turning to the sales environment on slide seven. We continue to use mortgage rate incentives to support our sales. Although the number of contracts in the fourth quarter fell by 8% compared to last year, It basically reflects the overall market conditions. Last year's fourth quarter was a particularly strong quarter for sales. Making a difficult comparison for this year. Our use of incentives has helped soften some of the challenges and maintain steady activity. Turning to slide eight. This slide displays traffic per community for each month in the fourth quarter as well as the month of November. Compared to last year, traffic increased significantly in three of the four months, These results clearly highlight a positive trend Buyer interest has grown compared to last year. However, many potential buyers are still hesitant to move forward and enter contracts given a lot of economic and world uncertainty. You can see that contracts during the year on slide nine show that it was quite choppy every month. Looking at slide 10, you'll notice that quarterly contracts per community declined this year compared to the fourth quarter of last year. Similar to our year-over-year monthly results, our quarterly year-over-year results were also volatile. These comparisons demonstrate how challenging the current environment is The contracts per community in the '25 were 16% below the levels seen during the ninety seven to o two period, one in the few that we consider a normal sales environment. On slide 11, we provide a closer look at monthly contracts per community comparing each month in the fourth quarter to the same month last year. The set this year, sales pace for each month in the fourth quarter was lower than the same months last year and below our normal levels. If you refer to slide 12, we present contracts per community as if our quarter ended on September 30 allowing for a direct comparison with all of our peers that report contracts per community on a calendar quarter basis, which is most of them. With 9.6 contracts per community, our sales pace ranks us the fourth highest among all the publicly traded homebuilders. As illustrated on slide 13, contracts per community declined year over year for a vast majority the homebuilders reporting this. Metric. Although any decrease is less than ideal our performance surpassed all but two of our peers. These comparisons are based on an adjusted quarter ending in September for us, which allows us to have a direct evaluation and comparison compared to our peers. The takeaway from these last two slides is clear. Our focus on sales pace over price is delivering above-average sales results and strengthening our margin position. I recognize, however, that it's sad to point out that we are one of the least bad in a difficult market. But that will eventually change. For the past two years, about 70% of our buyers have used mortgage rate buy downs. As shown on slide 14, the total value of incentives and buy downs has grown considerably over the last four years. Incentives began to rise sharply in early 'twenty three jumping from 3.9% in the '22 to 7.4% in the '3. While these higher incentives have put short-term pressure on our margins, they've helped us keep us sales keep our sales steady. Move through lots with lower margin potential. To further support homebuyers, we are maintaining a robust inventory of quick move in homes or QMIs as we call them enabling customers to benefit from incentive programs and secure homes quickly and cost-effectively. On slide 15, we show that at the end of the fourth quarter, we had 6.5 QMIs per community. This marks the third quarter in a row where the number of QMIs per community has gone down reflecting our ability to align starts with sales pace and optimize inventory levels. QMIs are homes that we have started framing but have not yet sold. One, as shown on slide 16, the number of QMIs fell from 1,103 at the 25 to 907 at the October '25. This represents a 22% decrease over that period. It demonstrates our flexibility in aligning supply with current demand and optimizing our approach to meet buyers' needs while maintaining operational efficiency. In the fourth quarter, QMI sales comprised 73% of our total sales down from the record of 79% in prior quarters but still well above our historical norms of about 40%. By focusing on QMIs, we sign and deliver more contracts within the same quarter. This approach means we have fewer homes in backlog at the end of each quarter. But a higher rate of converting backlog to deliveries. In the '25, 36% of our homes delivered were both contracted and delivered in the same quarter. While this makes it a bit harder to predict next quarter's results, It led to a backlog conversion ratio of 102%. Much higher than the historical average of 66% for fourth quarter since '98. That was the it also was the first time we've ever been above 100% in any quarter. We continue to closely manage our QMIs for each community, making sure the rates at which we start these homes matches the rate at which we sell them. If you look at seven slide 17, you'll see that despite higher mortgage rates, and a slower sales pace nationwide, we managed to increase net prices in 36% of our communities during the fourth quarter. More than half of these price increases happen in Delaware, Maryland, New Jersey, South Carolina, Virginia, and West Virginia. Some of our strongest markets. However, we've also been successful and have communities in some of our most challenging markets typically in a and b locations, that have great returns. Our approach remains to prioritize sales pace but when the market strength is evident, we capitalize on opportunities to raise prices. And reduce incentives. I'll now turn it over to Brad O'Connor, our chief financial officer. Brad O'Connor: Thank you, Ara. Before I get to the next slide, I want to comment on the other income line on our income statement. During the 2025, we assumed control of two previously unconsolidated joint ventures after our partners received their final cash distribution achieving their preferred return requirements. As a result, we consolidated the remaining assets and liabilities of these successful joint ventures at fair value recording a gain of $18,900,000 in other income. This type of consolidation has become more common, and we anticipate another similar event in the 2026. Importantly, these communities continue to meet our standard return metrics even after the step up to fair value and after current incentives. Turning to slide 18, We finished the quarter with 156 communities open for sale. Reflecting steady growth as we focus on expanding our top line. We expect newer communities to outperform older vintages supporting our growth strategy. Unfortunately, the difficult market is currently a headwind to our growth but the larger higher community count is allowing us to generally maintain our volume. Slide 19. Details our land position. We ended the fourth quarter with 35,883 controlled lots. Equivalent to a six point five year supply. Including joint ventures, we now control 38,742 lots. Our lot count decreased 14% year over year, reflecting disciplined land acquisition and a willingness to walk away from or postpone less attractive Even with fewer lots, we remain we remain well positioned to increase our home deliveries in the coming years. On the far right side of the slide, you can see that our lot count decreased sequentially for the third quarter in a row. These recent declines are reflective of the operating environment. We walked away from almost 15,000 lots during fiscal twenty twenty five, putting almost 6,000 lots in the fourth quarter. Having said that, our land teams remain active, so securing 9,600 lots under contract in the last three quarters, 3,100 in the fourth quarter, all meeting or exceeding our margin and IRR hurdles even after factoring in current high incentives. Slide 20 shows the age of our lot position, both owned and optioned broken down by year by the year each lot was controlled. The number above each bar represents the percentage of total lots that were controlled in that year, The number below each bar indicates the percentage of incentives used on homes delivered during that year. This slide illustrates that by the fourth quarter of this year, 62% of our land was initially controlled in either 2024 or 2025. By which time we were assuming more significant incentives in our underwriting of land acquisition. However, 87% of our deliveries in the fourth quarter were from lots with vintages from 2023 or earlier. Those vintages are more challenging from a margin perspective, because we were assuming much lower incentives when they were underwritten. We are working through those lots, as you can see on this slide, but it is a gradual transition. The process of shifting our land position towards lots that were purchased with greater incentives is slow and ongoing. We are working through the older, less profitable lots and replacing them with newer land acquisitions that offer better returns. In today's challenging market, we're also working with some land sellers who we have option agreements with to buy mutually beneficial solutions where we both share a little bit of the pain in a difficult market. Strategically, we decided to sell through lower margin lots to make room for new land acquisitions that meet our our our IRR targets. The good news is we are still finding new land opportunities that meet our underwriting criteria even with current high incentives and the current sales pace. Given our recent land acquisitions that begin delivering in 2026, we expect our gross margin percentage to bottom in the first quarter fiscal 'twenty six and to gradually improve in the following quarters. On slide 21, we show our land and land development spend for each quarter of fiscal twenty five and the quarterly average for all of 2024. Land and development spend has decreased in response to market conditions, reflecting disciplined capital allocation and rigorous evaluation of every acquisition factoring in current prices, incentive levels, construction costs and sales base, to ensure IRR is above 20%. We continue to identify compelling opportunities in our markets and remain laser focused on revenue and profit growth for the long term. Our commitment to disciplined underwriting and strategic investment will drive continued success. Turning to Slide 22. We ended Q4 with $4.00 $4,000,000 in liquidity, well above our targeted range even after spending 199,000,000 land and land development. We completed a significant refinancing during the fourth quarter, which is highlighted on slide 23. The top of the slide shows our maturity ladder as of 07/31/2025. This refinancing shown on the bottom portion of the slide marks a major milestone for us. For the first time since 2008, all of our debt, except for our revolving credit facility, is now unsecured. This change strengthens our balance sheet going forward, providing us with greater financial flexibility. Reducing risk, and positioning us for future growth. The successful refinancing underscores our disciplined approach to managing debt and emphasizes our commitment. To maintaining a strong and stable financial foundation. On slide 24, we highlight how we've successfully increased our equity and reduced our debt over the past few years. Over that time, equity has grown by $1,300,000,000 and the debt has been reduced by $754,000,000 Net debt to capital is now 44.2%. A substantial improvement from 146.2% at the start of fiscal twenty twenty. While we still have work to do, we remain on track toward our 30% net debt target. With $230,000,000 in deferred tax assets, we will not pay federal income taxes on approximately $700,000,000 of future pretax earnings. Enhancing cash flow and supporting growth. Given the current volatility and challenges with predicting margins, we are only providing financial guidance for the next quarter. Our outlook assumes that market conditions remain stable with no major increase in mortgage rates, tariffs, inflation, cancellation rates, or construction cycle times. As we rely more on QMI sales, forecasting profits is tougher. While we've performed at the top of our guidance for many our goal is to provide realistic guidance that we can meet or beat if conditions are favorable. Our forecast includes ongoing use of mortgage rate buydowns in similar incentives, and it does not include any changes to SG and A expenses from FAM stock cost tied to stock price changes from the $120.23 closing price at the end of Q4 fiscal twenty twenty five. Slide 25 shows our guidance for the '6. Our expectation for total revenues for the first quarter is between $550,000,000 and $650,000,000 Adjusted gross margin is expected to be in the range of 13% to 14%. This is lower than our typical gross margin, particularly because of increased cost of mortgage rate buy downs and our focus on pace versus price. Assuming no further deterioration in the market, we expect our gross margin to bottom in the '26 with margins gradually increasing each quarter and the remainder of 'twenty six. We expect the range of SG and A as a percentage of total revenues to be between point 514.5% which is still higher than usual. One of the reasons the SG and A ratio is running a little high is that we are expecting community count growth we have to make new hires in advance of those communities. In addition, we are making significant investments to improve processes and technology in many areas to significantly increase our efficiency in future years. We expect income from joint ventures to be between breakeven and $10,000,000 and our guidance for adjusted EBITDA is between $35,000,000 and $45,000,000 Our expectation for adjusted pretax income for the first quarter is between $10,000,000 and $20,000,000 This includes the expectation of other income from the consolidation of the joint venture in the first quarter when the partner is expected to reach their full return of all capital as prescribed in the JV agreement. As a reminder, this has become a normal part of the life cycle of our joint ventures as we have had other income from JV related transactions four times in the past ten quarters. Our first quarter guidance also includes proceeds from a land sale we expect to close the first quarter. On slide 26, we show 85% of our lots controlled via up from 46% in fiscal twenty fifteen reflecting our strategic focus on landline. Looking at slide 27, we may we remain strong compared to our peers in controlling through options. In fact, we have the fourth highest percentage of option lots. Placing us well above the industry median of 58%. On slide 28, we have the second highest inventory turnover rate among our peers This is an important part of our strategy because it means sell and replace our inventory more quickly than most competitors, demonstrating a more efficient use of our capital. This reflects many other factors in addition to land light. We see more opportunities to use land options as well as reduce lot purchase to construction start and construction start to completion cycle times, which would further help us improve our inventory turnover. On slide 29, we show that compared to our midsized peers, we have the second highest adjusted EBIT returns on investment. At 17.7%. On slide 30, we have the five larger builders, and we still rank fifth highest overall. Our adjusted EBIT return on investment is a true measure of pure homebuilding operating performance. Over the last several years, we've consistently had one of the highest ROIs among our peers. On slide 31, we show our price to book value compared to our peers. We're try trading slightly above book value, and just below the median for all the peers shown on the slide. These last two slides emphasize the point that given our high return on investment combined with our rapidly improving balance sheet, we believe our stock continues to be undervalued. I'll now turn it back to Ara for some brief closing comments. Ara Hovnanian: Thanks, Brad. Five years ago, we were above median compared to our midsized peers in EBIT ROI. Which we believe is at the true key operating metric for homebuilders from our perspective. Four years ago, we were also above median in ROI. For the past three years, we have been number one or the number two performer in ROI. Our operating model is yielding industry leading results. It's true that we have a high debt to cap ratio and higher interest rates than many of our peers which means that we have been more sensitive to margin compression. However, as we've shown you, we have been steadily increasing our equity and decreasing the amount of debt. With our recent refinancing, we've decreased the cost of our debt. Our fourth quarter pretax was significantly by the heavy fees to pay off our debt early. During the refinancing but the interest savings would quickly bring back the benefits and the longer maturities give us the flexibility to deal with market uncertainties. We have plenty of work ahead of us. But the key is that we have the right operating model that is producing top results on an ROI basis. As Brad mentioned, we're making heavy investments in business process redesign technology, and in searching for new opportunities and cost reductions that will make us even more competitive in the future. Our land position, as shown on slide 32, is heavily weighted to the Northeast which is over 53% of our lots controlled And that's important because the Northeast is one of our most profitable segments. In the in it is lowest in the Southeast a more challenging market at the moment, where we only control 17% of our total lots. Finally, the West has 3030% of our lots. While our short-term sales have been below last year, as I mentioned earlier, traffic per community is up fairly significantly over last year in recent months. Buyers are definitely out there looking but with all the world and economic uncertainty, they are hesitating at the moment. But that will eventually pass. Our new land acquisitions particularly the land and lot contracts in the last year have been underwritten with significant incentives that should yield dramatically better gross margins and returns. In addition, on Monday morning, I can look back and say we were too heavily invested in the more affordable tertiary markets with entry-level homes. This has been the more challenging segment of the housing market and we've been staying clear of these locations in our new land acquisition. Conversely, our active adult segment has been performing quite well. And we are focusing more on this segment which is currently only about 19% of our deliveries. Regarding our move up product, clearly, the a and b locations are performing the best all over the country. And that's where we're concentrating our efforts on new land acquisitions. By focusing on pace over price, maintaining a higher inventory of quick move in homes, we're able to sign and deliver more contracts each quarter convert backlog at a higher rate, and keep our communities active and burn through our older land that has lower embedded margins. This clears our balance sheet for newer land acquisitions underwritten to provide solid returns even with the current high incentives. As Brad mentioned, our internal guidance suggests that margins should bottom out in the first quarter and begin to steadily increase in subsequent quarters if the market conditions remain similar to current conditions. That concludes our formal comments, and we're happy to turn it over for Q and A now. Operator: We will now open for questions. One one on your telephone and wait for your name to be announced. One moment for our first question. Our first question comes from the line of Natalie Kulasekere with Zelman. Your line is open. Please go ahead. Natalie Kulasekere: Hey, good morning, and thanks for taking my question. Are you doing anything to offset some of the pressure from gross margins? Have you seen any cost improvements, maybe cost improvements? Have you been able to negotiate anything lower with your vendors? Yeah. Just any color on that would be great. Brad O'Connor: I mean, we have consistently gone back in existing communities and certainly for new communities to rebid with suppliers, trade partners, etcetera. We've had some success controlling costs and reducing costs in some places. We're down pretty significantly in costs on a per square foot basis from two years ago. Over this year, we're basically holding steady. So any increases are being caused by tariffs or other things have been offset by savings elsewhere. So we've been able to manage costs flat we'll continue to pursue ways to reduce costs either with trades or change in material suppliers, etcetera. Ara Hovnanian: I'll mention one additional thing. We have seen several of our peers have success with buying down a seven-year arm versus a thirty-year fixed. That has two benefits. One, you can qualify buyers at a lower rate and at the same time actually save cost which helps margins. So we're going to begin advertising and promoting that program more aggressively starting this weekend, and if it's as successful as we're seeing, you know, that incremental portion of our buyers that use a seven-year arm will help our margins. Natalie Kulasekere: Okay. That's helpful. Thank you. And when you expect gross margin to take higher year, is that driven by a mix impact, or is it because you think you will be done selling to underperforming assets at that point? Brad O'Connor: It's a mix because you're working through the older stuff. So, yeah, as we continue to work through the older, more challenging property and bring on deals we identified in 2024 and 2025 that mix shift to newer land will help our margins improve. Natalie Kulasekere: Okay. Thank you. Thank you. Operator: And as a reminder, to ask a question, please press 11 on your telephone. I am showing no further questions at this time. And I would like to hand the conference back to Ara Hovnanian for closing remarks. Ara Hovnanian: Thank you very much. Well, needless to say, we're pleased that we met or beat all of our guidance metrics. Disappointed in the absolute results, but we look forward to our performance bottoming out in this upcoming quarter and then beginning our improvement from there. Thanks so much, and we look forward to reporting better and better results in future quarters. Operator: This concludes today's conference call. Thank you for participating and you may now disconnect. Everyone have a great day.
Li Ying Kevin: Hello, everyone. Good morning, and thank you for joining us today. I know it is a busy day, and we appreciate your time. For today's results, Sharjeel will take you through some market context and the FY '25 performance. I will come back to talk through our vision, strategy and my confidence in how the actions we are taking to build the business of tomorrow will deliver substantial value upside. What we would like you to take away from this presentation is 3 things: one, a better understanding of the topic that is understandably front of mind for many, namely audience and AI. Sharjeel will cover why the risk is not as big as you think. And I will take you through why this is actually already a revenue opportunity. We want to be open or as open as possible in sharing what we are seeing and how we are positioned. Two, a clear view on what Future is today. A data-first scalable platform and the progress we are making on our strategic initiative to take full advantage of this, in particular, as we build out new revenue streams to drive the platform effect -- the network effect. Three, and finally, how we are continuing to evolve our business model to drive productivity and efficiency gains and continued strong cash generation. Thank you. Sharjeel, over to you. Sharjeel Suleman: Thanks, Kevin. Good morning, everyone. Right. First thing, the score in the second test was 204 for 4 when I had to turn off my phone just now, right, Future financials. I'll get serious. We are pleased to deliver financials in line with consensus. Revenue at GBP 739 million was down 6% year-on-year on a reported basis, with organic performance down 3% as previously communicated. Our adjusted operating profit of GBP 205 million reflects the expected full year margin of 28%. This margin is flat year-on-year and demonstrates our disciplined approach to costs. Combined with the benefit of our share buyback program, this has translated into an adjusted EPS decline of only 1%. The group continued to generate good cash flows at 86% of AOP and 96% underlying. The balance sheet remains strong with leverage of 1.3x after having returned around GBP 100 million to shareholders in this period alone. And in line with our capital allocation policy, this morning, we have announced a 5-fold increase to our ordinary dividend and also our fifth share buyback program. To summarize these results, despite the macro challenges, we are focusing on what we can control, executing against our strategy, showing pockets of growth, investing in our future while tightly managing our costs, focusing on cash and applying our capital allocation framework. Before I get into the detailed results, I wanted to spend a bit of time on some market context with regard to our audiences and the impact of AI, given the heightened focus on these areas. Amid all the noise about AI and its impact on media, one question we're asked most often is what is happening to our audiences, how we are impacted and the extent to which we're impacted is not that well understood. Sharing that understanding is our responsibility. So let me take you through that today and share some insight about audiences today. Kevin will then pick up on our strategic initiatives, focused on our new audiences of tomorrow as well as AI as a revenue driver. So the first point I wanted to highlight is the world-leading brands we have across many verticals, brands and their trust they bring to audiences are increasingly important in our view. Brands provide our business with scale, resilience and multiple routes to monetize content. And our brands live across many platforms. Let's dig a little bit deeper on those digital audiences in blue on the left-hand side of that donut. Here, you can see the 317 million monthly average sessions we get on our website. You can also see that millions, in fact, billions of views we get on social media, e-mails, podcasts, et cetera. The point I want to make is that our websites are not the sole driver of how our passionate audience interacts with us. Next, let's go a little bit deeper on our specialist sessions, specifically on how our audiences come to us today. Firstly, at the macro level, it is worth noting that the use of Google Search has so far not seen a reduction. Conversational or AI-driven search is growing rapidly, but not at the expense of traditional search. The key point I wanted to share is that only 27% of the 317 million sessions are from Google Search, which is probably a lower percentage that many in this room and watching on the webcast thought it was. It is worth noting that Google Discover, a personalized news feed, when you use the Chrome browser or use the Google app on your mobile, did not exist a few years ago. We find that Discover builds brand loyalty as an excellent source of repeat visitors, Future proactively adapted to that change, and we'll continue to innovate and remain agile, it is part of our DNA. Next, let's talk about the impact of AI in that blue Google Search segment. We have seen AI overviews that appear on Google Search grew rapidly over the last 6 months. AI overviews now appear on about 50% of Future's key terms, words that we value and track. Yes, this growth in overviews has impacted our sessions performance being down 10% year-on-year at 317 million, but we have only seen a 4% reduction in total digital advertising across the year. The point I wanted to make is that the decline in sessions has not resulted in a straight drop-through to advertising. Why? Because while we have seen a reduction in programmatic ads, this has been offset by increased interest in branded content advertising. Brands matter and increasingly so. And this is even more clear to see in the second half of the year. Sessions were down minus 16% in H2, but total revenue from advertising was flat. Yes, total ad revenue was flat in H2. As a result, our direct digital advertising revenues have increased to 68% of total advertising. And remember, these revenues come with a higher yield than programmatic. So what does this all mean for our business today? AI search trends do impact us, but only on those revenues that are more directly tied to sessions. We are a diverse business, and those revenue streams only account for 16% of our business. Further, Go.Compare and B2B are fairly immune due to the high barriers of entry. If you look at the revenue breakdown on this slide, there are areas that are impacted by AI, and there are areas of good growth, which will offset areas of decline. And to that point, we are creating our own momentum to drive growth, which brings me nicely to the last slide in this section. We remain laser-focused on to the day-to-day execution of the business, but we are also focused on building tomorrow. Shaping our own trajectory, we are developing new revenue streams, which will enable us to deliver our ambition of sustainable revenue growth and cash generation. Direct audience relationships that we pull rather than audiences being pushed to us will increasingly drive future monetization. And this is exactly what Kevin will talk you through later. For now, let's get back to the FY '25 financials. Overall, the group's organic revenue declined, as expected by 3% for the full year. In B2C, we were down 2%. As I mentioned at the half year results, Future started the year well and was an organic growth for the first few months of our financial year. And despite tariff uncertainty impacting our performance in March, we have seen a fuller recovery in U.S. ad budgets in H2. Go.Compare was down 5%, again, in line with our expectations given the record performance last year. It is worth noting that FY '25 is the second highest revenue year ever for Go.Compare. In B2B, the tech enterprise market remained very difficult. However, other verticals like financial services and retail have shown good growth. And our SmartBrief asset continues to perform well. Right. Let's get to the detail by each division. Let's start on B2C digital advertising. It has been about puts and takes across halves and also across geographies. This year, we are showing more information to help give a better understanding of the business. Firstly, let's discuss the high level, which are the 2 boxes on the left-hand side. Audience sessions were down 10% during the year, and this resulted in lower programmatic revenues. However, there was stronger demand on the direct advertising side. The lower audience volume was, therefore, partially offset by higher yield at plus 6%, which translated into an overall 4% decline. Now, let's do the story by geography, on the right-hand side of the slide. Back at the half year results, I spoke about the uncertainty caused by tariffs, and you can see this in the first half performance in U.S. direct digital ads. However, as we previously highlighted, the U.S. returned to growth in the second half. We had a number of good client wins across the U.S. in gaming technology as well as fashion and beauty. And overall, our direct business in the U.S. grew double digits in the second half of the year. In the U.K., you can now see the benefit of the sales reorganization coming through. Direct sales in the U.K. grew in the second half of the year. I am conscious that these percentages can sometimes be quite abstract. So let me share a little bit more. This chart shows the success we've had in driving digital advertising direct to us, especially in the second half. Direct ads grew 8% in the second half of the year, resulting in H2 total revenue being flat year-on-year despite the decline in sessions. This gives us confidence that we can grow the business despite the headwinds of the programmatic part of the waterfall. The U.S. remains the largest market for us, and there is more potential here. Given our #1 position in technology and strong positions in other verticals, we can gain market share. Turning to e-commerce affiliates. E-commerce was a game of 2 halves. We started the year positively with a strong peak trading season, which showed in the H1 performance at plus 10%. However, as we flagged at the half year, we saw a softer H2 as a result of a decline in unique page views. And in H2, we saw the decline at 22%, a combination of lower page visibility of our buying guides and lower consumer confidence. Basket size highlights this confidence point. It remained flat year-on-year with inflation offset by less high-value purchases. This performance in products has been partially offset by continued growth in the vouchers business, which was up 12%, but at 19% of the overall e-com business, this did not offset the decline elsewhere. The second half of the year has been disappointing, but we have been actioning a number of initiatives to improve our e-com business, and Kevin will give more color on how Signal, our strategic initiative in this area, has performed so far. Last but not least, magazines. Magazines have performed strongly at flat year-on-year against an overall market which is in secular decline. This is a combination of 2 factors. First, we have produced premium books for Rolex, further print runs for Submariner as well as revenue from the second book in the series, Datejust. Secondly, a number of our initiatives in this area are now starting to deliver, notably around subscriber acquisition and retention. The resilient performance of magazines demonstrates the strength and value of our premium and specialist brands. At GBP 192 million, Go.Co represents 1/4 of the group's business. Revenue declined 5% in the period, which is a solid outcome given the 28% revenue growth we experienced in 2024, translating to a 10% growth on a 2-year CAGR basis. Car insurance revenue, as expected, was down in the period, reflecting declines in overall quote volumes as insurance premiums also came down. However, this was partially offset by improved conversions when users came to the site. Overall, we are now fourth in car market in terms of price comparison. During the period, we managed the business for returns. We have not chased revenues, which are not going to make a profit. And as we have said previously, diversifying revenue is the key strategic initiative for Go.Compare. And other revenues across home, life, pet grew 3% in the year. Turning to B2B on Slide 22. B2B represents around 7% of the group at GBP 54 million in revenue. B2B performance continues to be challenged by the enterprise tech market. However, other verticals within B2B delivered growth in the period, like financial services as well as retail. A further point to note is that while B2B declined across the year, H2 was an improvement on H1. So signs the business is turning around. Within B2B, our SmartBrief newsletter platform remains a key asset that consistently delivers strong e-mail advertising performance for our clients. And this is highlighted by SmartBrief growing 1% year-on-year despite a very difficult market. Going forward and in response to market challenges, we are actively integrating the B2B group to unlock cross-brand opportunities, both revenue and costs. For example, we have launched a combined brand sale to our tech clients across SmartBrief, ActualTech and IT Pro, and this is paying early dividends with client wins. We are also increasingly embedding AI tools such as Ad Genie, which suggests new ad copies to clients to improve campaign performance. Turning to Slide 24, which highlights our P&L. The group's gross margin of 73% was up 2 percentage points. The accretion reflects the change in our revenue mix with less revenue coming from Go.Compare, which is dilutive at the gross margin level, but accretive at the net margin. During the year, sales, marketing and editorial costs were flat, driven by lower sales commissions, less TV media spend as planned and a number of brand closures, which were offset by inflation on salaries and wages and our planned investment across the teams. Other revenues -- sorry, other costs saw a 11% decrease, reflecting the benefit of R&D tax credits and no FY '25 bonus accrual. There was an increase in depreciation and amortization year-on-year as a result of CapEx investment in prior years. Overall, this meant the group's adjusted operating profit was GBP 205 million, and margin has remained stable at 28%, which is a good outcome given the revenue declines. And each of our divisions maintain their percentage margins year-on-year. And at 30% EBITDA, Future remains a strong margin business. Right. On to cash. As I said when I joined, now a year ago, cash conversion is my favorite topic. Future continued its strong cash performance, but we had a couple of one-off items. We had a catch-up VAT payment following an agreement with HMRC regarding our partial exemption method. Secondly, last year's staff bonus was paid from this year's cash, always the case. But with no bonus this year, there is no accrual and a working capital swing. These items will not repeat next year, and we expect to be around 95% going forward. Moving on to the balance sheet and net debt. After CapEx of GBP 16 million, the group generated GBP 177 million of adjusted free cash flow. And after tax, interest, exceptional and EBT purchases, Future had a net cash generation of around GBP 83 million. We applied our capital allocation framework thoughtfully to utilize this cash. We spent GBP 3 million to buy Renewal and Kwizly, and we have returned circa GBP 100 million to shareholders through dividend and share buybacks. And after those uses of cash, the group saw a modest increase in net debt to GBP 276 million, representing a leverage of 1.3x. During the year, we refinanced our RCF and also issued our debut Sterling corporate bond. The group now has committed facilities in place until 2029, and we expect plenty of liquidity to execute our strategy. We have cash conversion also expected to remain strong going forward. This highlights the group's solid financial position, which is a good segue to capital allocation. Given the return announcements this morning, let's spend a bit of time on the capital allocation. In the past, the weighting had focused on strategic acquisitions, whereas more recently, has turned to shareholder returns. While the policy remains the same, going forward, the Board intends to have a more balanced acquisition. Allocation. With capital allocation that will invest in and drive organic growth, have plenty of room for bolt-ons to accelerate the strategy and give a higher and more consistent return through our annual dividend and also return excess cash to our shareholders. Our intention is to have all of these engines in active operation while maintaining a conservative approach to leverage. I want to give more color on bolt-ons and dividends. But before that, our CapEx will be slightly higher than before as a result of the strategic initiatives. However, at 3% of revenues, Future remains an asset-light business. The one allocation that remains great out is strategic M&A. It is not currently a priority. Turning to Slide 30. As well as organic investment, we believe that bolt-ons are a great way to create value by accelerating the strategy. We are focused on bolt-ons that will drive our leadership position in a particular digital vertical, be that to luxury or technology. Key criteria include being platform agnostic, aimed at faster-growing segments of the ad market, driving diversification of our audiences, assets that pull audiences rather than assets that have audiences pushed to them. We're also looking at bolt-ons that can bring in interesting products quicker than building it ourselves, like we did with Renewal, which Kevin will cover in a bit. Or lastly, where a bolt-on can give Future skill capability in a new area, like Kwizly did with gamification and data. And we have a good pipeline of bolt-ons. All bolt-ons will have a clear alignment to the strategy and will be reviewed against a strong set of financial criteria as well. Our first 2 allocations are rightly focused on growth. This is our #1 priority. But at the same time, we believe it is important to consistently return capital to our shareholders. We are very confident in the long-term cash generation of our business. This morning, we have announced a fivefold increase to our ordinary dividend. The dividend will be progressive, and we expect to increase it in subsequent years. It will provide a more meaningful return without impacting our ability to fund the strategy. At this level, there is plenty of cash to be pointed towards growth, organic or bolt-on. Also, this morning, we announced our fifth share buyback, this time for GBP 30 million. This will start in the next couple of days once the current buyback is completed. We have now announced GBP 230 million of share buybacks. And with this, we will have purchased more than 20% of our share capital by the end of the fourth buyback program. This highlights, if that we have excess cash, we will use it to create value. Finally, turning to the outlook slides. We are confident in continuing to deliver on today and building on tomorrow. In terms of the FY '26 outlook, we expect modest revenue growth in line with current consensus. FY '26 will be H2 weighted as the strategic initiatives and the operating model changes will deliver in the second half of the year. In terms of margin, we are confident of achieving 30% in EBITDA terms. And as ever, the group will continue to generate strong cash flows, improving to around 95%. In the medium term, we are confident in achieving our ambition of sustainable revenue growth and cash generation, again, in line with market consensus. Right. At Slide 34, I am only a few boundaries away from a half century here, which is a really tempting milestone for [ Ebola ]. But don't worry, I will declare and hand over to Kevin, who will take you through the vision and the strategy. Thank you, everyone. Li Ying Kevin: Thank you, Sharjeel. Future is a data first platform that monetizes high audience engagement powered by technology and enabled by our trusted specialist brands with authority. We will leverage our data insights and intelligence to expand into numerous emerging adjacent data-hungry markets. Remember, we have over 175 brands, giving us scale that we monetize by leveraging our tech platform in a multitude of ways, making the platform a powerful vehicle or a powerful value creation vehicle. Let me explain this platform concept in more detail. So you can understand the lenses through which we operate the group. All great platforms have 4 common characteristics. They are connectors. They are data first. They are scalable. They deliver the platform effect, a network effect. To date, we have -- we are having successes on each of these characteristics, but we have so much more to go for. Before covering what this means for Future, I would like to emphasize that for us. This goes hand-in-hand with our financial characteristics of being, one, asset light; two, having a high EBITDA margin; and three, being a strong cash generator. We ticked 3 out of those 4 boxes. The one which is missing is sustainable revenue growth. I want to come back and add revenue growth as the fourth bullet on this right-hand side. Now, starting with connecting through brands. Sharjeel has covered the importance of our brands earlier. Let me emphasize this point. We are connecting audiences through the power of our brands that give us authority. Whilst we know that people also trust brands, people trust our brands. We have market-leading brands across valuable content verticals and geographies. We are #1 in tech in the U.S. and in the U.K. We are #1 in homes in the U.K. and #4 in the U.S. We are #2 in beauty in the U.K. and #4 in the U.S. This is our moat. This is a competitive advantage. When it comes to taking on market share commercially, the power of the brands is even more important going forward than it was before. Next, data first. This is where, at the moment, we don't score a 10 out of 10 and where there is an exciting opportunity to do more. We have an immense amount of data. In fact, 1 trillion data points in our data lake each month, yes, trillion. We already have or we already use an extensive amount of data to better inform our content decision-making, for example, what to write, when and to assess the performance of ad campaigns. But data in abundance is less valuable than data with intelligence and insights. This value is disproportionate. Our content, which helps people find what they want, also gives us data and insights that helps brand achieve their objectives, up and down the funnel. So this is not data for data's sake, but first-party deterministic data that drives value and help increase brand and ad campaign's performance. Now, for example, if you are buying travel insurance and you are in the market for student laptop that we can leverage, this is very rich first-party data that we can leverage on our brands and/or through partnerships with other brands. This aligns with the platform effect. Third is scalability. This is about the scalability of our tech and other back-office function, meaning that back-office costs don't need to grow in line with revenue and that our centers of excellence can be leveraged across our brands and revenue streams. We are quite effective at this. But again, we can do more, and I will cover this in one of our strategic initiatives later on today. Fourth, the platform effect. For those of you that have been following us for some time, you will be very familiar with it. It is about applying everything we do when relevant to our whole portfolio of 175 brands. It is about driving cross-pollination between products. It is about driving cross-pollination between brands. We do it once and deploy it across brands and audiences, which leads me nicely to our business model. We have a strong track record of executing it with an EBITDA margin of 30%. The more we drive initiatives and revenue, the more powerful and valuable the platform becomes creating a flywheel. Let me first cover the theoretical business model before bringing it to light with examples. It all starts at the top of -- with brands and content to reach and pull in the audience in a diversified manner on the right-hand side. Next, we apply a growing set of innovative products at the bottom to further drive engagement, brand stickiness and a clear value exchange with our customers and clients. Finally, we monetize through diverse routes from print to digital subscription, newsstand to -- down to e-mail and, of course, display and video advertising. And alongside each moment, we capture more data, which in turn, used to perfect our products and content and further drive revenue. What this means in practice for driving growth? Well, it is about existing and new audiences that we can monetize with existing and new products driving net new revenue streams. Right. Let's have a look at how it works in practice today using Kiplinger. Kiplinger is a largely U.S.-focused personal and investment brand, largely a subscription brand. We have put Kiplinger through the platform effect in the last 12 months understanding our audience and the data, improving the monetization of existing and new audiences. The results are clear. We have diversified the audiences with 16% digital audience growth coming from social, referral and e-mail. We have monetized these new and existing audiences more effectively, driving 10% overall organic digital revenue growth. This example is not unique. We are seeing similar outcomes on Cyclingnews, Cycling Weekly, homes and gardens, all showcasing diversified audiences with more effective monetization, all of this with our existing tech not adding the new strategic initiatives to propel it. We do it once, and we deploy it across. Now, let's have a look at how Collab a strategic initiative and how it is making our flywheel spin faster. Collab is about creating a network of content creators that use our platform to publish and monetize their content using our tech stack. We can do this at scale through a revenue share model across brands. Now, let me explain how it works using Editors in Residence. That's a Collab product on who, what, where. Content creators such as Karla Welch and Tiffany Reid publish their content on who, what, where to build their own personal brands with ours, and we benefit from their audience. They then use our suite of products to monetize their content effectively on their own. They don't have the tech and capabilities to do so effectively. So they monetize their content, and we get a revenue share. What this means is that this is a 100% variable cost model to us, leveraging existing and new capabilities, and along this journey, we collect data, audience data, e-commerce data, adding to our 1 trillion monthly data points generating valuable insights. We increased our audience through the creators, making our brands more powerful. We attract in turn new creators that are looking to build their personal brands whilst making money. These are early days, but the green shoots are giving us confidence. On Collab content, we get 3x the social traffic, diversifying further from Google SEO. We are also getting incremental e-commerce revenue on top of digital advertising. And the platform effect has yet to be deployed, as this is only on 7 brands. On this example, we are monetizing new audiences with existing products, but we are also monetizing new audiences with new products, and I hope this example has clearly and practically showcased the power of the flywheel. And before turning to new initiatives, let me give you a quick update on the other 2 we presented in September. They are about revenue building across brands. They are about brand-agnostic initiatives. Starting with Signal, which, as a reminder, is our e-com 2.0 proposition to diversify our affiliate model and meet our users wherever they are, such as on social media. Signal has produced to date over 160 collections powered by our editor teams or Collab content creators, translating into over 900,000 page views, and we have doubled our social and e-mail traffic compared to traditional content. Next, Future+. The embodiment of our Google Zero strategy, driving engagement directly on our -- with our audience through a range of products and tools. The green shoots here are very encouraging. Whilst we have only launched it on 3 brands in 3 months, it has driven 67,000 new members for whom the sessions are 4x longer, driving more revenue, and cream on top is adding insightful first-party data in our data lake. And picture that, we have delivered all this and more in less than 10 weeks, and we have yet to leverage the platform effect -- the network effect in full, as we have not yet deployed these initiatives across the group. And now, let's turn to the new initiatives. At our investor webinar, at the end of September, we rolled out our 12-month roadmap with initiatives to deliver on our strategy. Today, I will cover 3 new ones. One, AI audience, which we are calling Future Optic. This is about how we are leveraging our expertise to create net new revenue streams. Two, rev renewal, the Go.Compare membership proposition that focus on increasing retention. Three, fostering efficiency in our business model. Now, on to Future Optic. Most people view AI as a risk to us. Sharjeel has addressed why this is not as big as feared. What I'm about to cover now is the opportunity it represents. Authority inside AI surfaces is now a monetizable asset, not just a nice to have. We are already monetizing this authority. My use of the present tense is important because we're seeing it in our numbers. So it all starts with brands. Because of the quality of our content, because of the history and the years of archive that comes with it, because of the brand's equity. Our brands are authoritative and influential, and they are even more influential on LLMs given the concentration of citation versus traditional search or SEO. We then leverage our tech platform, our data and our audience, specialist teams to understand how LLM was creating a playbook on AI visibility. Now, this playbook is not static. It is refined constantly. This in turn inform our editor teams on what, when and how to produce content that is visible, ensuring we are best placed to answer valuable prompts. And in turn, the work of the editor teams is fed back and informs the work of the tech data and audience teams. As we are building LLM's authority and can demonstrate our savoir faire, the sales team is able to leverage our brands combined with our editorial authority to sell branded content packages to advertisers in order to -- for them to be visible and drive in return their own brand equity. This LLM visibility is not made profound, and AI analytics company says that TechRadar is the third most cited source on ChatGPT. And looking at our own key terms, we are leaders in 8 out of 10 content verticals on AI overview. Now, the problem we're trying to solve here is that there is a shift in audience. Our brands and our customers are looking for visibility in large language models. What we are doing here is that we need our content to be visible on LLM as it is a convent -- as it is in conventional search. The fact that we are leaders in SEO combined with the trust and authority of our brands give us a competitive advantage. Just like we work to be the best at SEO, we work to be the best at LLMs. And we can transform this knowledge into bespoke advertising package for our clients, as I said. Simply put, this is driving -- it is about driving new revenue streams from new audiences as well as new direct revenue, one that does not require our audience. This is happening and driving our revenue right now. On this slide, you can see an example of Future Optic in real terms through a large campaign we did for Samsung in the late summer this year. Samsung was looking to promote one of its products and wanted visibility in AI as well as on authoritative brands like Tom's Guide. We produce a bespoke package for them, which included a range of formats, helping to educate humans and bots with accurate up-to-date information and advice. The outcome of this campaign was successful with an uplift in mentions between 23% to 33% and close -- giving us close to 5,000 LLM citation. Samsung is not the only client we sold Future Optic to. We have sold it to other tech and luxury clients, demonstrating our ability to build the playbooks and deploy it across brands and clients. And the pipeline is building, including renewable opportunities. Now turning to price comparison initiative. Before we dive in, I wanted to recap on how we drive value and price comparison. Simply put, it's about improving the consumer funnel by, one, reducing the cost of acquisition; two, increasing the conversion, i.e. consumers across -- consumers request a quote actually convert into sales; and three, increasing the retention, not having to acquire back these consumers each and every time they come back to renew their insurance. So how have we delivered since the acquisition in '21? To drive acquisition we have leverage, our SEO capabilities. We have a center of excellence in our B2C business, sharing best practices. We've leveraged our in-house ad space, meaning utilizing any unsold inventory on our B2C website. We've renamed it Go.Compare to drive direct landing onto the site rather than on search results. And to drive conversion and retention, we have fully replatformed Go.Compare. This has enabled us to: one, consistently improve the log-in journey; two, push effectively new products to drive engagement. That integration of Go.Compare and being excellent operators of this business has translated in strong financial outcomes with 9 percentage point -- 9% CAGR revenue growth and 7 percentage point improvement on EBITDA margin. This is only the start. We now have a true platform that we leverage to drive further upside, and let me show you our first price comparison strategic initiative, Renewal. Back in March 2025, we bought Renewal because it combined all your insurance details in a single place, no matter where you bought from and who your policy is with. No more searching through e-mails in a time of crisis. It helps users to manage their policies, including renewal dates, offers and advice moving Go.Compare from just being about buying a policy to being alongside our users all year around whenever they need us. All to say that it fast tracks our membership proposition with the aim to improve the consumer funnel I presented earlier by being the best place for consumers to manage and save costs on households-related products. Now, it is worth sizing up the opportunity. Today, 25 million to 30 million -- yes, millions of adults in the U.K. use a price comparison website to buy insurance every year. This is the addressable market. This year, we spent GBP 75 million on pay-per-click or TV campaigns costs. This is a part we believe we can reduce without impacting revenue. We want to be more efficient and have better returns on marketing spend. So what are we doing with Renewal? We will relaunch the app in Q1 to drive growth at Go.Compare beyond market growth. This will encourage Renewal and Go.Compare improving our marketing efficiencies, therefore, improving retention. It will drive cross-selling opportunities. It will enhance our rich first-party data lake that can be leveraged across the group, making our data and users more valuable to us. It will attract new customers through an engaging value-added app. This is the focus of renewal. And I'm hoping that I have convinced you to download Renewal and become part of the journey with us. Now, to date, we have been good operators. We have made Go.Compare a better business. The financial outcomes are the proof points. However, what I want you to recognize is that we aren't just here to be good operators, we are here to leverage the platform we have created to drive further growth. And to do so, we will continue to leverage Go.Compare assets, supercharging this with Future group assets. And the outcome will be to fuel the Future's growth profile by improving acquisition, conversion and retention, driving the platform like for any of our brands. Turning to the last strategic initiative I want to cover today, a more efficient operating model. Innovation is transforming the way we do things. We are leaning into this to drive productivity and efficiency gains. The group-wide program is about creating efficiency and sustainability on our value chain and business model. And we are doing this by rethinking and streamlining our processes and structure using AI tools to drive automation. This initiative will drive GBP 20 million of efficiency savings by FY '28 maintaining our EBITDA margin at least 30%. This initiative is the perfect demonstration of our DNA through agility, innovation and focus on execution and delivery -- focus on execution and delivery. And I look forward to updating you on the progress we're making. And, I know we have covered a lot of ground today, there is momentum. And if you were spending a day with us, you would feel and see it. I just wanted to leave you with 3 thoughts. One, AI risk is not as big as you think, and AI represents revenue opportunities that we are delivering today. Two, we're further leveraging the platform to drive initiatives across businesses. I have taken you through AI audience, price comparison and the operating model and how all these initiatives will drive the platform effect, the network effect as we deploy them across the Future ecosystem. And finally, we are continuing to evolve our business model to deliver efficiencies. In summary, we are delivering on today at pace, whilst building for tomorrow to deliver sustainable, profitable revenue growth and cash. I just want to share my conviction and excitement with you. And I hope the following slide helps frame the opportunity. Our strategy supported by our initiatives is to drive that sustainable, profitable growth over the medium term of 2% to 4%. This is, as Sharjeel said, our #1 priority. This is a significant change from the last 3 years, where revenue has declined by 4% on average. This isn't predicated on a material change in macro. We are good operators, and therefore, we are confident on having EBITDA margin of at least 30%. And we will continue to deliver cash conversion of at least 95%. I am keen that we are open and transparent, and we will continue to share our progress and new initiatives through a webinar before our half year results in May. Thank you for listening. I will now open the floor to Q&A. I'll take a question from each, please. Gareth Davies: First one from me. Gareth Davies from Deutsche Numis. Sorry, was that I'm restricted to 1 question or I can ask the 3 that I was going to ask? I'll ask for 3. I can't ask 3. Direct advertising, very strong performance in H2, a big step-up in both markets. Can you just talk a little bit about how lumpy some of the contracts are in there? How much visibility you've got into '26? Some of the self-help that kind of drove that beyond a slightly more positive macro backdrop? Li Ying Kevin: I'll start, and I'll pass it on to Sharjeel. So in terms of the contract length, it varies by client, to be fair, right, from 3 to 12, by and large. In terms of the quantum, right, it is -- again, varies by client and propensity to spend depending on the campaign. In terms of the quality. It's like it matches with what the brands give. The brands, we have market-leading brands. Not only we pull -- we're working to pull the audience, but we're also actually working to actually pull in the advertisers, and they are coming. In terms of pipeline, it's a healthy pipeline. Yes. Sharjeel Suleman: The way I would look at it is, remember, all the things we're looking at in terms of visibility, the same thing is happening to our clients as well. This isn't just a Future or a media thing. This is happening to other brands around the world in other companies as well. So our authority is more important. And that's why when I said brands are more important and increasingly slow, that was what I was saying. In terms of how we're faring Q1, similar in terms of what we've seen in Q4, which is branded content doing well and direct sales growing as a percentage. So similar trends. Gareth Davies: And then the second one, a similar one on Go.Co, obviously, the tough comps this year made it a little more difficult, but we're sort of starting to lap those now. From a car insurance perspective, what are you seeing and sort of confidence in pickup in other areas? Are we still expecting a bit of a lag there given home was sort of later to come in? Sharjeel Suleman: I'm not going to get into month 1, October; month 2, November. These things will ebb and flow, and Q1 has historically been the soft quarter for Go.Co anyway. As a step back, let's have a look at what we think the year will be for Go.Co. Car insurance premiums declined last year. Inflation is now still in the market, it's 3%. So that hopefully should start working in our favor going forward on car. Others, it's still the diversification strategy. We've got some very exciting initiatives coming up, which I'm not going to talk about today, but some really interesting things that we're doing, and we've launched Renewal as well. When I stand back low to mid-single digits, Go.Co is what I'm looking for, for the full year. Whether that's from home, life, pet, van, car, we will see that. But our ambition is around mid-single digits to low-single digits. Gareth Davies: And then final one, just a point of clarification, really. Kevin, you sort of said we're not 10 out of 10 on data. And did you mean in the context of we're not collecting the right data? Or did you mean we're not using the data in the way we should be and we're not taking advantage? Li Ying Kevin: It is in both, right? And I think that we are dutifully, rigorously and working on this at pace. And I think there's more upside. Sophia Yu: Sophia Yu, I'm from ABN AMRO. So one quick question on the strategy side. So could you elaborate a bit more on the whole Google Zero strategy, the horizon and how you see that bring impacts to business? Li Ying Kevin: Yes. So thank you for your question. The Google Zero strategy, look, we have audience from Google Search and a diversified audience mix. Google Zero strategy is about focusing on non-Google Search channels for growth. And we obviously welcome the Google Search source of traffic, of course. And our focus is to focus on the quality of the brands, building that up, building the customer proposition and the value exchange between us and the clients, us and the customers and with a clear view of attracting them and pulling them in. Nick Dempsey: Yes. It's Nick Dempsey from Barclays. I've got 3, please. Li Ying Kevin: If you go one at a time. Thank you. Nick Dempsey: Okay, sure. The first one, seeing the -- how big Google Discover is on your pie chart -- I mean, there were some issues in terms of the algorithm change there, which other people experienced this year, has that been a problem for you guys? And is it a risk that you're so exposed to that, that they can make any change whenever they want, they could get rid of Discover if they wanted? Li Ying Kevin: Thank you for the question. The -- Nick, the critical thing to understand is our audience is diversified, right? And our focus is to focus on diversifying it further, right? And with regards to the Google Discover, it demonstrates that it's a personalization fee that Sharjeel said. It demonstrates the value and strength of our brand, how our content connects with the people, our consumers. And it works. With regard to the algorithm that you mentioned, we have dedicated focus, resource, talent, expertise, and that is key to us. The landscape changes, we react as much as we plan ahead. And at all times, we're here literally inches away in order to actually combat that and thrive and build off that. Nick Dempsey: Yes. The second question was, to what extent do your new initiatives need to come through as you hope through the year in order to hit the revenue guidance you've given us for the full year? Li Ying Kevin: We'll answer it in 2 parts, right? I'll take the strategic roadmap. The key for us is, is to have an approach whereby we can go at pace on many fronts. Now is the time because we're seizing the opportunity and creating our own momentum at pace. For us, we've shared with you the green shoot. And it's a constant iteration, and as for those that works, we'll double down on it. And for those that doesn't, we'll stop it. And we'll -- we have -- like Sharjeel just said a moment ago, we have a raft of initiatives that we're planning in the background. So that is a healthy operating model and how we're approaching it. Now, in terms of the numbers... Sharjeel Suleman: Yes. I will take it. So the key thing to say on the strategic initiatives for me, it's not unproven items. Future Optic, we're selling in the market today. It is happening right now. But there's also a bunch of BAU initiatives that we haven't spoken about here, but we're doing them. Anyway, that's what we do, we run the business today and build tomorrow. So I wouldn't say it's reliant on that, but there is a waiting piece that I'd like to bring out. So revenues are probably going to be around 45% H1, 55% H2 because some of the operating model will come in later on. The profitability will probably be 40% H1 and then around 60% H2. But it's not that the strategic initiatives have to all fire, all work for us to hit those numbers. There's some benefit baked in, but there's other stuff, which we haven't talked about as well. Nick Dempsey: Okay. And the third one, a bit geeky. The change in working capital was, I think, the biggest outflow that we've seen ever. So can you talk us through what drove that? And given you've got 95% cash conversion expected this year, can we expect definitely a smaller outflow in change in working capital? Sharjeel Suleman: Yes, you can. Right. I love this. So the 2 -- we pulled out 2 key drivers on working capital, and I'll give you 2 or 3 others, which weren't working capital as well related. So underlying 95%. Why is that? Future doesn't have stock, right? It doesn't build assets. I mean, I asked the other day, what our stock was? It's about GBP 1 million on the balance sheet. It turns out it's paper. So we don't have stock. The key thing is those are 2 one-off items. If we hit our numbers, we'll pay a bonus year. So that won't happen this year. The key one, it was about GBP 16 million one-off payment to HMRC. It's a partial exemption piece. We can talk one-on-one, and I can explain to you exactly what that is. That's not going to happen again. We've settled with HMRC. It's a working capital piece because we had already provided for it last year. So that's why there's no P&L effect. It's purely a cash and a working capital piece, the accruals coming down that we had provided for. Those are the 2 big swings. There's deferred income, which tends to go down every year a little bit because subscriptions are sort of down every year. So again, I can spend a bit more time talking to you about that. But even if I take just those 2 out, the GBP 16 million and the GBP 4 million, that GBP 20 million gets you from GBP 86 million back to GBP 96 million. So I'm very confident on that. But there were a couple of other cash items, which impacted leverage, but in a good way. We gave back GBP 100 million of share buybacks this year. That fourth one went a lot faster. I mean, it's about to finish in the next couple of days. So we bought back shares quicker than we had done previously. That impacted it. David is sitting right in front of you. David did a really good job on the RCF and on the corporate bond. But we had bank arrangement fees. So that was a bit there as well. And when I take all of those out, the working capital and the one-offs, I'm very confident in our cash generation going forward. Johnathan Barrett: It's Johnathan Barrett from Panmure. I do have 3, but I'll go one at a time, if that's okay. Not too much more to ask really after the others. Just one very broad question. Now that you've kind of been running the business for a while, and you've seen how the world is evolving and you've got your plans, is 175 brands the right number? So that's the first question. Li Ying Kevin: There's no good answer for that. It's like we -- all of our brands, right, is additive, right? And the way how we actually -- we invest on those that has the most promise, potential for growth and where brands tend to actually underperform whereby it's telling us that there is no consumer demand for it, there's no client demand for it, we are fiscally responsible. We don't run brands to be unprofitable, and we review them. We have the work stream that is always on, and we actually review our brand performance over time and like we've done so in the past. Johnathan Barrett: And then the second question, your growth guidance, again, 2% to 4%. Just thinking about everything you said today, how does the 2% to 4% work out? Which bits of the business are going to do what, roughly so that we can understand your assumptions on that, please? Sharjeel Suleman: Okay. So stepping back, around 1% next year is what the consensus is at the moment for FY '26. FY '27, possibly around 2%, 2.5%. The bit that Kevin talked about is his and mine and the Board's ambition going forward. That's why we've got the 2% to 4% going forward, probably from 2028. But that's the base, right? That's what we believe. How does it pan out? Well, very similar to what you've seen, direct ads are becoming more and more important, right? 68% of our total ads is from brands. We see that growing. That will drive mid-single digits from advertising perspective. At the same time, you've got to remember, we've got a very large magazines business, print, news trade as well as subscription. That is declining. We're declining a lot less. And I know we were flat this year. And that will always be our ambition as we turn it around, but that will probably decline low single digits going forward as well. So you've got a bit of growth there and you've got that. You've got e-commerce, but then you've got Signal coming in. When I overall look at it, B2B -- sorry, B2C, flattish this year and a little bit more growth and a little bit more growth going afterwards. And then in B2B and Go.Compare, look, we're great owners and we've got some fantastic plans for both of those businesses. But again, those are profit -- growth, yes. And I see mid-single digits for those 2 in terms of the long run. And when you do the math and the weighting across the piece, I think you kind of get to the 2% to 4% going forward. Johnathan Barrett: And then just thinking about the various AI platforms that are out there scrapping it out at the moment, any thoughts on who's looking like they know what they're doing? Who's going to be in your space? Who you really need to pay attention to? You mentioned a few names today in the deck. Just anything you want to say about that? Or do you want to start that one? Li Ying Kevin: We'll be -- one thing for us all to remember, we are platform agnostic. We will be where the consumers and the clients are, and we will actually deliver the value exchange for both at pace. Sharjeel Suleman: And look, we adapt, so... Li Ying Kevin: The agility. Sharjeel Suleman: The agility. Right. So to the earlier question from Nick, we will adapt depending on what the world we face. Andrew Renton: Andy Renton from Cavendish. Just got a question around Google Discover. So is that part of the Google Zero strategy as well? Or is it just Search? And has that source been impacted differently to Search? And then, is there sort of a difference in terms of the audience that is delivered from each of those, just given that it's obviously a larger portion of your audience? Li Ying Kevin: Right. Can you repeat, please? Andrew Renton: Repeat? Li Ying Kevin: Yes. Andrew Renton: Okay. So is Google Discover part of the Google Zero strategy? Is that source also impacted differently to Search? And then, is the value of the audience that is delivered from Discover different to Search? Li Ying Kevin: In terms of, is it part of the Google Zero strategy, well, look, we're looking at it from the lens of e-mail, direct, right, and social platform to us or within social platforms and the likes. Two is like -- so that's what I mean by Google Zero strategy. Is it yielding differently? Right. It depends on the content that is serviced through those channels. And if it is depending on the category as well and depending on the type and depending on the volume. So the answer is that there is many variables that affects yield in this channel versus the other channel, right? And I think your middle one, sort of a question was? Andrew Renton: Is that source being impacted differently by chatbots to the Search? Li Ying Kevin: No, they're just different. It's like consumer pattern as in personalization, what is in there in terms of like it's like the more you consume the more you actually sort of like -- it surfaces more in the same type over time. So 2 different types of use case, and therefore, 2 different types of economics. Sharjeel Suleman: Any further -- I'm getting the kind of do it from the back there, but anyone for anything else? No? We wrap up. Li Ying Kevin: Thank you. Thank you ever so much. And I hope you have a good day. Sharjeel Suleman: Thank you very much, everyone. Thanks. Bye.
Lawrence Oliver: Good morning, and thank you for joining us as we discuss RGC Resources' 2025 Fourth Quarter and Year-end Results. I am Tommy Oliver, Senior VP, Regulatory and External Affairs for RGC Resources, Inc. I'm joined this morning by Paul Nester, President and CEO of RGC Resources; and Tim Mulvaney, our VP, Treasurer and Chief Financial Officer. But before we get started, I want to review a few administrative items. One, we have muted all lines and asked that all participants remain muted. Two, the link to today's presentation is available on the Investor and Financial Information page of our website at www.rgcresources.com. And lastly, at the conclusion of the presentation and our remarks, we will take questions. So let's turn to Slide 1. This presentation contains estimates and projections. Slide 1 has information about risks and uncertainties, including forward-looking statements that should be understood in the context of our public filings. Slide 2 contains our agenda. We will discuss our operational and financial highlights for the fourth quarter and our 2025 fiscal year. We will then provide an outlook for the 2026 fiscal year with time allotted for questions at the end. So let's get started on Slide 3. We had a very strong year for main extensions. In addition, renewal activity was steady during the fiscal 2025 year. Residential growth in the Roanoke Valley has not abated. We installed nearly 5 main miles, which is 50% higher than the total main miles installed in fiscal 2024. We also connected more than 700 new services. This compares to customer additions in fiscal 2024 of approximately 630 and fiscal year 2023 adds of approximately 550. Those that dive into our year-over-year customer count will notice that our average customer count increases slower than the actual ads cited above. This is due to the nature of our business. We routinely have customers that use natural gas exclusively to heat their homes, disconnect their service or will not pay their bills and will be disconnected through the collections process once spring weather arrives. This past spring, we had over 1,500 customers disconnect, many of which are now returning to the system with the onset of cold weather. In fact, we have reconnected over 500 customers since October. By the end of the second quarter, we expect our customer count to be approximately 65,000 customers. Focusing on the right side of the slide, our system safety and reliability is always a high priority. Through our SAVE program, we renewed 4.2 miles of main and nearly 350 services during the fiscal 2025 period. Transitioning to Slide 4. We delivered record volumes of gas in fiscal 2025. However, I will come back to that in a moment as Slide 4 shows delivered gas volumes for the quarter. Total volumes increased 8% compared to the fourth quarter of 2024. One industrial customer with fuel switching capability continued their higher natural gas consumption this year as we have discussed in previous quarters. Residential and commercial volumes were slightly up when compared to the same quarter in the prior year. Slide 5. The combination of that same industrial customer, along with a few other customers, combined with colder weather, also as discussed on previous calls, enabled us to achieve a new gas delivery record with heating degree days up 18%, total volumes moved up 14% compared to last year. This record level of gas delivery outstripped our prior annual record throughput set in 2021. Slide 6 shows full year CapEx. Total spending was $20.7 million in the current year, down 6% compared to the 2024 fiscal year. However, recall that in 2024, we spent approximately $3.2 million to complete the MVP interconnections, which enables us to grow our system in Franklin County. We did not have that kind of onetime expenditure in fiscal 2025, but continue to invest in extending and renewing our system as noted above. We will provide our outlook for CapEx as we discuss fiscal 2026 later in this presentation. I will now turn the presentation over to our CFO, Tim Mulvaney, to review our financial results and to comment on the consummation of the financing that we told you about at the end of quarter 3. Tim? Timothy Mulvaney: Thank you, Tommy. Turning to Slide 7 now. We experienced a slight loss in the current quarter. The fourth quarter is traditionally seasonally weaker for us, and we had higher expenses than the same period a year earlier as inflation, while lower, is still present. This resulted in a net loss of $204,000 or $0.02 per share compared to net income in the same quarter a year ago of $141,000 or $0.01 per share. We will touch on our plans to deal with higher expenses in the outlook section. One item present in both periods were gains of approximately $0.06 per share each year related to donations from the local housing authority as we converted master meter arrangements into system assets to improve reliability and safety for customers. This will not recur in 2026. Year-to-date results are also shown on Slide 7. Our performance for the year was outstanding. Net income for fiscal 2025 was $13.3 million or $1.29 per share, an increase of 15% from fiscal 2024's $11.8 million or $1.16 per share. The strong increase reflected the record levels of gas deliveries that Tommy discussed and was aided by higher operating margins, partially offset by inflationary cost increases and lower equity earnings from the company's investment in the Mountain Valley Pipeline. MVP's equity earnings for the first 3 quarters of fiscal 2024 contained significant amounts of AFUDC. Moving to Slide 8. We ended the year with a strong balance sheet. During the fourth quarter, we refinanced the debt that supports our investment in MVP for the long term. We have disclosed the details in our investor communications in September and in Note 7 of our Form 10-K that was filed yesterday. All of these documents can be found on our website. So I will not repeat all the details here. We were pleased to extend the maturity of all the debt supporting our MVP investment to 2032 with reasonable amortization. During the intervening years, we expect cash flows will be enhanced by the Southgate and Boost projects at MVP, and we have addressed our share of funding these projects as well. With these projects generating cash flow, our investment will be more valuable. Now let me turn the presentation over to Paul Nester, our President and CEO, to take us through our 2026 outlook. Paul? Paul Nester: Thank you, Tim, and good morning to everyone. And I would like to take a moment before we dive into the outlook, just to issue our thanks to our customers and our employees for a fantastic fiscal 2025, as Tim and Tommy have just reviewed and certainly to all of our employees for their everyday dedication to serving the customer and doing that safely and reliably. It's translated in these incredible, what are really record earnings and earnings per share results. So thank you. As you can see on Slide 9, we have a short agenda here for the 2026 outlook, and let's move on to Slide 10. We continue to have momentum with new housing here in the greater Roanoke Valley. Tommy mentioned our customer additions over the last 3 years. If you average those out, it's over 660 customers per year, which is just almost exactly 1% customer growth. And if you look back over the history of the company for really the last 20 years, we've been in that upper 1%, lower 1% range, and that continues to be steady. We're very optimistic about 2026 in that regard. We continue to have expansion in our health care and medical sector and complex here in the Roanoke Valley. It's really one of the shining stars, both scientifically and economically, but we are seeing more real estate there, more footprint, which is hopefully going to result or translate into additional natural gas usage. Tim mentioned MVP in the Southgate and Boost projects. We are thrilled to continue as a partner in those, and we're very optimistic about the success of those projects and what it will mean to this region. As you can see on the slide, we have the Google logo there, and we've talked about Google in the past and the announcement that was made in our fiscal third quarter about their location in the Roanoke Valley. That's progressing on schedule. Again, I think there'll be more to come about that in our fiscal 2026. We're still working on Franklin County. As Tommy mentioned, and some of new Business Park, they're working very closely with the county to hopefully spur some economic development in the park. And we're also still working on expanding gas service in other parts of the county. We recently had some discussion with our westernmost territory, Montgomery County, which you may recall is actually where most of the MVP in this region is located and in fact, where the Boost project will do some construction hopefully in the near future about some expansion opportunities there. Moving on to Slide 11. I'd like to hand it back over to Tommy so he can give us a few more details on the recently filed rate case. Tommy? Lawrence Oliver: Yes. Thank you, Paul. As Paul noted, we filed an expedited rate case on December 2, in which we're seeking an approximate $4.3 million increase in annual revenues, and that's based on our currently authorized ROE of 9.9%. Based on the timing of the notice and filings, we believe these new rates will become effective January 1, 2026. Those are subject to refund once the commission fully adjudicates the case. We expect that process to take about 12 to 18 months. Offsetting that increase, we recently reached agreement with regards to certain tax credits and expect to begin returning these credits to customers over the next 12 months and are included with our regulatory liabilities on our balance sheet. So I will turn it back over to Paul. Paul Nester: Yes. Thank you, Tommy. It's no small feat to actually get this case filed right on the heels of the prior case being resolved. And Tim and Kelsie and their teams have done a very nice job on this tax credit initiative, which is, we believe, greatly going to help and benefit our customers. So we're pleased to be able to incorporate that with the rate application. Moving on to Slide 12, this slide looks yearly similar year after year. But again, that's part of the predictability of our customer growth and our SAVE program, our ability to invest $20 million, $21 million, $22 million, $23 million a year now is, in fact, proven. And again, for 2026, we're showing a capital budget of $22 million, led by the continued renewal of the [pre-73-adalate] plastic and a couple of other items through our SAVE program. Again, we have reasonable customer growth expectations and a normal amount of system enhancement. One thing I'd like to add back to the 2 slides ago about the expansion opportunities and growth opportunities. As those arise, we have the ability to either add capital or shift capital. Again, that's something we've historically done and I think done quite nimbly. And again, we're prepared to do that again in 2026. And in fact, like to do that as growth opportunities present themselves. Let's take a minute and just talk about some of these drivers for 2026, but it does require us to go back and look at 2025 a little bit. Tim and Tommy have already talked about those first 2 bullets, the housing authority transfers. And just as a recap, those were projects with our local housing authority that started 4 years ago, where we converted 5 complexes with modern pipe, modern meters, modern equipment. And our company now owns and operates those facilities. And we're just excited about that because of the safety and reliability that those projects have provided. And we'll see on the next earnings per share slide, and Tim talked about it, there was an income statement impact to those projects that since we have completed the projects, again, will not recur. And obviously, that creates a little bit of a hole for 2026 when you compare the year-over-year earnings. The other item there, again, thanks to our customers, and as Tommy highlighted, the record gas deliveries last year were just that. And we saw that in a couple of areas, not just the large fuel switching customer, but also in some of our largest firm commercial customers. We just thought it prudent to not plan for those kinds of record volumes again this year. They could happen. We hope they're happening. We'll do everything in our power to help make them happen. But from an expense management standpoint, we thought it more prudent to lower the top line as a planning tool for 2026. Tommy just talked about the new rate case. That's obviously very important to how 2026 turns out. The Save rider continues to provide helpful revenue and in fact, does cover some of the depreciation and property tax growth that, again, we experienced very predictably related to our capital spending. And finally, there in 2026, it was just announced a few days ago, our Board did authorize a larger increase this year than last year, $0.04 per share on an annualized basis, almost 5% to $0.87 per share, again, a result of the strong earnings in 2025 and what we think is going to be a solid 2026. On Slide 14, you'll see our earnings per share guidance for 2026 and the range. Again, we think there are some headwinds, Tim, and Tommy talked about inflationary pressures. Those are still very real. Obviously, the rate making will hopefully offset some of that. So we do have a little bit of a wider range than normal here. But based on some of the uncertainty in 2026, again, with volume, deliveries, weather and the rate making, we feel like the range is appropriate. You can see also the slide does highlight the impact of those housing authority projects in 2024 and 2025. I would like to add, we're already 2 months into fiscal 2026, and it is a more challenging year already than 2025, again, for the items we've talked about there. But we're doing our best again to work through that and manage through that. We finally have had some cold weather set into the Roanoke region here in the last 1.5 weeks, and it looks like we're going to have another 1.5 weeks of cold weather. That should be helpful. But again, I'd like to take one more opportunity to thank our customers and especially our employees for working safely. Safety is our #1 priority, working diligently to serve the customer. We're excited about economic development in the region. We continue to participate in a meaningful way on that. And with that, I think we'll conclude our prepared remarks and open the line for questions. Michael Gaugler: I'd like to go back to your comments here on weather. I take it, it's tracking favorably versus last year. Paul Nester: Yes. We started off -- we had some strange weather patterns in October and November, part of the challenge there. October had a lot of heating degree days, but we really didn't see the volume because of the dispersion of those heating degree days. So October was off from October of last year. November, we're still, of course, closing the books for November. We'll know a little more in a few days. But November turned very warm and then it turned very cold around Thanksgiving, the last few days of the month, and that cold air mass is hung in here. In fact, we're calling for winter mix and snow to [indiscernible] here in Roanoke. So if you look at the Henry Hub future prices and the NYMEX future prices of natural gas, it feels like nationally, there's going to be more cold weather this year. I think yesterday, it closed at $5, approximately a dekatherm on the current month. And that's a high number. As you know, Mike, we haven't seen that number in quite some time. We did not see it last year, as I recall, certainly not this early in the year. Michael Gaugler: And then [MVP], they've got a lot of projects going. Any capital requirements from you in 2026? Paul Nester: Yes, I may hand that one over to Tim. Timothy Mulvaney: Sure, Mike. We have -- as part of the refinancing that we did, we set up 2 facilities to fund the investment in Boost and in Southgate. So we expect that, that will come straight through what we borrow. It includes over the course of the next several years, our investment in those projects will probably total $4 million to $5 million with maybe the first $1 million to $1.5 million this year. Michael Gaugler: Okay. And then I guess my question, Paul, you kind of sidestepped it a little bit on the data centers. Just wondering if there's been anything you can share there as to what it's looking like. Paul Nester: Yes. Happy to maybe give a little context from the state lens, and then we can zero into the region here. There's been a lot of announcement in the last 3 to 6 months across the state of Virginia, a fair amount of it, in fact, in the Richmond and Fredericksburg areas. Google announced back in August, approximately $9 billion of investment for 3 data centers sort of south and just to the southwest of Richmond. It was a very large announcement about 1.5 weeks ago with the governor in Caroline County, which is just north of Richmond sort of between Richmond and Fredericksburg. So the state through, I would say, the Governor's office and our Virginia Economic Development Partnership continues to be active in this area. If you drill that back to Southwest Virginia, there continues to be interest and discussion among prospects, Mike. And I think that's a common answer around the country. As a matter of fact, that's not per se special to us. Certainly, the Google announcement in late May of them acquiring property, and that's really all they publicly announced. But that's certainly, I think, sort of lifted this region a little bit higher in the windshield, if you will, of some of the folks that do this kind of development. Obviously, if Google is willing to consider making an investment here and in fact, buying property to do so, it's noticeable. So what we're hearing, Mike, is I think there'll be more precise announcement around Google's intentions in the region in 2026. I don't know that there's been a per se date or time frame for that to happen, but that's what we're hearing. Well, thank you so much for joining us, Mike. Always good to have you. Do we have any other questions? It doesn't seem like there are any further questions at this time. So this will conclude our fourth quarter and fiscal 2025 earnings call. On behalf of all of us here at RGC Resources, we appreciate you taking time to join us this morning. We wish you and your families a Merry Christmas and a safe and prosperous 2026, and we look forward to speaking with you in February to review 2026 first quarter results. Thank you.
Operator: Thank you for standing by, and welcome to the Sportsman's Warehouse Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Riley Timmer, Investor Relations. Please go ahead, sir. Riley Timmer: Thank you, operator. Participating on our Q3 call today is Paul Stone, our Chief Executive Officer; and Jennifer Fall Jung, our Chief Financial Officer. I'll now take a moment and remind everyone of the company's safe harbor language. The statements we make today contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which includes statements regarding expectations about our future results of operations, demand for our products and growth of our industry. Actual results may differ materially from those suggested in such statements due to a number of risks and uncertainties, including those described in the company's most recent Form 10-K and the company's other filings made with the SEC. We will also disclose non-GAAP financial measures during today's call. Definitions of such non-GAAP measures as well as reconciliations to the most directly comparable GAAP financial measures are provided as supplemental financial information in our press release included as Exhibit 99.1 to the Form 8-K we furnished with the SEC today, which is also available on the Investor Relations section of our website at sportsmans.com. I will now turn the call over to Paul. Paul Stone: Thank you, Riley, and good afternoon, everyone. Before we begin, I want to recognize our team of dedicated outfitters across the country. Each day, they deliver on our promise of great gear and exceptional service, and their commitment continues to help drive our momentum. Turning now to our third quarter results. I'm encouraged by the solid progress our team continues to make as we execute against our transformation strategy. Despite a tough consumer environment and the impact of prolonged government shutdown, we delivered our third consecutive quarter of positive same-store sales growth. Same-store sales grew 2.2% versus last year, with broad-based strength in our core categories of honey and shooting sports as well as fishing. Our firearms business once again outperformed adjusted NICS checks, extended our market share gains for yet another quarter. While adjusting NICS checks declined, our farm unit sales increased, despite the election-driven headwinds from Q3 last year, underscoring the continued focus and improvements on a curated assortment with depth in key products, strong in-stocks and seasonal readiness with inventory, our enhanced marketing efforts and our outside are led in-store experience. In ammunition, sales demand remained strong, growing nearly 2% in Q3. Our EDLP strategy on core calibers complemented by healthier in-stocks and bulk ammo strategy continue to resonate with customers, with average unit retail up in the low single digits. We are seeing sustained engagement from customers as we lean in further to drive the areas of our business. Looking now at our key categories. We drove meaningful growth across several strategically important departments. Hunting and Shooting sports increased 5%, supported by strong inventory levels with relevant local assortments, heading into our peak fall season. Fishing delivered exceptional growth of 14%, reflecting broad participation in the category and strong execution from our teams. Apparel grew about 1.5% with particular strength in technical outdoor wear that supports our solution selling approach. Camping, however, remained challenged. Sales declined versus last year, reflecting the highly discretionary nature of this category. This is a category where we continue to refine and curate the assortment to complement the pursuits that drive customers into our stores. In fact, inventory in this category was down more than sales, highlighting greater efficiency with our inventory and investments in our key sales and traffic-driving categories. E-commerce was another bright spot, delivering growth of 8% in the quarter. Both ship to home and buy online, pick up in store perform well, with BOPUS continuing to drive traffic and improved conversion in our stores. Our digital-first marketing efforts are supporting higher engagement and customer acquisition across all channels. The improvements we're seeing across the business remain tied to the strategic priorities guiding our transformation. Inventory precision, we meaningfully reduced inventory from Q2 to Q3, while supporting peak seasonal demand, demonstrating improved planning, forecasting and allocation disciplines, Importantly, we paid down debt during the quarter and remain on track to finish the year with lower total inventory than last year and positive free cash flow. Our focus on faster turning regionally relevant assortments continues to drive both margin and working capital efficiency. Local relevance, aligning our merchandise and marketing to local outboard pursuits continue to drive measurable results. We are expanding targeted marketing, community partnerships and in-store educational events that reinforce our position as the local authority for outdoor enthusiasts. Personal Protection. This category continued to resonate strongly with customers with strength across both lethal and nonlethal solutions. Byrna and TASER remain strong growth drivers and the try before you buy model and our archery lanes and enclosed pods is differentiating our store experience in meaningful ways. We added Byrna in additional stores during Q3 and now have live demos available in 116 of our 147 stores across the country. We are committed to building on this momentum as we further position Sportsman's Warehouse as the authority in personal protection. Brand awareness, Q3 marked an important milestone in our brand awareness journey. Our venture like a local campaign and digital first go-to-market strategy has proven to resonate with customers as we noted highest year-to-date engagement, deepened our loyalty subscribers and strengthen brand affinity. Using our new first-party data insights, this now gives us the foundation to strengthen retention and customer value through the transformation of our Explorewards program, focused on increasing AOV, transactions per customer and long-term customer value. Q4 will be dedicated to road mapping and enterprise-level 2026 customer acquisition strategy that reduces reliance on promotion and shifts the business towards more sustainable profitable growth. In early November, we were pleased to open our newest store in Surprise, Arizona, our 11th location in the state. Arizona is a market we know very well with several of our top performing stores already operating in the region. This new location features a unique personal protection focused format, the first of its kind in our fleet designed to meet the needs of the customers seeking both lethal and nonlegal solutions. This will be our only planned stores opening for both 2025 and 2026, reflecting our disciplined approach to growth and our commitment to investing where we see the greatest opportunity for long-term returns. I'll now provide a little color in the current market conditions, creating headwinds in the business. Starting in mid-October, we started to see a slowdown in our positive sales trend, which we believe was partially driven by external disruptions from a prolonged government shutdown impacting consumer confidence. This has made for a challenging start to Q4, and while still early in the quarter, we believe it's prudent to take a conservative approach to the balance of the year. With the U.S. consumer under pressure and a very promotional retail landscape, we are navigating the environment carefully and maintaining disciplined control over variable cost and inventory productivity. Given these dynamics, we are taking a cautious view of the fourth quarter. So we remain confident that our strategic priorities and ability to adjust with speed will support modest sales growth for the full year. We remain confident in our ability to finish the year with lower inventory than last year, generate positive free cash flow and a lower debt balance. I'll now turn the call over to Jennifer. Jennifer Fall Jung: Thank you, Paul, and good afternoon, everyone. We delivered our third consecutive quarter of same-store sales growth in Q3, with comps up 2.2% year-over-year, maintaining our positive trend from the second quarter. Net sales for the quarter were $331.3 million, an increase of 2.2% compared to the prior year. We are pleased to report that the company achieved 3 consecutive quarters of year-over-year comp store sales growth. This has been the result of a focused strategy to win the seasons in hunting and fishing and our conviction to lean in heavy to the personal protection category, an area where others in the industry are backing away. Reflective of this focus is the 5.3% growth we achieved in Q3 in our hunting and shooting sports department and the 14.1% increase in fishing, which on a 2-year comp stack is up 17.9%. Additionally, apparel was up 1.4% in the quarter. The combination of this growth was partially offset by decreases in our other departments. Gross margin for the quarter was 32.8%, a 100 basis point improvement versus Q3 last year. This increase was largely driven by improved overall product margins from healthier inventory, lower freight expense due to lower inventory receipts, improved shrink and a higher penetration of sales from our fishing department, which has a higher overall gross margin. This increase was partially offset by an outsized mix shift to firearms and ammo, which has lower gross margin and a lower penetration in the camping and footwear departments which carry higher margin rates. SG&A expenses were $104.5 million or 31.5% of net sales versus 30.8% in the prior year. This increase was driven by a reinvestment in our customer-facing areas of the business. including store and support area labor and digital marketing to drive sales and omnichannel traffic. Additionally, SG&A was pressured this quarter from about a $3 million of additional nonrecurring add-back expenses. Excluding add back expenses in both years, SG&A as a percent of sales was 30.3% versus 30.1%. We will continue to closely manage our variable operating expenses. Net income improved $8,000 or $0.00 per diluted share versus negative $0.01 per diluted share in the third quarter of last year. Adjusted net income in the third quarter was $3 million or $0.08 per diluted share compared with adjusted net income of $1.4 million or $0.04 per diluted share in the third quarter of last year. Adjusted EBITDA for the third quarter grew 13% to $18.6 million compared with adjusted EBITDA of $16.4 million in the third quarter of last year, an improvement of 50 basis points as a percentage of net sales. Now turning to inventory. Total inventory at the end of Q3 was $424 million compared to $438.1 million in the same period last year. a decrease of $14.1 million or 3.2%. As anticipated, we also reduced inventory by approximately $20 million compared with Q2. We strategically pulled inventory forward in the first half of the year and into early Q3. This was in an effort to ensure our stores were well prepared and set on time for the fall hunting and fishing season, and to be ready and on time to support the holiday selling season. Our focus remains to build depth in core items and eliminating the slow-moving inventory that doesn't resonate with the customer. It's critical that our inventory is seasonally and regionally relevant faster turning and supported by predictable customer demand, which will produce lower inventory balances. This will continue to be a focused effort for 2026 and provide efficiency in our operating model. Through enhanced buying discipline, our goal is to be in season earlier, exit earlier and achieved clean sell-throughs across the categories, which will improve the return on our working capital. Given the improvements in working capital efficiency, we expect to end the year with ending inventory less than $330 million, which is $12 million less than prior year on a higher base of sales. In regards to liquidity, during the quarter, we paid down $13.2 million of debt and ended the quarter with a total debt balance of $181.9 million and total liquidity of $111.9 million. Additionally, in November, we drew inventory down by $23 million and paid down an additional $9 million in debt. As we move through the holiday selling season and end of the year, we expect to end the year both free cash flow positive and total debt to be lower than our ending balance last year. Inventory efficiency and tight control of variable expenses remain top priorities as we manage the business prudently through Q4 and into 2026. Finally, let me speak to our update on full year guidance. Starting late in the third quarter and now into Q4, we are seeing accelerated macroeconomic headwinds from a pressured U.S. consumer and what we believe are the prolonged effects of the government shutdown. Given this pressure, we have increased our promotional efforts to maintain inventory efficiency while driving sales, which is putting pressures on margins. Additionally, we have increased our digital marketing spend to be more competitive in the marketplace to accelerate omni-channel traffic during this period of high shopper demand. Accordingly, as we recognize and navigate current market conditions, we are revising our full year guidance. For the full fiscal year 2025, we are adjusting our net sales range to be flat to up slightly. Again, this adjustment reflects a tough Q4 environment due to a challenged U.S. consumer. Furthermore, we are adjusting our full year EBITDA guidance due to margin pressure from the very promotional Q4 and lower-than-anticipated Q4 sales. We now expect adjusted EBITDA to be in the range of $22 million to $26 million. As mentioned earlier, we expect ending inventory to be less than $330 million and we expect our capital expenditures to be less than $25 million for the full year. As we move forward into 2026, we anticipate continued progress around our strategic initiatives with very modest top line growth and are focused on improved profitability through disciplined cost management, inventory efficiency and improved gross margins. I will now turn the call back to the operator to facilitate any questions. Operator: [Operator Instructions] Our first question comes from the line of Ryan Sigdahl from Craig-Hallum Capital. Ryan Sigdahl: I want to start with kind of what you're seeing in recent weeks, Black Friday, Cyber Monday, et cetera. And if you've seen any improvement? And then maybe separately to that, given the cut to the guidance, we consumer, you mentioned government shutdown curious if those trends have been persistent or if you've seen any improvement on let the government shutdown is no longer. Jennifer Fall Jung: Great. Ryan, this is Jennifer. Thanks for the question. Yes, I think as we spoke about in our guidance, what we saw in the end of October, where our trajectory turn more negative. We started to see that through November as well. So we didn't necessarily see a pickup from right after the government shutdown. So that's really reflected in our guidance for the quarter. Ryan Sigdahl: Got you. Maybe just gross margin help us out for Q4. I guess how much of this is you guys are going to lean into promotions to try and bring customers in versus trying to more hold profitability and manage the margin side? . Jennifer Fall Jung: Yes. So it's a little bit of using the inventory we have to drive sales and to drive foot traffic into the store, but it's also inventory management. There's a seasonal component to our business, and we know that we need to exit this inventory when the customer is shopping for it. We don't want to carry aged inventory into 2026. So it's twofold: one, managing our inventory, managing our net working capital and to using it to help stimulate our sales. Ryan Sigdahl: Last one for me, just we have Florida Second Amendment sales tax holiday. Curious if you guys saw any benefit to the business and how you think that trends into the new year as that goes away? . Jennifer Fall Jung: Yes, not necessarily. That's not one of our larger markets, but no huge amount to us. . Operator: And our next question comes from the line of Anna Glaessgen from B. Riley Securities. Anna Glaessgen: I'd like to touch on the marketing spend commentary in Q4 understanding the headwinds that you're seeing from the consumer and the government shutdown impacting sentiment, I guess, what are your thoughts on elevating marketing when the consumer seems to be responding to more external headwinds? And what are you expecting in terms of that marketing efficiency in the quarter? Jennifer Fall Jung: Anna, this is Jennifer. Thanks for the question. So the way we were thinking about it is twofold. First off, as we look across, excuse me, the competitive landscape, it is highly promotional and higher market out there. So it's really for us to be competitive in the marketplace, we feel we need to spend. We did go up against print last year in the month of November, which we did not have this year. We've turned more to a digital marketing and e-mail, but that's really kind of what's been working for us. And so we have a lot of great deals out there right now, and we're going to start leaning in heavier into firearms and ammo. And so we need to tell our customers, that's what they come to us for. So we need to communicate that to it. Anna Glaessgen: Got it. And then turning to camp. Could you give us what the comp was in the quarter? And then bigger picture, as what do you think needs to happen for that department to perform more consistently? Jennifer Fall Jung: Thanks. Yes. For Camp, as you know, Q2 was tough on camp, Q3 has been tough on camp. So we've been expecting that -- that being said, the inventory trend is below their sales trend. On the quarter, they were down high single digits from a same-store sales perspective. But yes, their inventory is down double digits. So we're managing it. We know we have an area of opportunity there and from an assortment standpoint. And so that's definitely something we'll be focused on right now and in 2026. Paul Stone: I think the other thing just on that, Anna, is that's one of the biggest categories we hit from a general standpoint is we're evaluating where to redeploy working capital dollars. So as we were pulling back on inventory at the same time to be able to reinvest back into fish and to hunt and shoot that department took the biggest date as far as being able to pull back on our inventory versus categories. Operator: And our next question comes from the line of Mark Smith from Lake Street. Mark Smith: First, I wanted to ask just about kind of the promotional environment, in particular around Black Friday. Jennifer, you just talked about how you guys didn't have print this year. It seems like -- and correct me if I'm wrong, that you weren't as promotional as we historically think about kind of doorbusters and print ads. Was this purposeful? And I'm curious, your thoughts around kind of the impact on your outlook for Q4 purely around kind of Black Friday weekend? Jennifer Fall Jung: Yes. Great question. Mark, thanks for the question. For Black Friday, we are definitely promotional, but you called it out. We didn't necessarily go out with doorbusters like a lot of our competitors were right now during the month of December, we're reimplementing some of those doorbusters because it's still a high-traffic area. So that's where we were a little bit different. But if you looked across our box, we were very promotional, a lot of it was in-store signage in terms of like what our big deals were. And we kept a lot of them on for maybe a couple of weeks versus being churning them constantly like some of our competitors were. So we're writing that and changing our strategy in the month of December to go after what our customer wants and to continue to drive foot traffic to the stores. Paul Stone: And I think looking year-to-year promotion to promotion, much heavier this year on the total promotion, the doorbuster -- we look at that. We'll continue to look at that on what that means and what it means to the customer markets as we think about it. But as we look at it now and then we think we have some runway over the next few weeks to be able to light up promotions actually starting tomorrow to be able to help us in a different time frame, but at the same time, be able to be super aggressive promotionally to be able to drive a that's needed. Mark Smith: Okay. And then as we think about kind of inventory by category, and I don't know how much you can share with us on this, you just talked about camping down kind of double digits. I'm curious, as we think about -- and the inventory looks good, down sequentially, down year-over-year. But if there's certain categories where maybe you're a little heavier and as we see maybe more promotions or marketing spend, here over the next 30-plus days. Should this we expect this to be really heavy in kind of that hunt shoot category? Or is it maybe more widespread as we think about inventory that you want to move through here in Q4. Jennifer Fall Jung: Yes, I'll start with the category perspective. So if you look at kind inventory by category, all of the categories that were down in the quarter, they actually have inventory that is more down. So they are doing a great job managing the inventory for those categories that weren't performing. The only 2 categories that were up with fish, which as we mentioned, was very successful in the quarter and then slightly up than hunt but not much. I think it's like less than 2%. But as we look forward to the coming weeks, we are going to be leaning on the hunt and shoot category to drive sales because that's what we know drives our customers to our store. It's a large portion of our sales, and we have the inventory to do so. So that's how we're going to leverage that category. Paul Stone: I would just add, Mark. At this point, we're not worried about inventory. The team has done a great job all year where we do have it in fish, and we're running and continue to run strong performance in fish. And then farms and ammo is in the best position it's been and we feel good and have the opportunity, we think here over the next 7 weeks to be able to deploy more firearms and ammo from a promotional standpoint to be able to help drive that traffic. But as we look at inventory and where we're at and where we're working our glide path down, we feel very comfortable even given the current macros we're facing to put inventory in a good position. Mark Smith: Okay. And the last question for me, just personal protection, it seems like you're seeing some solid results there. I'm curious if you can share any thoughts around kind of the margin profile as we think about burn Taser lethal, non-lethal if there's any real difference in that nonlethal personal protection margin profile versus maybe traditional carry firearms? Jennifer Fall Jung: Yes. Personal protection has been great for us, and it is 1 of our strategic pillars. So that will be a theme you'll continue to hear on calls. From a margin perspective, it is accretive, the nonlethal is accretive to the category. And right now, it's in at least Byrna is in 117 stores, TASER not as many. But we'll continue to evaluate stores to put those in. But it's been a success, and we're glad to see it bring in a different customer base. I mean, we think that's one of the values of it. You have a lot of customers coming in and buying it for other members of their family, maybe their wife, maybe the daughters. I had a friend that bought 4 of them for his entire family. So yes, it's bringing in people that are just looking for something different that don't necessarily want something that's lethal. Operator: And our next question comes from the line of Matt Koranda from ROTH Capital. Joseph Schneider: This is Joseph on for Matt. Just kind of hop into your response on driving traffic for promotions in Hunt and so. Is that the only lever that we have here to pull in terms of returning back to positive comps here it looks like 3Q was down about 8%. Just anything else that we can pull to return back to those positive comps in hunt and shoot? Jennifer Fall Jung: Okay. This is Jen. So our Q3 comp was a positive too. I'm not sure if I misunderstood your last comment. So we have been positive comping for 3 consecutive quarters. as we look forward into holiday, we're not leaning strictly on firearms and animals. That's more of a layer on. I mean holiday is a very promotional season in any way. So there'll be many promotions throughout the store. That's just something we are layering on that we didn't have as upfront in November or as in Q3. Paul Stone: Yes, I think just to answer that, I mean, to pits for the Q, north of 5% hunting, as we define it, was up over 5% for the Q. Clearly, that's the traffic drivers along with ammunition that helps to drive it, but also the attachment part of the business to around optics from the different components and the total solution of the firearm piece of it. But the kind of the milk and bread is clearly farms and ammunition to be able to drive people in and it really gives our operators the opportunity to be able to attach to increase the AOV and the UP as well. So I think we use that. You've got ammo and we said we'll start seeing that are extremely aggressive prices on oven our inventory is in great position. But it will be a driver to be able to help us to attach increase the overall box AOV and UPT. Joseph Schneider: Got it. And just if you guys could give us any preliminary thoughts on margin expansion, just going into fiscal '20 this current tougher demand environment sustains, can we still deliver any margin expansion in the next year? Jennifer Fall Jung: We haven't quite given guidance on 2026, but what we'll be focused on is really efficient as I can see importable growth. We will continue to look at our inventory and make sure that we are getting as much margin accretion out of that as possible. But yes, we're really focused on 2026 on our profitable sales growth and managing inventory and margins and continue to look at our cost structure. . Operator: This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Riley Timmer for any further remarks. Riley Timmer: Thank you for joining the call today, and thank you to all our passionate outfitters around the country for their commitment to Sportsman's Warehouse. Together, we look forward to providing our customers with great gear and exceptional service. Thank you all. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Greetings. Welcome to Build-A-Bear Workshop Third Quarter 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to Gary Schnierow with Investor Relations. Thank you. You may begin. Gary Schnierow: Thank you. Good morning, everyone, and welcome to Build-A-Bear's Third Quarter 2025 Earnings Conference Call. With us today are Sharon John, Build-A-Bear's Chief Executive Officer; Chris Hurt, Chief Operating Officer; and Voin Todorovic, Chief Financial Officer. During this call, we'll refer to forward-looking statements that are subject to risks and uncertainties. Actual results could differ materially. Please refer to our forms 10-K and 10-Q, including the Risk Factors section. We undertake no obligation to update any forward-looking statements. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website. And now I'll turn the call over to Sharon. Sharon John: Thank you, Gary. Good morning, and thanks for joining us for Build-A-Bear's Third Quarter Fiscal 2025 Earnings Call. Today, I would like to begin by thanking the entire team for continuing to drive our positive momentum from the first half to deliver year-to-date record revenue and pretax income. Results that reflect the many strategic and operational advancements we have been systematically executing over the past few years. Solid third quarter results coupled with the consistency of the underlying fundamentals give us confidence in reaffirming our full year guidance, inclusive of ongoing tariff headwind. Based on this guidance, Build-A-Bear is positioned to deliver fiscal 2025 revenue of over $0.5 billion for the first time in the company's history. We believe our year-to-date results and positive outlook underscore the resilience of our evolved and diversified business model. Even as we navigate a challenging macro environment, we remain on track to deliver top-tier store contribution margins for the fifth consecutive year, while our asset-light commercial segment is expected to achieve its fourth straight year of growth exceeding 20%. This strong performance reflects our continued efforts to monetize the power, positioning and equity of the Build-A-Bear brand, such as leveraging our multigenerational appeal to expand the addressable market with teens and adults now representing about 40% of sales, opening unique experiential retail concepts, including new co-branded locations and scaling through initiatives designed to go beyond our workshop like our new Mini Beans collection. Simply put, we're building on the brand's iconic status to reach more people in more places with more types of products for more occasions. Specifically for the quarter, revenue grew nearly 3% to almost $123 million, and pretax income declined $2 million to nearly $11 million, inclusive of about a $4 million negative tariff impact. For the first 9 months, revenue grew more than 8% to over $375 million and pretax income increased by 15% to almost $46 million, inclusive of about $5 million in a negative tariff impact. We also returned more than $26 million to shareholders through dividends as well as buybacks, which contributed to more than 24% EPS growth for the first 3 quarters of the fiscal year. Overall, shareholders have received over $160 million since the beginning of fiscal 2021. As we look toward the final and most impactful quarter of the year, our primary focus remains on delivering strong 2025 results. At the same time, we continue to advance the long-term strategic initiatives that position us for future success. As a reminder, these priorities have remained consistent over the last few years and include: One, expanding and evolving our experiential retail footprint; two, advancing our comprehensive digital transformation; and three, leveraging the powerful equity of the Build-A-Bear brand beyond our workshops while continuing to return capital to shareholders. Now Chris Hurt, Build-A-Bear's Chief Operations Officer, who has been an instrumental part of delivering our positive results over the past decade, will share more on expanding our retail footprint. Chris? J. Christopher Hurt: Thanks, Sharon. We remain committed to bringing our signature workshop experience, the cornerstone of the Build-A-Bear brand into new markets through a mix of our corporately managed partner-operated and franchise business model. This quarter, we made significant progress, adding 24 net new experience locations with 70% of those openings outside the United States, bringing our total locations to 651 and extending our reach to 33 countries, underscoring the global appeal of our brand. We also expanded our corporately operated business model in North America, with 7 new stores, including 3 in Canada, 3 in the greater metro areas of New York and Atlanta, plus a return to Puerto Rico in the highly popular Plaza Las Americas Mall, where the store opening was met with tremendous fan fare as our guests were excited to once again engage with the Build-A-Bear brand. These openings, which vary in size and format, reinforce our commitment to high return opportunities in new markets. Our international partners and franchisees continue to drive growth in expansion with new locations in Colombia, Denmark, Finland, Mexico, New Zealand, Panama, Qatar, South Africa, Sweden and the UAE. This expansion by our international partners and franchisees further demonstrates the scalability of the brand and our ability to continue to grow our international presence. We ended the quarter with 375 corporately managed stores, 108 franchise locations and 168 partner-operated locations. Since Q2 of 2023, we have doubled the number of asset-light partner-operated locations, which now represents more than 25% of our total units. Given an emphasis on optimizing operations during the busy holiday season, we opened a vast majority of our planned expansion through the first 9 months and remain on track to achieve our guidance of at least 60 net new locations this year. We are also excited to share that after a decade, the Build-A-Bear brand reentered Germany in the first part of the fourth quarter with one of our existing European partners, Intersource, with locations now open in Berlin and Frankfurt. These openings were a tremendous success as guests were thrilled to once again experience a brand in their home market. An additional location is planned for Stuttgart later in the quarter. This marks another important step in our overall European growth strategy and further strengthen our global footprint by demonstrating international scalability. As a reminder, we opened the first Build-A-Bear Hello Kitty and Friends workshop in the popular Century City mall in Los Angeles in November of 2024, and it quickly became a successful destination for devoted and real fans, collectors, families, kids of all ages and even Hello Kitty herself. This one-of-a-kind collaboration made it clear that the experience deserve a broader presence, especially in unique places that attract millions of visitors, both domestically and from around the world. As announced this morning, we are expanding the Build-A-Bear Hello Kitty and Friends workshop concept with corporately managed stores opening in early 2026 at 2 premier malls, American Dream just outside New York City, and Mall of America in Minneapolis. These co-branded experiential stores will complement our already established Build-A-Bear workshop at both shopping destinations. As new Build-A-Bear Workshop experience locations open around the globe, we are not only expanding our reach, we're adding a little more heart to life in more places for more people, positioning Build-A-Bear for sustained global growth. Sharon John: Thank you, Chris. Our workshops and the emotional, memorable experiences they provide remain at the heart of the Build-A-Bear brand, and we're excited about continuing the expansion of our global footprint especially through our asset-light partner-operated model, which we believe offers a meaningful runway as we bring the Build-A-Bear experience to more markets and consumers around the world. As part of our digital transformation objective, which is focused on driving omnichannel growth, we recently appointed Carmen Flores as the Senior Vice President of E-commerce and Digital Experiences. Carmen, a seasoned executive, having led digital evolution at companies like Montblanc and the LEGO Group will partner closely with our brand and technology team to strengthen consumer engagement to drive our digital business through more personalized, seamless interactions powered by technology and AI because we know that some of our visitors come to buildabear.com to transact, while others come to find a store and plan a visit. We believe the real unlock for the concept of e-comm at Build-A-Bear is striking the right balance between e-commerce and e-communications. Over the past few years, we have built a strong infrastructure and the next step is leveraging through our people and processes to monetize that investment fully. Our third area is capitalizing on opportunities that leverage our 30 years of multigenerational brand equity for incremental growth. On top of our experienced location expansion that Chris discussed, one example of this effort is represented by pre-stuffed branded plush that can be sold outside of our workshop in a wide variety of retail environments. While we originally launched our proprietary Mini Beans collectibles in Build-A-Bear Workshop as a pilot project, given that we are now approaching 3 million units sold with over 60% growth in the third quarter alone, we believe this highlights the opportunity to drive broader global reach of the brand through thousands of additional points of sale beyond the workshop. In fact, Mini Beans' distribution has already expanded into a number of independent retailers. Specific third quarter highlights include our strong Halloween collection, featuring a new fan favorite Posable Bat that generated over 3 million social views, raising awareness of the entire Halloween offering. You may recall that 2024 had been our best-selling Halloween assortment on record, but we're pleased to share that we saw a double-digit increase in 2025, likely driven by the continued macro interest in the holiday, but also from our strong seasonal offering, including our exclusive Hello Kitty and Friends co-branded Halloween characters, further solidifying the power of that special relationship. Separately, on September 9, once again, we positioned Build-A-Bear as the celebrated centerpiece of National Teddy Bear Day, delivering record results on top of all of those teddy hugs during a special acknowledgment of the importance of stuffed animal. From a fourth quarter-to-date perspective, we're pleased to share that we delivered the best Black Friday in the company's history, with momentum improving after a slowdown at the end of the third quarter in October. While some of this shift may reflect external factors, we believe our holiday merchandising and marketing efforts have played a key role in driving our stronger conversion and higher dollars per transaction so far in the quarter. Turning to the holiday strategy. This season, we are offering fun trend animals like Gingerbread Axolotl, classics like our Timeless Teddy in Santa gear, stocking stuffers including our all-important gift cards, which are key to driving January traffic and sales, seasonal Mini Beans and new on-trend bag charms inspired by some of our historical bestsellers. And as always, we are reinforcing Build-A-Bear as an experiential destination. A big part of the strategy is being seen as a part of our guest holiday tradition. That is why our core messaging leverages our centerpiece Merry Mission animated feature film, which this year celebrates the tenth anniversary of Glisten, the magical snowdeer and heroine of the movie with a limited edition version that really lights up. In closing, it's been a delight to be here in Manhattan this week, participating in Giving Tuesday with our value partners Salesforce and First Book, alongside the Build-A-Bear Foundation to provide books and bears to kids in need. This week's events culminate with today's earnings call from the New York Stock Exchange, where we will also take part in the annual tree lighting ceremony this evening. Without a doubt, I feel genuine sense of pride and gratitude for this remarkable organization, our Board, shareholders, partners and amazing guests around the world who not only enable us but also share in our mission to add a little more heart to life. And with that, I'll turn the call over to Voin. Vojin Todorovic: Thank you, Sharon, and good morning, everyone. I will discuss the quarterly results and then share more about our full year outlook. We achieved the highest revenue in the company's history for both the third quarter and the first 9 months of the year. This was also the highest pretax income for the first 9 months. And absent the impact of tariffs, it would have also been a record for third quarter pretax income. These results underscore the durability of our evolved business model and the effectiveness of the strategic initiatives that we have implemented over the past several years. Moving to a more detailed review of our third quarter results. Total revenues were $122.7 million, an increase of 2.7%. As a reminder, this was on top of 11% growth last year. Net retail sales were $112.3 million, an increase of 2.5%. Looking at our direct-to-consumer sales in more detail, we saw solid performance in August and September followed by a decline in October around the time of the government shutdown. As Sharon mentioned, the fourth quarter to date has shown a positive rebound from October. For the quarter overall, store sales were up with a slight transaction decrease driven by a 1% decline in traffic. October also faced a tougher comparison due to a new license introduction last year that benefited traffic. For the quarter, domestic store traffic outperformed the national benchmark. Also, dollars per transaction were up as selected price increases and product mix contributed to higher average unit retail prices. E-commerce demand declined 10.8%, primarily due to challenging comparison driven by a strong license product launch last year. The timing of web launches also shifted revenue between quarters. And as such, on a year-to-date basis, e-commerce demand is down less than 1%. Commercial revenue, which primarily represents wholesale sales to our partner operators grew 4.2% for the quarter. The timing of shipments negatively impacted our third quarter. However, commercial revenue has increased 15.3% year-to-date. We continue to expect commercial revenue to grow by more than 20% for the year. Gross margin was 53.7%, a decline of 40 basis points compared to last year, primarily reflecting the impact of tariffs. Tariffs and related costs reduced gross profit by about $4 million in the quarter. SG&A was $55.3 million or 45.1% of total revenues compared to 43.3% last year. Higher store level compensation, including medical benefits and higher minimum wage requirements, timing of marketing expenses and general inflationary pressures contributed to the increase. Pretax income of $10.7 million was $2.4 million below last year's $13.1 million. Tariffs and associated costs reduced pretax income by about $4 million. EPS of $0.62 compared to $0.73 last year, reflected lower pretax income, a slightly lower income tax rate and a reduced share count. Although this quarter is the first to be meaningfully impacted by tariffs over the first 9 months, we delivered record revenues and profits resulting in over 24% EPS growth versus last year. We also remain committed to returning capital to shareholders. During the quarter, we returned $13 million through dividends and share repurchases, bringing our year-to-date total to $26.1 million. We also maintained significant flexibility with about $70 million remaining under our Board approved repurchase authorization. Turning to the balance sheet. At third quarter end, cash and cash equivalents totaled $27.7 million compared to $29 million last year. The company finished the quarter with no borrowings under its revolving credit facility. Inventory at quarter end was $83.3 million, an increase of $12.5 million. The increase was driven by the accelerated purchases to mitigate contemplated changes in tariff rates as well as the inclusion of tariffs into the cost of inventory. In addition, a portion of the increase was made to support the growth of our commercial segment. We remain comfortable in both the level and composition of our inventory, which we believe positions us well to meet demand and execute our growth strategy for the balance of the year. Turning to the outlook. We are reaffirming our full year guidance as shared in today's press release. At the midpoint of our range, our annual revenue guidance implies about 2% growth in the fourth quarter. As you know, December has historically been the most significant month of the quarter and the year for Build-A-Bear. We also continue to expect our commercial segment to grow by more than 20% for the full year, which implies at least 30% growth in the fourth quarter. Turning to our pretax income guidance. The midpoint implies about $20 million in fourth quarter pretax income. As a reminder, we guided to less than $11 million in tariffs impact for the year. For the first 9 months, we recognized about $1 million in the second quarter and roughly $4 million in the third quarter, which implies a remaining tariff impact of less than $6 million for the last quarter of the year. It is important to note that tariff impact in 2025 reflects only the last 7 months of the fiscal year. Additionally, as previously mentioned on our last call, our pretax guidance continues to include approximately $5 million in additional medical and labor costs. Of note, these costs collectively represent a headwind of almost $60 million for the year. In closing, we are pleased with our strong year-to-date performance. As we look ahead, our focus remains on executing the company's strategic objectives of expanding the global footprint, accelerating the digital transformation and leveraging our strong brand equity while delivering consistent value to shareholders through disciplined capital allocation. Finally, I want to extend my sincere thanks to our store and warehouse associates, corporate team members and valued partners around the world. Their dedication and collaboration were instrumental in delivering a record first 9 months results as we continue to be on track to achieve our fifth consecutive year of record results. This concludes our prepared remarks. We will now turn the call back over to the operator for questions. Operator? Operator: [Operator Instructions] Our first question is from Eric Beder with SCC Research. Eric Beder: I'd like to button up on the tariff piece a little bit. So you [Technical Difficulty] tariffs is about $10 million and a little bit of that was in Q2. When we think about next year, what are the opportunities to reduce this? Because if I sit here and just kind of extrapolate it to kind of like about $18 million in tariff impact next year. How should we be thinking about this going forward and your ability to start mitigating this even further? Vojin Todorovic: I'll take that, Eric. Thank you for your question. As we mentioned in our call, yes, this year, we had about 7 months of tariff expenses. We believe that's going to be less than $11 million total for 7 months. As we go into next year, even though we are not providing any guidance on 2026 at this point, there is going to be additional months. Clearly, first 5 months of next year, we'll have some tougher comparison because we are going to be experiencing tariffs. We continue to work to find ways to mitigate some of the challenges that are caused by tariffs. Even as you've seen in our quarter, this year in Q4, we had $4 million of negative tariff impact and our profits only declined at a smaller margin. So we continue to do things that are within our control. We are working with our partners in Asia to reduce our cost. We are looking at ways to selectively and increase prices where we can to mitigate the offset of this additional cost. We are managing things within our control, such as promotions and discounts. And that's part of the reason, even in Q3, we are seeing a lesser negative impact of these tariffs on our financials with our strong margin results. So there are things that we continue to do to manage from the margin perspective as well as we are looking at things from the overall P&L perspective that are within our control to help mitigate some of those things that we are seeing. Now one of the positive things from the tariff perspective as administration like the Chinese rates will go from 30% to 20% next year. So that will be a little bit of a benefit compared to the 30% that we had for a big part of this year. Sharon John: It's also important to realize that some of our strategic initiatives that we have implemented even prior to the tariff situation have been focused on the diversification of the company. And so as Chris noted in some of his comments, we are growing our store count outside the United States, which are not for the large part, impacted by the tariff situation. Eric Beder: Great. And I want to talk about something we can see in our store visits. So one of the things in 2025 has been kind of the, I guess, diversification in pricing in the sense that the Mini Beans continue to be a great part of the business and they're about $10 right now. And on the flip side, we've also seen some higher-priced items expand such as the Giant Furry Friends. And to your point about Glisten, Glisten is a limited edition. It's about -- correct me, it's $100. How -- where are you seeing kind of the gains from doing these pieces? And how is this diversification? Is it bringing in the different customers to the business? And where should we be thinking about that going forward? Sharon John: Yes, Eric, I'll start. Yes. I mean we've talked about diversification across numerous fronts over the years and rethinking beyond just what had been the standard approach to Build-A-Bear Workshop because the brand equity is, in our opinion, and from a research perspective is bigger than just the location of Build-A-Bear Workshop. That's one thing. But the second piece of the diversification is not just the global aspect that I mentioned, but yes, we have an enormous amount of opportunity, we believe, from the multigenerational aspect, which I noted in my comments, 40% of our sales are to teens and adults. That often, particularly when it is related to license, some of our key licensed products allows us a lot more pricing latitude. And then we have also had partnerships in the past where we've been up in the $100 range before like the Swarovski relationship that we have. But that latitude, both on the lower end and the higher end, does bring in different types of gifts. And we reiterated that in that we believe that we have an opportunity to appeal to more people in more places for more products and more occasions. So while we have Mini Beans at $10, which are meant to be and, in fact, are manifesting themselves as a collectible, so people tend to buy more than one of those, so in an individual is a $10 purchase, but you usually are buying more than one. But we also continue to offer at the lowest end, our birthday treat bear. So we have accessibility to consumers. But it is our -- we believe that it's an important aspect of our brand to stretch the limits on what makes sense and what that is still valuable to the consumer. People love Glisten. So we wanted to try our own collectibles this year in our own special limited edition, and thus far so good. Operator: Our next question is from Greg Gibas with Northland Securities. Gregory Gibas: Great. Wondering if you could speak to your promotional activity in the quarter? Was it something that you leaned into a little bit more? Or I guess, maybe how would you say compared year-over-year? Vojin Todorovic: Well, actually, our promotional activity, we have been managing our discounts and promotional activity much more stringently. And we are actually seeing lower discount rate in the quarter as we have seen over the last couple of quarters. This is one of those things that we believe it's within our control, and this is one of the ways we are trying to help mitigate the impact of some of these additional costs that are outside of our control. And as a reminder, over many years that we've been with the company, we have done a tremendous job of expanding our merchandise margin, managing our margin cost and being really focused on the experience and driving the overall ticket value versus really trying to drive growth to promotion. Our brand, it's very unique in a way how we are positioned and people are coming to our stores to celebrate their special events. And we believe creating the best experience for them and upselling and doing things to really enhance that experience is the way for us to both grow the business and deliver strong margin results. This goes in line as being a destination and people are coming to celebrate these special events and over the years, we have done, in my opinion, doing a really good job managing the margin and expanding over probably 1,000 points over the last decade or so. Gregory Gibas: Got it. That's very helpful. And I wanted to ask if you could share anything more about trends that you're seeing with Mini Bean sales and then, I guess, just overall demand with that product line? And I guess progress with kind of new SKU introductions with that product line as well. Sharon John: Yes. Well, we're really excited about Mini Beans for a number of reasons. And I did share in the comments that we were approaching $3 million in sales. And just in this last quarter, we saw a 60% increase. And we are now, and as I mentioned as well, in the early stages, but we're selling Mini Beans in different retailers outside of the workshop, but also to a lot of our partners where we have partner-operated relationships. So it's got the mask head of the Build-A-Bear, but it's like Great Wolf Lodge, for example, they offer so many also outside of the United States and some of our partnerships in Europe. But we see this as it's a -- we create variety with the Mini Beans. They are collectible. They are seasonal. We bring out new characters. Some of them are based on our favorites from the Build-A-Bear historical collection. We also bring out what we call takedown of some of the seasonal products that we're doing and people like to buy those together. But we're also just recently created things with partners. So we're starting to have Mini Beans with some of our licenses which has been extremely successful and very exciting. So Sanrio, as an example, which we mentioned a number of times in the prepared remarks, with Hello Kitty and Friends, just again, a tremendous multidimensional partnership for us, whether that's us creating seasonal products with them or Mini Beans with them or even new locations with that partnership. It's been wonderful and they have such great fans and the fan base overlaps tremendously with Build-A-Bear. So it makes a lot of sense. But we see Mini Beans as just -- it's a proof point in many ways of how we can extend beyond the make your own plush. And while we will never remove the destination aspect from the centerpiece and the heart of our company, it's how people are often introduced to our brand, and it's where that halo effect comes from. It is important for us to recognize that there is potential beyond that. Gregory Gibas: Yes, that's good to hear. Congrats on the Black Friday. Sharon John: Thank you. Operator: Our next question is from Steve Silver with Argus Research. Steven Silver: I had a question about the tie-ins. I know you guys mentioned that you had a presence around the Wicked movie coming out, which came out like right around Thanksgiving, which may have contributed to the strong results on Black Friday. But I'm just trying to get a sense as to just broadly speaking, whenever Build-A-Bear is involved with a high-profile movie launch and a tie-in kind of thing, whether the sales that those products generate are really more concentrated around the launch of those movies or really what the tail looks like for how long beyond the launch marketing tends to go toward these products and how long the contributions extend? Sharon John: Yes. Thank you. Yes. So this is actually our second year of Wicked. We had Wicked with the original movie and because we knew, as did many of the partners that, that would be a 2-year event, successive years. So it's been great because Wicked was more successful than we expected in the first year so we were able to prepare a little bit better for this year. And while it is the tremendous partnership, I really can't look at it and say that's the reason why we drove Black Friday or that's the reason why we're seeing this increase. Our November trend is based on a much broader assortment than that. But of course, all of these licenses and everything that we do to appeal to different consumer groups for different purposes, and even our growth outside the United States is helpful in the achievement of those objectives and Black Friday. In fact, one of the interesting things about Black Friday is, I believe, Eric mentioned earlier, is these jumbos. We had a really great -- we did do a promotion. We just walked through like last week, but we don't. But I mean, clearly, you have to participate in what the consumer expects on the Black Friday. But very limited promotion on that on the -- in some ways to introduce people to the aspect of these jumbos, and that was a big success for us on Black Friday. But the tail to your question of licensed products, particularly related to film. I'm going to apologize upfront. It's such a wide variety. They're almost like snowflakes. I mean it is a -- there isn't that much of a predictability on exactly how the consumer will react. Now we have a lot more information when it's a sequel like we did with Wicked because -- and that's a known entity. So that one we expect we had a little more latitude and those are a little more stretchy. But literally, unless the film is a big hit, if it's an unknown, it's -- you try to calculate and manage your risk on that. We do a pretty good job. Steven Silver: Okay. I appreciate the color. And one more, if I may. It was a very interesting concept, the idea of expanding to a second Build-A-Bear location in these initial malls. I think you mentioned American Dream and Mall of America. So given the fact that Build-A-Bear would then have a multiple presence in some of these large malls, I'm curious as to whether that plays into any leverage from Build-A-Bear just in terms of lease terms given the existing presence and the contribution that Build-A-Bear is already making to some of these locations? Sharon John: Yes, that's a great question. I mean, obviously, the more revenue you're driving and the more foot traffic you participate or create with any of our great mall partners, it does create another bullet point of communication and possible leverage, if you want to call it that. But our biggest, I would say, opportunity there is just continuing to work with these partners, particularly given that 60%, 70%, up to 80%, depending on how you think about it or some of our research, of our guests are coming to Build-A-Bear that happens to be in the mall or just coming to the mall and like stumbling into a Build-A-Bear. That destination-driven marketing and the experience that we provide is now the hallmark of what most retailers are looking for. We are often credited with being a pioneer in that space. And that's a big asset for us as an organization, as a company, and we realize that and so do our partners. So that's probably our largest contribution in many of the discussions that we have with malls is that we believe we're part of the solution of people returning to in-person shopping and mall shopping and as do our partners, which is why we are getting a second location in 2 of the biggest destination-based retail concepts in the United States. Operator: [Operator Instructions] Our next question is from Keegan Cox with D.A. Davidson. Keegan Tierney Cox: Yes. I was just curious on what you guys said with respect to the slowdown you saw with the government shutdown. I'm just wondering, did you see a trade down from your customer, like a mix shift towards lower price point products like Mini Beans? And then kind of continuing on that theme, how that spend shapes on kids versus kind of your adult customer? Vojin Todorovic: Yes. So thanks, Keegan, for the question. And as I mentioned in my prepared remarks, definitely, we saw some strength in our business in the first 2 months of the quarter. Then October, we had a little bit of a slowdown in traffic. And there are a few things that were happening at that time. Definitely, there was some noise related by the government shutdown. In addition to that, last year, we had an introduction of -- for us at that time, we licensed Bluey, that performed really well for us and did help drive traffic last year. So that compounded some of the traffic challenges that we were facing this time around. And as we talked about, we had softer finish to the Q3, but we rebounded in November, and we are seeing some positive momentum. We, as Sharon talked about, best Black Friday in our history. So some of those things, it is really difficult to point out specifically what's happening. But we are seeing growth in Mini Beans, as Sharon told, over 3 million units sold -- or sorry, approaching 3 million units sold with that particular property. But in addition to that, we are selling these giants to our consumer like over $100 price point. So we are getting like to a lot of different consumers. And I don't think that's necessarily impacting us in a negative way. Our dollar per transactions continue to grow and we are pleased with that. Our conversion is strong. So those are things that we believe are within our control. But definitely, there are concerns and challenges when we think from the macro environment and things that we always say, things that are outside of our control. We are trying to mitigate. We are trying to manage our expenses. And we still feel good about the guidance that we have provided on the full year basis to deliver fifth consecutive record year in our history. Keegan Tierney Cox: Got it. And then listening to just some of your competitor calls and some Black Friday store checks, they mentioned they're taking share in plush, and I saw that in some stores. I know you guys mostly benchmark against yourself. But as we think about the Mini Beans opportunity, I mean, what interests you about fulfilling that product in other retailers and taking on that competition. Vojin Todorovic: Yes. So definitely, that's one of those areas that when we think about what's happening with our stores, what's happening with Mini Beans, as I mentioned that we are approaching 3 million units sold in our stores. And that portion of those sales are also in other retail channels. So we are selling some of that to wholesale account, that's definitely an area of opportunity for us. And we believe there is a little white space as we move forward. But as we think about the overall plush sales and everything, I can't comment on how other people and what their performance is, but I'll again reiterate, it's a fifth consecutive year of record results for us. So year after year, yes, we continue to beat our revenue goals, margin goals, so we are pleased with the progress that we are making. But there is still some white space for us as we look to the future, especially in the wholesale channel. Sharon John: And I'll just add a little bit to that. I mean, while we're really pleased with our growth from experiential retail location expansion, and I think Chris mentioned to 651 locations around the globe now, the expansion into new retail environments, that offers up literally thousands of doors that Build-A-Bear would otherwise not have a presence in, where it's not necessary to go through the experience that created us, but because that experience is so emotional and sell memorable, it creates a halo effect. It's that brand and the brand equity stretches beyond the workshop walls. And Mini Beans is an example of that in that they are -- people understand that this is going to be a quality product. They think of it as it has the branded equity with it. So it's not just another plush on the shelf, it's Build-A-Bear. So when you think about what is the essence of the competition, we believe that the Mini Beans carry that branded aspect that benefits it in that space. And we are seeing that from early sales, both, of course, inside the Build-A-Bear Workshop, as I noted, but in some of the early stages of outside of the workshops as well. Operator: There are no further questions at this time. I would like to turn the conference back over to Sharon for closing remarks. Sharon John: Thank you for being on the call today. And we certainly appreciate everyone joining us to hear our third quarter results and look forward to sharing our fourth quarter results with you next year. In closing, we wish you and your families a very happy holiday and a wonderful new year. Operator: Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.
Operator: Hello, and welcome, everyone joining today's Inotiv Fourth Quarter and Full Year 2025 Earnings Call. [Operator Instructions] Please note, this call is being recorded. We are standing by if you should need any assistance. And it is now my pleasure to turn the meeting over to Steve Halper of LifeSci Advisors. Please go ahead. Steven Halper: Thank you, Claudia, and good afternoon. Thank you for joining today's quarterly call with Inotiv's management team. Before we begin, I'd like to remind everyone that some of the statements that management will make on this call are considered forward-looking statements, including statements about the company's future operating and financial results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected. Any such statements represent management's expectations as of today's date. You should not place undue reliance on these forward-looking statements, and the company does not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events -- the company does not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to the company's SEC filings for further guidance on this matter, including risks and uncertainties that could cause results to differ from forward-looking statements. Management will also discuss certain non-GAAP financial measures in an effort to provide additional information for investors. Definitions of these non-GAAP measures and reconciliations to the most comparable GAAP measures are included in the company's earnings release, which has been posted to the Investors section of the company's website www.inotiv.com and is also available in the Form 8-K filed with the Securities and Exchange Commission. If you haven't obtained a copy of today's press release yet, you could do so by going to the Investors section of Inotiv's website. Joining us from the company this afternoon are Bob Leasure, President and Chief Executive Officer; and Beth Taylor, Chief Financial Officer. John Sagartz, Chief Strategy Officer, will join us for the question-and-answer portion of the call. Bob will begin with some opening remarks, which -- after which Beth will present a summary of the company's financial results for its fourth quarter and full year fiscal 2025 and then we'll open the call for questions. It's now my pleasure to turn the call over to Bob Leasure, CEO. Bob, please go ahead. Robert Leasure: All right. Thank you, Steve. Good afternoon, everyone. During the fourth quarter of fiscal 2025, we saw the continuation of some positive trends for our business, including a strong year-over-year increase in demand for our Discovery & Safety Assessment business. We continue to execute on the core goals outlined in our May 2025 Investor Day, including improving our cash flow and margins and maintaining our focus on customer metrics. Two critical elements of our plan consists of improving DSA revenue and margins and continuing our RMS site consolidation efforts in order to further reduce cost. On today's call, I'll provide an update on the progress we are making on these objectives along with the other general business updates for the fourth quarter. On that last point, on August 18, we filed an 8-K disclosing that we became aware of a cybersecurity incident which caused disruption to certain of our business operations. We worked to restore availability and access to our networks and systems during this fiscal fourth quarter. We are required to work through a number of challenges that were disruptive to the business, but we continue to execute request for delivery of products and services. While this incident inevitably had some financial impact on the quarterly results, I'm very proud of how the team responded. And as you can see from the results of the quarter, the company maintained its momentum through this process. In September, we disclosed that we had engaged Perella Weinberg Partners to provide general financial advisory and investment banking services to assist the company in exploring potential debt refinancing alternatives. And then we later announced that a proposed settlement of our securities class action and an agreement in principle to settle the derivative lawsuits in each case pending court approval and expect that the settlement payments will be fully covered by insurance. Now moving on to the quarterly results. We continue to see some very encouraging signs. For the fourth quarter of fiscal 2025, total revenue was $138.1 million, an increase of $7.7 million or 5.9% compared to the fourth quarter of fiscal 2024. The DSA business was the primary driver of this increase. Sequentially, revenue was up $7.4 million or 5.7%. For fiscal year 2025, total revenue was $513 million, an increase of $22.3 million or 4.5% compared to $490.7 million for fiscal 2024. Some of the key highlights of Q4 2025 included quarter-over-quarter and year-over-year increases in net DSA awards and revenue growth. DSA revenue growth was a goal that we outlined during our Investor Day in May of this year. Compared to the prior year fourth quarter, DSA quarterly revenue increased 15.7% and awards increased approximately 61%. These results were some of the strongest DSA quarterly results we have seen over the last 2 years. Since our May Investor Day, we have posted increases of 12.4% in DSA revenue and 41.1% in DSA awards for the last 2 fiscal quarters of 2025 as compared to the last 2 fiscal quarters of 2024. In the fourth quarter, Discovery business awards increased 55% over the same period a year ago, and we achieved even stronger growth rates in the new service lines that we started or expanded over the last couple of years, including biotherapeutics, medical devices and genetic toxicology. The DSA backlog conversion rate was 37.4% for the fourth quarter and was the highest quarterly conversion rate we have seen in 3 years. DSA margins also continued to improve. And while we believe there should be further opportunities in the future, we are pleased with the current momentum. RMS revenue for the fourth quarter was slightly ahead of last year by approximately 1% and for the fiscal year 2025 increased 4.7% over fiscal year 2024. Phase 2 of our RMS site consolidation project has remained on track. In early October, we closed one of the three planned RMS facilities and now have two additional lease facilities remaining to close. As we stated last quarter, we anticipate future annual savings of $6 million to $7 million on a capital investment related to expanding an existing lease location of approximately $6.5 million. To date, we have spent approximately $1.8 million net of tenant allowances related to this capital investment. As with previous projects we have executed in the RMS segment, these additional investments are intended to help modernize our existing footprint while allowing us to close older facilities. The plan will reduce open capacity, should create operating efficiencies while continuing our efforts to support our animal welfare objectives. Additionally, we believe that this plan allows us to remain agile and to increase production capacity in the future as needed. When the site consolidation project is complete, we expect to have closed a total of 13 RMS facilities or approximately 60% of the RMS facilities over the last 3 years. During fiscal 2025, we sold two properties as a result of our site consolidation project. One property was sold in June, and the other property was sold in September. And the net proceeds were used to repay principal on our term loans during July and October, respectively. Our efforts also saw additional achievements during the fourth quarter, including advancements in our RMS management operation system, which have been developed over the last 14 months and are now providing data and metrics that we believe will allow us to further improve RMS operations and efficiencies in the future. We continue to improve our North American transportation fleet and operations. In the second quarter of fiscal 2026, we expect to have achieved a 24% reduction in our fleet to yield the cost savings since bringing the North American transportation in-house. This 2-year project has been critical helping improve our delivery and client satisfaction. In addition to other improvements being made with order intake and accuracy, we have seen a 55% reduction in our RMS client complaints over the last 2 years. Subsequent to the end of fiscal fourth quarter, in October 2025, we're able to transfer our commercial operations to one new CRM system, integrating multiple systems into one solution for our customer relationship management systems. In addition to cost savings, we anticipate this will provide operating efficiencies, improved data metrics and enhanced ability to communicate internally between business segments and with customers. And we have reduced the number of IT systems from 249 in early 2022 to 162 as of October 2, 2025. This reduction has been part of our planned efforts beginning in 2022 to streamline and enhance our technology environment. We look forward to continue to focus our efforts on increasing revenue, improving margins and improving our client experiences. While we did face some headwinds in the quarter, we were pleased with our results, which we believe further demonstrate our ability to identify opportunities, integrate businesses we acquired in startup and implement action plans designed to improve revenue and margins. As for our balance sheet, we generated $14.3 million of cash from operations in the fourth quarter and increased our cash balance to $21.7 million compared to $6.2 million at June 30, 2025. Our first lean term debt matures in November of 2026, our second lien term loan in February of 2027 and our convertible debt in October of 2027. As we mentioned previously, we have retained Perella Weinberg to assist us in exploring potential debt refinancing alternatives with the goal of improving our balance sheet. We are actively having these discussions, and we'll provide more information at the appropriate time. Before I turn the call over to Beth, I want to recognize and acknowledge that it has been very, very nice to see this increase in DSA revenue and the DSA awards over the last 3 quarters and believe these trends are continuing through the first 2 months of the current quarter compared to the same period in prior year. However, as a reminder, we are coming off some very weak numbers from a year ago and the geopolitical and macroeconomic conditions, risk and uncertainties are likely to remain with the industry for the foreseeable future. I'll now hand things over to Beth to provide the financial overview. Beth Taylor: Thank you, Bob, and good afternoon, everyone. For the fourth quarter of fiscal 2025, total revenue was $138.1 million compared to $130.4 million in the fourth quarter of fiscal 2024. This was a $7.7 million or 5.9% increase in revenue from the prior year quarter, primarily driven by increased revenue of $7.1 million within our DSA segment. For fiscal 2025, total revenue was $513 million compared to $490.7 million in fiscal 2024. This was a $22.3 million or 4.5% increase in revenue from the prior year due to a $14.5 million or 4.7% increase in RMS revenue primarily driven by higher NHP product and service revenue and a $7.8 million or 4.3% increase in DSA revenue. DSA revenue in the fiscal 2025 fourth quarter was $51.6 million compared to $44.6 million in Q4 of fiscal 2024. The year-over-year 15.7% increase in DSA revenue was primarily driven by an increase in discovery and translational science services, biotherapeutics, general toxicology services and surgical services. DSA revenue for fiscal 2025 was $187.9 million compared to $180.1 million for fiscal year 2024. The year-over-year 4.3% increase in DSA revenue was primarily driven by an increase in safety assessment services, including biotherapeutic services, surgical services and general toxicology and an increase in discovery and translational science services. Additionally, the year-over-year increase in DSA revenue was driven by our improved performance over the last 6 months of the fiscal year. The book-to-bill ratio for DSA for the fourth quarter of fiscal 2025 was 1.08:1, and our trailing 12-month book-to-bill was 1.05:1. DSA backlog was $138.2 million at September 30, 2025, compared to $129.9 million at September 30, 2024, and $134.3 million at June 30, 2025. Overall, net new DSA awards this quarter were $54.2 million, a 61% increase over Q4 of fiscal 2024 and a trailing 3-quarter increase of 37% year-over-year. We continue to see strong quoting and awards for the months of October and November. The backlog conversion rate in the fourth quarter of fiscal 2025 was 37.4%, up from approximately 33% in the prior year period. The DSA cancellations and negative change orders in the fourth quarter of fiscal 2025 were approximately 29% lower compared to the prior year fourth quarter. Cancellations in the trailing 12-month period were approximately 7% more than the prior trailing 12-month period. RMS revenue for the fourth quarter of fiscal 2025 was $86.5 million, an increase of $700,000 or 0.8% compared to Q4 of fiscal year 2024. RMS revenue for fiscal 2025 of $325.1 million increased $14.5 million or 4.7% compared to fiscal 2024. The increase in RMS revenue was primarily due to higher NHP products and services revenue. The overall operating loss for the fourth quarter of fiscal 2025 decreased $6.4 million from $13.2 million in the fourth quarter of fiscal 2024 to $6.8 million in Q4 of fiscal 2025, primarily due to increases in RMS operating income of $2.9 million and in DSA operating income of $2.3 million as well as a reduction in unallocated corporate expenses of $1.1 million. The increase in RMS operating income was driven by a reduction in cost of revenue, which predominantly related to reduction in costs related to NHP's operating expenses and depreciation and amortization of intangible assets. The increase in DSA operating income was driven by the increase in revenue discussed above, partially offset by an increase in cost of revenue primarily driven by increased research model expenses, compensation and benefits expense, professional fees and facility-related expenses. The overall operating loss for fiscal 2025 decreased $55.5 million from $86.4 million in fiscal 2024 to $30.9 million in fiscal 2025, primarily due to RMS operating results. The change in RMS operating results was primarily related to decreased operating expenses, a $14.5 million increase in revenue previously mentioned and partially offset by increased cost of revenue. The $38.2 million decrease in operating expenses was primarily driven by the $28.5 million charge incurred during fiscal year 2024 related to the Resolution Agreement and Plea Agreement, which did not repeat during fiscal year 2025 and a legal settlement of $7.6 million that we received during fiscal year 2025. Increase in RMS cost of revenue primarily related to increased costs associated with the increased NHP related products and service revenue. Non-GAAP operating income for our DSA segment in the fourth quarter of fiscal 2025 was $9.3 million or 6.7% of total revenue compared to $7.4 million or 5.6% of total revenue in the fourth quarter of fiscal 2024. Non-GAAP operating income for our DSA segment for fiscal 2025 was $28.5 million or 5.6% of total revenue compared to $30.3 million or 6.2% of total revenue in fiscal 2024. As Bob mentioned, we continue to be focused on our DSA margins, and we expect to see improvement in future quarters, largely through operating leverage and assuming we continue to see a stable pricing environment. In our RMS segment, non-GAAP operating income in the fourth quarter of fiscal 2025 was $14.9 million or 10.8% of total revenue compared to $12.7 million or 9.7% of total revenue in the fourth quarter of fiscal 2024. Non-GAAP operating income for RMS segment in fiscal 2025 was $56.7 million or 11.1% of total revenue compared to $44.3 million or 9% of total revenue in fiscal 2024. Interest expense in Q4 of fiscal 2025 increased to $15.7 million from $12.3 million in the fourth quarter of fiscal 2024 primarily due to noncash interest incurred in relation to the second lien notes issued in September of 2024. Interest expense for fiscal year 2025 increased to $56.6 million from $46.9 million in fiscal year 2024, primarily due to noncash interest incurred in relation to the second lien notes issued in September of 2024, and periodic growth on our revolving credit facility. Consolidated net loss attributable to common shareholders in the fourth quarter of fiscal 2025 totaled $8.6 million or a $0.25 loss per diluted share. This is compared to consolidated net loss attributable to common shareholders of $18.9 million or $0.73 loss per diluted share in the fourth quarter of fiscal 2024. Consolidated net loss attributable to common shareholders for fiscal 2025 totaled $68.6 million or $2.11 loss per diluted share. This is compared to consolidated net loss attributable to common shareholders of $108.4 million or $4.19 loss per diluted share in the fourth quarter of fiscal 2024. For the fourth quarter of 2025, adjusted EBITDA was $11.8 million or 8.5% of total revenue compared to $5.4 million or 4.1% of total revenue for the fourth fiscal quarter of 2024. For fiscal year 2025, adjusted EBITDA was $34 million or 6.6% of total revenue compared to $18.2 million or 3.7% of total revenue for fiscal year 2024. Our balance sheet as of September 30, 2025, included $21.7 million in cash and cash equivalents as compared to $21.4 million on September 30, 2024, and $6.2 million on June 30, 2025. Net cash provided by operating activities in the fourth quarter of fiscal 2025 was $14.3 million. This was primarily driven by a change in operating assets and liabilities of $18 million, partially offset by consolidated net loss adjusted for noncash impact of $3.7 million. The change in operating assets and liabilities was largely attributable to NHP customer deposits received during the fourth quarter. Cash used in operating activities was $10.5 million for the 12 months ended September 30, 2025, compared to $6.8 million of cash used in operating activities for the 12 months ended September 30, 2024. The company has utilized and will continue to utilize its revolving credit facility during the normal course of business as needed. As of September 30, 2025, the company had access to the $15 million revolver and had an outstanding balance of $3 million. Total debt, net of debt issuance costs, as of September 30, 2025, was $402.1 million compared to $393.3 million on September 30, 2024, inclusive of our first lien term loans, our convertible notes and our second lien notes. Capital expenditures in the fourth quarter of fiscal 2025 were $2.7 million or 1.9% of total revenue. The fourth quarter of fiscal 2024 capital expenditures were $5.3 million or 4.1% of revenue. Capital expenditures in the 12 months of fiscal 2025 were $16.6 million or 3.2% of total revenue. Fiscal 2024 capital expenditures were $22.3 million or 4.5% of revenue. While we continue to feel positive about the progress we have made in recent quarters, we are not providing formal fiscal 2026 guidance at this time. As we have stated previously, we hope to resume providing guidance once we have greater clarity on the market and client demand and clarity on any impact to our business once there is more information on tariffs. As with that financial overview, we will turn the call over to our operator for questions. Operator: [Operator Instructions] And our first question comes from Frank Takkinen with Lake Street Capital Markets. Frank Takkinen: I was hoping I could start with one on -- one of your previous comments in the prepared remarks about some headwinds in the quarter. Look like really nice top line, really great bookings, maybe a little bit more expense in the model than expected. Can you maybe kind of parse out what some of those headwinds were and maybe what revenue would have been without those headwinds or what those incremental expenses were in the quarter to kind of give us a better feel for maybe what some of the extra expenses in the model were and kind of parse out what the quarter could have been maybe without some of the extra cybersecurity expenses in the model? Robert Leasure: Yes. Well, Frank, you identified what the major headwind was for us in the early August finding out the cybersecurity incident we reported. That was probably the most -- major thing we faced. And we can quantify some of those things, a lot of overtime, a lot of communication, a lot of third-party cost and some studies and some work that may have been redone. But it's the intangible cost that you can't really identify the toll it takes on the operation or the customers or people may be holding back on issuing an award until you get through it. And so it's hard to quantify that. And what happened, if you would have asked me, do you think you could have increased our award 63% during a quarter or come close to the $54 million in awards we had, I would have never expected that. So I think we did a great job, but I think it would also be naive for us to think that it didn't have some impact on our earnings, our expenses and some of our awards, that would be hard for me to quantify. If we could quantify, I would. But I think it's really those intangible costs and the time it takes for organization to focus on that. As you can see, we're very focused on the client service, we're very focused on integration, we're very focused on IT integration. And so that's a lot of diversion of time and effort when you have to go through something like that. But I was very pleased how quickly we recovered. I was very pleased with our ability. We have had other times before when we've had other suppliers hit or that we've had to go manual on paper. So we try to be prepared, but no matter how prepared you are, there are always things that you're not -- you're never prepared for. But overall, I was very pleased with how we responded. But yes, it'd be naive to think that it did have some impact that is not really that quantifiable. But I think we're getting through it nicely. And as I look at the last quarter and I look at the first 2 months of this quarter, the quoting and the awards and -- are moving forward nicely. So I think we've gotten through that. Frank Takkinen: Got it. That's helpful. And then my second one was going to kind of follow up on your last sentence there. Just any quarter-to-date trends you're comfortable sharing would be great on -- as it relates to ordering patterns and then a refresh around kind of some seasonality. I think in the past, you've called out some of the holiday season has had some seasonality for kind of revenue recognition for the quarter. So anything you can help us understand as we think about [indiscernible] would be great. Robert Leasure: Yes. Thank you. Our quarter ended December 30 is typically our weakest quarter during the holidays. We -- for a lot of research models and our diet between Thanksgiving and Christmas tends to be a slower time. There are probably less working days. Some of the universities in some places are down for the holidays. So we do tend to see this being our -- typically our weakest quarter. As far as quantifying, we're coming off 6 months -- the last 6 months of 12.5% DSA revenue, for us, is very important. As we go back to Investor Day, Frank, there are really two things that we're focused on. Costs coming out of the RMS business. We're not looking for a lot of major increase in sales, but costs coming out of the RMS business, we identified that $6 million or $7 million. And we talked about growing the DSA business and seeing incremental margins of 50-plus percent on that growth. And so seeing that 12% revenue -- increase in revenue over the last 6 months is encouraging. And we have an increase in awards of over 37% over the last 9 months. So that's -- I think last quarter, we say 63%, but it's coming off a very weak Q4 of last year. So -- but if we can maintain that awards increase of somewhere 25 -- 20% to 30%, and we can maintain the revenue increase of anything close to what we've experienced the last 2 quarters, then we're going to be pretty pleased with how things are going to go for us, I think, in the future. So I'm not seeing anything right now that says that we can't -- after these last 2 months, that can't -- it's not possible. I think that it would be helpful to see others in the industry, see some of those same tailwinds that we've seen. And I think some are starting to indicate they're starting to see that. I think that's very encouraging. For us, when the industry does well, we're obviously going to do even better. But we've had a great 9 months, no doubt about it. Very pleased, probably better than we thought we could have done. I think we're seeing the pricing stabilize quite a bit. And I think we're hopefully hearing other people now starting to see some of those same trends. And as we -- and that will be a huge help to us also. Operator: We'll take our next question from Matt Hewitt with Craig-Hallum Capital Group. Matthew Hewitt: Maybe first up, and I'm sure you're sick of talking about this since April, but with the FDA now announcing formal guidance regarding new approach methodologies and trying to pare back on the use of large animal models in toxicology studies, I'm just curious if you could remind us how you're positioned, maybe your exposure to monoclonal antibodies, anything along those lines. Robert Leasure: Yes. Well, our revenue related to monoclonal antibodies is minimal, very small if any. And so we're not really worried about that. With the amount of quoting activity we have going on, that's not going to, I think, have an impact. We do sell a lot of research models and NHPs. I could not tell you how all of our customers use those NHPs. I've seen some others that we've reached out and talked to, and I don't think it they see any impact. I think what we saw in the guidance that they're providing is just that guidance. The customers are still going to make their own decisions about what they're going to require for safety assessment testing. And I don't know -- so this one thing is guidance. Second, what are our customers going to want to do before they put a drug into a human in terms of safety assessment. And so we've not seen a big change in that. And right now, I wouldn't see it having really any impact. But I think it was a positive that they were able to clarify what they came out and said in April. But still, it's guidance. It doesn't mean that's what people are going to do or not do because they're all going to make their own decisions of what is safe and what they want to do from a safety assessment standpoint. Matthew Hewitt: That's super helpful. And then -- and I realize it's early in the pharma budget cycle as they start to look at '26. But as you talk to some of your partners, some of your customers about those budgets for next year, what are you hearing? I mean, is your sense that budgets are going to be flat to up next year? Any color on those lines would be helpful, too. Robert Leasure: Well, right now, I think we are seeing, as we did last year, and we've seen so far this quarter an increase in the quoting that is meaningful. I would say this quarter, I think we'll see a substantial increase in quoting. I think we're -- and the closing also. So when it comes into next year, we're probably booking a little further out than we have for a while. And so I think that's encouraging. We also, I think over -- as we mature, again, we're a very young company. And I think what we're seeing is more of a reoccurring customer base. So a little bit more comfort in gaining our customers' confidence. We do a great job of delivery, and I think we see an increasing amount of reoccurring customers, which is also very encouraging. But right now, obviously, we're on a pretty good roll in the last 9 months. I don't see anything that's going to disrupt that. And I'd be very encouraged to start hearing as I think we started to hear others in the industry also identifying the same trends. So I don't have any more to add to that. I can't tell you what they're going to do next year. But right now, what we see so far this year and in the last 2 months is we haven't seen anything to dampen our optimism and our ability to see an increase in revenue next year. Matthew Hewitt: No, that's good. And yes, congratulations. It hasn't been an easy environment. You guys have executed well the last few quarters. So congratulations on that. Operator: [Operator Instructions] We'll move next to David Windley with Jefferies. David Windley: Bob, maybe another way to interrogate the DSA improvement in the environment would be to ask around your lead times. What -- how quickly can you start studies for clients and maybe flipping the coin, how quickly do clients want to start studies? And are you seeing any movement on that measure? Robert Leasure: David, I guess some of that depends on studies. We typically in the DSA business, see our DSA business come in and start within weeks, not months. The larger animal safety assessment businesses tend to come in and -- with closer to a 3- to 9-month lead time. We have started a studies faster than that. But right now, we're operating -- our large animal safety assessment capacity is operating at a very high level of capacity at the moment. So I think we can generally see out a couple of quarters in terms of the large animal capacity and the usage of that capacity. But the -- for the discovery and for the smaller animals, we can generally start those much quicker. David Windley: Okay. Flipping to RMS, and Frank may have tried to get at this a little bit, but in your segment disclosures, margin was impacted sequentially. And I'm wondering, I guess, first of all, was the cyber event cost differentially impactful in the RMS segment versus DSA? Or I would kind of have thought that, that would have been at the corporate level, but just want to try to interrogate the moving parts in that RMS margin. Robert Leasure: Well, the RMS margin for our small animals and diet business tend to be improving as we've reduced the number of sites we have by 60%. And I think that's becoming a bigger part of our margin story actually and that's improving. And I think we'll see that improve this year as those costs continue to come out. I believe that the -- in the NHP segment, sometimes that can differ based on the cost of the NHPs that we're bringing in. And so -- and some of the costs that relate to those NHPs. So I think we probably had a few -- a little bit higher cost maybe than we did in the prior quarter. So that's just based on spot market, sometimes what we're buying and selling for. David Windley: Okay. Maybe zooming out then, if I think about that RMS business, you've got a few different things going on, you just named a couple. But I'm wondering along a number of vertices, like how would you describe volume versus price in RMS, large animal versus small animal mix and then kind of models versus services. Again, you have kind of several different ways to think about the mix moving in that business. I wondered if you could shine a light into that for us. So volume versus price, large versus small animal. And then on the models versus services, I'm really digging at how is your animal services business in Texas developing? Robert Leasure: Yes, volume versus price. The small animal business and the diet business, one of the reasons that it was important, we reduced the sites by 13 or by 60% is because that is a very fixed cost structure. So taking out the cost and maintaining volume definitely has -- allows us to improve our margins. And as volume goes up, that also -- and mainly fixed cost structure would help us quite a bit also. So I think we're seeing the margins improve and the diet and small animals because of that formula. As far as the Alice, Texas facility, you're right, that is -- we are buying and selling. We're also boarding and breeding and we have services. So the services business continues to grow as does the domestic breeding operation. And then some of the other margins come and go based on the demand in the market and what we're able to buy for and sell for. So -- and that has I think not -- the volatility of that market and that price has been a lot less than it has been in the last 2 or 3 years. I think it's become a lot more stable. But there are a lot of factors in there, and you start putting in tariffs and you have transportation, you have quarantine. Those are all factors that can also change your cost. For the most part, we've been able to pass along tariffs. But if we have extended quarantine, which we at times have, and -- or change in transportation costs, which we at times have, those can also impact those margins. So those are probably a little bit more variable. We're not seeing big swings, but we're seeing -- and which is -- if that's half of our RMS business, then we could see some swings in those margins as the others are constantly improving. Operator: At this time, there are no further questions in queue. I will now turn the meeting back to Bob Leasure for any additional or closing remarks. Robert Leasure: All right. Well, thank you, everyone. We are encouraged with these results and the recent growth we've seen with our DSA quoting awards over the last 2 quarters. And as this growth develops, we'll need to remain vigilant on delivering an exceptional experience, service and product for our clients. We made great progress on the financial goals we outlined during our Investor Day, and we're continuing to evaluate opportunities to further improve our balance sheet. As I said in the past, we are a much better company today than we have ever been in the past, and we still feel we have a plan for much further improvement in the future. Thank you, and have a good day. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good evening. Welcome to the IDT Corporation's First Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference call is being recorded. I will now turn the call over to Bill Ulrey of IDT Investor Relations. Bill, you may begin. Bill Ulrey: Thank you, John. In today's presentation, IDT's Chief Executive Officer, Shmuel Jonas; and Chief Financial Officer, Marcelo Fischer, will discuss IDT's financial and operational results for the 3 months ended October 31, 2025. After their remarks, they will be happy to take your questions. Any forward-looking statements made during this conference call, either in their remarks or during the Q&A that follows, whether general or specific in nature, are subject to risks and uncertainties that may cause actual results to differ materially from those in which the company anticipates. These risks and uncertainties include, but are not limited to, specific risks and uncertainties discussed in the reports that IDT files periodically with the SEC. IDT assumes no obligation either to update any forward-looking statements that they have made or may make or to update the factors that may cause actual results to differ materially from those that they forecast. In their presentation or in the Q&A session, IDT's management may make reference to non-GAAP measures, including adjusted EBITDA, adjusted EBITDA margin, non-GAAP earnings per share, NRS's Rule of 40 score and adjusted net cash provided by operating activities. Schedules provided in the IDT earnings release reconcile these non-GAAP measures to their nearest corresponding GAAP measures. Please note that the IDT earnings release is available on the Investor Relations page of the IDT Corporation website. The earnings release has also been filed on a Form 8-K with the SEC. Now I'll turn the call over to Shmuel for his comments on the quarter's results. Samuel Jonas: Thank you, Bill. And thanks, everyone, on the call for joining this evening. IDT delivered consolidated revenue growth and record levels of gross profit, adjusted EBITDA -- and adjusted EBITDA in the first quarter. NRS led top line expansion, while all 3 of our growth segments reported strong bottom line results. Our Traditional Communications segment again provided steady cash generation. NRS recurring revenue increased 22% year-over-year, helping to drive a 35% increase in income from operations and a 33% increase in adjusted EBITDA. This quarter, we continue to launch and build out innovative premium services, delivery integrations, couponing and product data scan programs to name a few. Our premium offerings are becoming important growth drivers and factored into the large increase in average recurring revenue per terminal this quarter. There is tremendous opportunity for additional long-term growth through innovation, both in NRS's current and adjacent markets. At BOSS Money, our digital channel continues to outperform retail and that churn may accelerate as implementation of the new federal excise tax on cash remittances begins on January 1. The Fintech segment's income from operations and adjusted EBITDA nearly doubled year-over-year, aided by BOSS Money's increasing operating leverage and enhanced profitability of other smaller fintech initiatives. Our push to integrate tailored AI and machine learning into BOSS Money customer service and fraud detection activities have helped to significantly improve unit economics. Looking ahead, we will soon introduce the first integration of the BOSS Wallet, enabling our U.S. customers to share money and receive rewards. During the quarter, net2phone began offering its AI agent to both our existing and new customers and added our Coach AI solution at quarter's end. Increasingly, our customers are ordering multiple net2phone offerings to enhance their operations and streamline workflows. As a result, we have pivoted from stand-alone product offerings to holistic solutions comprised of multiple offerings tailored to customers' communications and workflow needs. This approach plays net2phone's product and distribution -- plays to net2phone's product and distribution strengths and we are very excited about the potential as we continue to add new AI solutions. On a final note, the Delaware Supreme Court in a ruling issued yesterday affirmed the decision of the Court of Chancery dismissing all claims against IDT in the Straight Path class action suit, and we are very pleased that this case has now been favorably resolved. I don't usually do this, but I would like to thank a couple of people in particular. I would like to thank Jason Cyrulnik and Paul Fattaruso and Rudy Koch, as well as our own, Menachem Ash. I would also, on a sad note, like to remember our esteemed colleague, Suzy Sillman, who led the data division of NRS and worked tirelessly for NRS even while very sick and in lots of pain and unfortunately, has departed. I will wrap up by thanking everyone on the IDT team for their hard work and another great year and wishing them and all of you on the call a very joyous holiday season. Now Marcelo will discuss our financial results. Marcelo Fischer: Thank you, Shmuel. My remarks on the fourth quarter of our fiscal year 2026 will focus on the year-over-year comparisons to set aside seasonal impacts on our business. From a financial perspective, this was a terrific quarter, highlighted by good top line growth, record gross profit and record adjusted EBITDA and adjusted EBITDA margin. Consolidated revenue increased 4% to $323 million, driven by our 3 growth segments: NRS, Fintech and net2phone, which together grew by 16%, with particularly strong contributions from NRS and Fintech. Consolidated gross profit increased 10% to a record $118 million for a gross margin of 37% as we continue to benefit from the increasing contributions of our 3 higher-margin growth segments relative to that of our low-margin Traditional Communications segment. Consolidated income from operations increased to $31 million, a 31% year-over-year increase. Adjusted EBITDA and adjusted EBITDA margin also hit record levels at $37.9 million and 11.7%, respectively. EBITDA less CapEx totaled $32.1 million in the first quarter, a 30% year-over-year increase and also an IDT all-time high. EPS increased by 31% or $0.21 to $0.89 per share on both the basic and diluted basis. Non-GAAP diluted EPS also climbed by 32% to $0.94 from $0.71. As Shmuel pointed out, the big driver in the first quarter was again our 3 growth segments. Together, they contributed $103 million in revenue, equal to 32% of our consolidated revenue compared to 29% a year earlier. But because the average gross margin is 66% compared to 18% in our Traditional Communications segment, they provide tremendous operating leverage as the revenue contribution increases and the cost structures continue to be optimized. Adjusted EBITDA from NRS, Fintech and net2phone combined totaled $21.4 million in the first quarter, a 50% increase from the first quarter of fiscal 2025. Together, they now represent 57% of our consolidated adjusted EBITDA compared to only 48% 1 year ago. And because these segments still generate less than 1/3 of our revenue, that rotation from low-margin businesses to higher ones still has a long way to run. This being said, given the quite solid and consistent profitability results delivered by our Traditional Communications segment, we believe that the largest segment of ours will continue to be a major contributor to our adjusted EBITDA generation for years to come. Now let's take a closer look at each of our segments. At NRS, results were highlighted by the very strong increase in the monthly average recurring revenue per terminal to $313 from $295 in the year ago quarter as a result of the strong revenue growth in merchant services, which is up 38% and SaaS fees up 30% that more than offset the 15% decline in advertising and data revenue. Merchant services revenue this quarter continued to benefit from consumer and retailer trends that we believe will drive long-term increases in payment processing revenue per account. Overall, NRS's recurring revenue climbed 22% to $35 million. Income from operations in the first quarter increased 35% to $9 million, primarily reflecting a 21% increase in gross profit, while adjusted EBITDA increased 33% to $10.3 million. In our BOSS Money remittance business, revenue growth at our dominant digital channel, which generated 84% of our transactions during the quarter, was 20%. Although revenue growth has slowed, we continue to take market share from our peers, many of whom, especially the retail-centric providers have seen revenues from U.S.-based remittances decrease in recent quarters. Income from operations in the Fintech segment, which includes also our Gibraltar-based bank and other smaller financial businesses and offerings increased 97% to $6 million, and adjusted EBITDA climbed 87% to $7.5 million. These exceptional increases reflect the reduction in our transaction cost structure that machine learning and AI are providing, the increasing operating leverage of the business and the improving profitability of the other businesses within our Fintech segment. Fintech's adjusted EBITDA margin climbed to 18%, and BOSS Money as a stand-alone entity would likely have achieved several percentage points above that, an impressive accomplishment that stacks up favorably in comparison to the larger, long-established players in the remittance industry. With the recent launch of its AI offerings, net2phone is transitioning its focus away from the per-seat metrics we have traditionally used as a key indicator of the performance of this business. As Shmuel just noted, net2phone customers are now increasingly looking for communications and operating solutions comprised of multiple offerings. So in order to better capture and report this new dynamic, over the next year, net2phone will begin reporting new customer-based KPIs that more meaningfully track the performance of customers -- of customer economics as opposed to per-seat economics. For now, however, seat growth remains a key performance indicator. And this quarter, seats increased 7% to 432,000, while revenue increased 10% on a net reported basis and 9% on a constant currency basis. Revenue growth outstripped seat growth in part because of some nice win for our higher-value CCaaS offering. Income from operations increased 94% to $2 million in the first quarter, while adjusted EBITDA increased 44% to $3.6 million. EBITDA less CapEx increased 104% to $1.9 million. Net2phone was able to achieve all of this, while at the same time ramping up its investment in strategic AI technologies. Looking ahead, net2phone expects to further increase its investment in technology development as it build out integrations and features for new verticals, such as health care. For our Traditional Communications segment, this was another very good quarter, exceeding our expectations. Income from operations again increased, up 1% year-over-year to $16 million. Adjusted EBITDA increased 2% year-over-year to $18.9 million as modest decreases in gross profit were more than offset by our ongoing efforts to reduce OpEx in our legacy paid minutes businesses. Adjusted EBITDA less CapEx for this segment increased 1% year-over-year to $17.3 million, indicating once again the durability of this segment's free cash flows. Turning to our balance sheet. At October 31, 2025, IDT held $220 million in cash, cash equivalents, debt securities and current equity investments. This represents a decrease of $34 million compared to the $254 million held at July 31. This reduction mostly reflects the fact that our first quarter fiscal '26 ended on a Friday compared to last quarter, which ended on a Wednesday. As I have mentioned in previous calls, as part of our weekly process of funding, weekend transactions for our BOSS Money remittance business in any given week, our highest cash balances are typically on Wednesdays and our lowest on Fridays. During the first quarter, IDT also repurchased $7.6 million in stock. We expect to opportunistically buy additional shares during the remainder of our fiscal year and to return cash directly to our stockholders through our quarterly dividends. To conclude, after generating $38 million in consolidated adjusted EBITDA this quarter, representing a 26% year-over-year growth, IDT is extremely well positioned to achieve our full year '26 adjusted EBITDA guidance of $141 million to $145 million, which would represent a 7% to 10% full year-over-year growth rate. For now, we will monitor Q2 performance and update our guidance when we report our next quarterly results, God willing, in early March. Now Shmuel and I would be happy to take your questions. Operator: [Operator Instructions] Our first question comes from Iñigo Alonso with MORAM Capital. Iñigo Alonso: Congratulations on the 26% EBITDA growth and on the resolution of the Straight Path litigation. You have always been a really shareholder-friendly company and now that the risk is gone and as you wait for the M&A market to clear out over the first half of the fiscal year, I was wondering if we could expect any special dividend accelerated buybacks in the second half of the year or do you still think that M&A is the way to go for that capital allocation. Samuel Jonas: I mean, on the M&A front, we're not looking at anything very large right now unless something regulatorily changes in the market, I think we're sort of waiting to see how the effects of the tax on money transfers affect retail businesses in particular. On the NRS front, we're not looking at any major acquisitions, but we do have 1 or 2 small acquisitions in mind for them. And we're continuing to plan sort of our next big move, and we hope that it will be pleasing to our investors. Iñigo Alonso: Okay. Another question, this one on additions of net payment processing accounts exceeding that of the terminal accounts. I was wondering if these additions are coming from businesses that do not require a POS. And if so, how relevant is a percentage of businesses to your revenue? Or is it coming from conversions? Samuel Jonas: No. It's coming from ones that require a POS. Iñigo Alonso: Okay. And then in the prepared remarks, you comment on NRS and you mentioned that there's tremendous opportunities for growth in adjacent markets. I was wondering what those adjacent markets are. Samuel Jonas: I mean there's a bunch of adjacent markets, some of which we've talked about in the past related to food service and related to international markets that we've yet to really launch in with the exception of Canada. And there's lots of adjacent markets inside of the -- that are sort of specialties inside of the businesses that we do already. I mean I can give you a bunch of examples, but you know most of them, whether or not it's hardware stores or CBD shops or there's lots of different verticals. I mean, as I said, I can give you 100 different ones that if we build out a couple of small features for each one of them, they open up tens of thousands of stores each. Iñigo Alonso: In the international market comment, do you think we could see other countries added to the IDT ecosystem in '26? Samuel Jonas: Yes. I mean, again, I can't say 100% that we have decided to go into more countries yet. We're looking at an acquisition outside the country that would accelerate that for us. But it's definitely on the road map. As I said, I'm not sure I can say it will be on the '26 road map, but definitely on the road map. Iñigo Alonso: And the last one, this is on IDT Global. You guys commented Traditional exceeding the expectations, especially on the bottom line front, and you guys commented on the initiatives to expand the bottom line. But you have not commented on the record IDT global top line revenue. I mean, it's a record number for the last 2 years. I know there's some seasonality to it, but if you could provide some color there, I would appreciate it. Samuel Jonas: Yes. I mean I think that they're doing a great job all around bringing lots of new and interesting solution to our carrier partners all around the world, whether or not it's SMS solutions, voice solutions, some of even our new AI solutions that we're using in net2phone are being, I'll say, offered to carriers as well. And they've really done a great job all around. Marcelo Fischer: Yes. And Iñigo, as we maybe have spoken before, when we manage our IDT Global wholesale carrier business, our account managers are incentivized to manage it in terms of generating maximum gross profit. On any quarter, revenues might go up or down depending on whether they chose the opportunities in a high revenue per minute country or a low revenue per minute country by high margin, low margin. So the IDT Global folks are doing exceptionally well in the sense that despite that the minutes business have been in decline now for so many years, they have consistently delivered what we look from a managerial perspective, about $9 million to $10 million of GP or gross profit every quarter for now several years, despite the declines in the minutes, right? So the fact that the revenue has grown in the last 2 quarters, it's just a small indicator, okay, on the resilience of the business. And the revenues could come down, but for us, the focus is really that the gross profit continues to be maximized as much as possible. Operator: [Operator Instructions] As there are no more questions, this concludes our question-and-answer session and conference call. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and welcome to the Aurubis Analyst Call. [Operator Instructions] Let me now turn the floor over to Elke Brinkmann. Elke Brinkmann: Good afternoon also from my side and a warm welcome to the conference call on the full year results of the fiscal year 2024-'25 of Aurubis AG. We, from Investor Relations are here with our CEO, Toralf Haag; and our CFO, Steffen Hoffmann, who will present the figures for the 12 months of 2024-'25 and current developments at Aurubis. After the presentation, the floor will be open for questions. [Operator Instructions] Before we begin, a brief reminder of the disclaimer on forward-looking statements. Today's capital markets presentation contains forward-looking statements about Aurubis plans and expectations. These statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated. Let me now turn the floor over to Toralf Haag. Toralf Haag: Thank you, Elke, and welcome, everybody, to our conference call for the full year results for the fiscal year 2024-'25. Aurubis looks back on a successful year in which our competitor strengths have once again been the foundation of our resilience. The past fiscal year was characterized by a highly dynamic market environment with unprecedented shifts in the market. The concentrate market swung into a deficit, motivating Asian smelters, in particular, to substitute copper scrap for concentrate. Developments that send TC/RCs and scrap RCs on a downward trajectory. Thanks to our multimetal excellence, our sustainability leadership but also our closing the loop activities with our customers, we were able to fully supply our primary and secondary recycling smelters. At the same time, demand for metals searched where trade measures redirected material flows and created local deficits. As an integrated copper producer, we were able to reliably supply our customers and ensure the flow of critical metals to strategic relevant industry sectors. Overall, we managed market challenges well, while also achieving key milestones in our strategic growth agenda. One was first melt Phase 1 of Aurubis Richmond. We are well on track and our robust business model was a cornerstone of our resilient performance in the past fiscal year. On the next page, I would like to give you an overview of the key financial highlights for fiscal year 2024-'25. In line with our sharpened guidance range, operating EBT came in at EUR 355 million. As highlighted before, this result was achieved in a challenging economic environment and includes the successfully completed major shutdown in Pirdop. EBITDA was at EUR 589 million versus EUR 622 million in the prior year, reflecting our solid operational performance. Operating ROCE decreased to 8.8% compared to 11.5% a year ago. This is primarily due to our ongoing strategic investment program, which is increasing capital employed until the full earnings contributions come through. Net cash flow was a strong EUR 677 million, significantly above the prior year's EUR 537 million level driven by the robust earnings situation and a clear improvement in working capital. Q4 was outstanding with EUR 319 million net cash generation alone. On the back of a healthy cash generation in Q4, free cash flow, pre-dividend improved by more than EUR 100 million from minus EUR 219 million in the previous year to a minus EUR 95 million. On this basis, we are proposing increasing the dividend to EUR 1.60 per share, up from EUR 1.50, which underlines our confidence in the business and its cash generation. Looking ahead to the next fiscal year, we are confirming our forecast of an operating EBT between EUR 300 million and EUR 400 million, which is expectedly roughly on par with the 2024 and '25 level, as well as free cash flow in a positive territory. Turning on the next page to our production figures. I would like to highlight once again that Aurubis is much more than just copper. We have a wide array of strategically relevant metals. On the input side, we processed around 2.2 million tonnes of concentrate a slight decline of 4% year-over-year, reflecting the planned maintenance shutdown in Pirdop and operational issues in Hamburg at the beginning of the year. At the same time, we increased copper scrap and blister input by about 3%, totaling 510,000 tonnes, demonstrating our ability to source and process secondary raw materials. Other recycling material throughput was down by 6% to 510,000 tonnes. On the output side, copper cathode production was stable at 1.1 million tonnes. In line with concentrate throughput development, we reduced roughly 2 million tonnes of sulfuric acid. The picture for other industrial metals, along with precious and minor metals is mixed. While some quantities exhibited fairly stable development or even increased, other metal quantities such as gold dropped versus the prior previous year, which is, to a large extent, a collection of the feed mix in connection with lower throughput levels. Our output of wire rod and copper shapes was on par with the prior year level. Flat rolled products and specialty wire volumes, however, were down 31%, mainly because of the previous year figures included volumes from the Buffalo plant, which we sold. Overall, our smelter network showed a solid operational performance. Our unique smelter network allows us to supply high-quality products from both primary and secondary sources with a high share of recycled content. As you can see, the share of recycled content in Aurubis copper cathodes has increased by 1 percentage point to 45%. And all of our copper products contain a sizable share of recycled content as well. We recovered 20 different metals and elements that are contained in our raw materials, such as tin. And here, we achieved even 100% recycled content, which highlights our strong position in circular economy solutions. This is the key strength of our network of plants in Europe and North America and is also a clear competitive advantage in securing supply and delivering sustainable products. Let me now run through the market environment of our main products and raw materials. Starting with the downstream side. European copper premiums increased significantly after the U.S. tariff decision. And although they came down from the elevated levels in Q4, they stayed clearly above last year's level. Sulfuric acid prices declined from prior year peaks but stayed stable at a relatively high level, supporting our earnings in the CSP segment. On the raw material side, according to industry reports, treatment and refining charges for copper concentrates on the stock market had fallen into negative territory in the recent quarters. They have now stabilized but remain at very low levels, reflecting the tightness in the concentrate market. This has been strained further by major main disruptions -- mine disruptions towards the end of Q4. Furthermore, tightening scrap markets led to declining refining charges for recycling materials, particularly in Q4. Overall, we saw favorable development on the product side but faced headwinds from raw material markets, especially for concentrates and scrap. However, please bear in mind that there are no direct one-to-one correlation with our P&L. We are actively managing to remain independent for short-term fluctuations. Let me now turn to the price development of -- for key metals in the U.S. dollar. As you are all aware, gold and silver prices increased sharply in Q4 of '24-'25 up 44% year-over-year and at new all-time highs, driven by macro and geopolitical factors. In comparison, copper prices remained relatively stable with a moderate increase towards the end of the quarter. This favorable development of key metal prices positively contributed to our metal result as we will see later. The U.S. dollar euro exchange rate moved into a tight range over the period with the U.S. dollar depreciating from the levels at the beginning of the year. Aurubis long U.S. dollar position remains unchanged at approximately USD 530 million for the fiscal year with 54% of the U.S. exposure hedged at a rate of 1.125 for the fiscal year '26-'27, around 40% of the exposure is hedged at a rate of 1.188. And now I hand over to Steffen Hoffmann for more details on the financials. Steffen Hoffmann: Thank you, Toralf, and a warm welcome from my side too. Let me take you through the financial details of fiscal year '24, '25 and touch on the KPIs in this chart. Our revenues increased by 6% to EUR 18.2 billion, mainly reflecting higher metal prices. Gross profit decreased slightly by 4% to EUR 1.6 billion as did EBITDA, which came in at EUR 589 million, which is minus 5%. Operating EBIT came in at EUR 358 million and operating EBT at EUR 355 million, 14% below the prior year. Compared to the EBITDA, the decrease of the EBT was more pronounced as in '24-'25. Depreciation increased by EUR 20 million as planned due to our strategic projects. A higher metal result significantly increased earnings from sulfuric acid a robust contribution from product sales, as well as lower legal and consulting costs positively impacted the result. However, lower concentrate throughput and reduced TC/RCs lower earnings from processing of recycling materials and the anticipated higher ramp-up costs and depreciation for strategic projects weighed on the results. Net cash flow improved significantly to EUR 677 million from EUR 537 million, underscoring the strong cash generation of our business. Our operating ROCE for fiscal year '24-'25 was 8.8% against 11.5% the year before, reflecting the investment phase we are currently in. Looking on the next chart at quarterly performance. Q4 showed clear improvement over Q3. Our operating EBT increased by 19% to EUR 68 million. Higher concentrate throughput following the successful completion of the Pirdop shutdown in Q3 supported earnings despite lower TC/RCs. Please keep in mind that the shutdown was completed in Q4, so a minor portion of the shutdown still affects Q4. In Lunen, we recognized a EUR 10 million environmental provision in Q4, while Q3 was impacted by EUR 12 million additional depreciation on the at equity investment. Net cash flow almost doubled quarter-over-quarter to EUR 319 million, mainly due to the significant improvement in net working capital. Moving on to the split of our gross margin, which is a nice representation of our multimetal strategy and the diversification of our earnings drivers. You saw this breakdown at our Capital Market Day, and we decided to provide you with the same breakdown for the 12-month period as well. In total, gross margin was at around EUR 2.077 billion, broadly in line with the prior year level of about EUR 2.1 billion. Please bear in mind that our former FRP site in Buffalo was still included in the overview for fiscal year '23-'24. Compared to the previous year, the metal result share increased mainly on account of strong precious metal prices but the higher copper price contributed as well. Here, we see again that Aurubis is more than just copper. We are multimetal and we will continue to strengthen this profile through targeted investments. However, declining concentrate TC/RCs weighed on the overall gross margin, while the scrap RC share remained stable. Still, our strategy of building on long-term partnerships and more complex materials shielded us to some extent from the extreme developments visible on the spot market. In products and premiums, higher asset prices supported the group's gross margin, partially counteracting the TC/RC decline. And with respect to product premiums, I'd like to reiterate that Buffalo was still included in the previous year. Overall, the balanced mix of these earnings drivers helped us to mitigate volatility in individual markets and once more underpins the resilience of our business. Let me now go into segment performance, starting with Multimetal Recycling. MMR generated an operating EBT of EUR 13 million compared to EUR 79 million in the previous year. Operationally, the throughput of recycling materials was slightly above the prior year level. However, in an environment of declining refining charges for recycling materials. The second half of the fiscal year was characterized by a challenging market environment with an impact on RCs, volume and mix. Additionally, compared to fiscal year '23-'24, the segment's performance was impacted, in particular, by higher ramp-up costs for strategic projects, especially at Aurubis Richmond, and furthermore, as we've alluded to, an impairment on an equity investment in the amount of EUR 12 million and a provision for a planned environmental measure in the amount of EUR 10 million weighed on the segment's performance and can be treated as a one-off. The ROCE declined from 5.6% to 0.9%, reflecting both the lower earnings level and the increase in capital employed, mainly due to Richmond. Overall, we are not happy with this level at MMR and we'll focus on improving the financial performance going forward. Turning to the segment's gross margin. Overall, the gross margin increased slightly to around EUR 640 million versus EUR 623 million in the prior year despite the tightening scrap markets. This increase is attributable mainly to the segment's metal result which benefited from higher metal prices. refining charges for recycling input were stable and contributed roughly 45%, very close to last year's 46%. Contribution of products and premiums in MMR remained flat compared to the previous year. Let's now take a look at the Custom Smelting & Products segment. CSP delivered an operating EBT of EUR 446 million versus EUR 458 million, so almost at the prior year level despite the deterioration of concentrate TC/RCs. The ROCE for the segment was 18.2% compared to 19.6% last year, influenced again by a higher capital base due to investments. Concentrate throughput was at 2.18 million tonnes and sulfuric acid production at roughly 2 million tonnes, both slightly below the prior year due to the major plant shutdown in Pirdop. Cathode output rose slightly to 582,000 tonnes, and rod and shapes volumes remained broadly stable. FRP products and specialty wire volumes declined to 90,000 tonnes mainly due to the sale of the Buffalo plant in the prior year. Overall, CSP showed good operational performance in a challenging market environment and delivered earnings broadly in line with last year, despite the Pirdop shutdown. Looking at the gross margin. This, in CSP highlights the different moving parts. Total gross margin was approximately EUR 1.44 billion, slightly below last year's level, reflecting lower global treatment and refining charges, as well as lower concentrate throughput. Accordingly, treatment charges for concentrate and recycling input contributed around 18% of gross margin, down from 24% in the prior year, mirroring lower TC/RCs and subdued scrap RCs. The metal result increased to 34% from 27% in the prior year, driven in particular by higher precious metal prices and higher copper prices. Products and premiums contributed 48%, roughly in line with last year's figure. This reflects significantly higher earnings from sulfuric acid and robust demand for copper products and here again, the reminder is that last year's figures included Buffalo for 11 months. So while TC/RCs were under pressure and throughput volumes were lower due to the shutdown in Pirdop, we successfully compensated with a stronger metal result and product contributions. Let us now take a look at cost development in the group. Total group costs were around EUR 1.9 billion, slightly below the EUR 1.98 billion in the prior year. Distribution among the cost categories was quite similar to last year. The decrease in total cost is largely due to the sale of the Buffalo plant and thus a lower asset and cost base. Personnel costs represented about 33% of total cost slightly increasing due to higher headcount, mainly for strategic projects, as well as wage increases. Our energy costs declined mainly on account of the sale of the Buffalo plant. For the remainder of the group, energy costs were stable due to energy management. Consumables and external services, both around 12% and at 22%, other operating expenses like logistics or maintenance were stable versus previous year. Depreciation and amortization increased as expected due to our strategic investments, bringing total D&A to about 12% of the cost base. Excluding D&A, our total cash costs decreased to EUR 1.665 billion from EUR 1.764 billion in the prior year, reflecting our cost discipline and portfolio adjustments. Turning to cash flow. We saw a very strong development in '24-'25. Starting from left to right, operating EBITDA of EUR 589 million is the starting point, reflecting our robust financial performance. Net working capital improved significantly driven by higher liabilities, partly offset by higher inventories. Tax payments, however, increased to EUR 92 million on account of the application of the global minimum tax rate in Bulgaria, as well as deferred taxes. This led to a net cash flow of EUR 677 million, clearly above the prior year's EUR 537 million. Cash outflows for investment activities remained high at EUR 754 million, mainly for Aurubis Richmond, complex recycling Hamburg and the planned Pirdop shutdown. Free cash flow before dividend was at minus EUR 95 million, which is a marked improvement versus the previous year's minus EUR 219 million figure and reflects that the peak of our investment phase is now behind us. In total, we paid dividends in the amount of EUR 66 million, which results in a free cash flow after dividends of minus EUR 160 million. Overall, we focused on strengthening the cash flow profile while executing large strategic projects. I would now like to move on to some of our balance sheet KPIs. Our equity ratio is 53.5%, slightly below almost 56% last year but very comfortably above our 40% target and above. Our net leverage is again very low at 0.5% and well below our maximum target of 3x EBITDA. Please take note that the capital expenditure of EUR 771 million on this slide includes capitalized own work. And for this reason, is slightly higher than the cash figure shown on the previous slide. Capital employed increased to roughly EUR 4.1 billion from around EUR 3.7 billion, reflecting the investment program. The net cash flow, as mentioned before, improved to EUR 677 million. So I think it's fair to say overall that the balance sheet remains very solid despite the high level of investments and the financial leverage remains low, giving us ample flexibility. The next slide is meant as a quick reminder of our updated capital allocation policy and our clear commitment to maintaining a strong balance sheet while pursuing disciplined growth and shareholder returns. Besides aiming to keep the equity ratio above 40% and maintaining a maximum net leverage of 3x EBITDA at the fiscal year-end, we provided guidance on how to allocate available capital among approved growth projects and baseline CapEx, as well as dividends. For the latter, we sharpened our dividend policy at the CMD and foresee a payout ratio of up to 30% of the group's operating consolidated net income in the medium term for fiscal year '24-'25, we stated that we would aim for a 25% payout ratio since the last fiscal year was still marked by high investment activity. So what's now our concrete dividend proposal on the next chart. Our operating EPS was at EUR 5.97 in '24-'25, down from EUR 7.66 in '23-'24. Main reasons for the decline were the lower operating EBT, as well as higher tax payments due in part to the higher corporate tax rate in Bulgaria, which I mentioned before. Despite the lower earnings base, we propose increasing the dividend to EUR 1.60 per share up from EUR 1.50 per share last year, continuing the gradual upward trajectory in absolute terms. This would correspond to a payout ratio of 27% which is above the 25% target for the transition year that I've just mentioned. It once more underscores management's confidence in the business and its outlook. While this would increase the absolute dividend, the dividend yield is lower than in previous years due to strong share price performance. Still, the absolute dividend amount and our policy reflects a clear commitment to shareholder renumeration. Looking ahead to fiscal year '25-'26, the mix picture for our main macro drivers that we presented at the CMD remains largely unchanged. Raw mat supply is not ideal but manageable thanks to our long-term contracts and market position. As many of you are aware, concentrate supply remains tight, and we remain cautious despite some hopeful news flow in recent weeks. Hence, we expect TC/RCs to remain at the low level of the recent months. For RCs for recycling raw mats, we expect a stable outlook, although recent months presented more of a mixed picture. Keep in mind that visibility in these markets is generally limited. The euro-U.S. dollar exchange rate remains affected to watch as it has developed less favorably for us in recent months, but we manage our exposure through our hedging and commercial policies. The sulfuric acid market is of a more short-term nature as well. And prices have normalized from previous peaks but are still at a sound level. We continue to see healthy demand from the chemical and fertilizer sectors, although with more volatility compared to the previous year. Metal prices and demand for our products are expected to remain supportive overall, especially given structural trends such as electrification and infrastructure investments. In total, we expect a challenging raw mat environment, though with positive contributions from metals and products. Despite the somewhat mixed macro picture, we expect a sound '25- '26 fiscal year. We maintain our outlook for operating EBITDA between EUR 580 million and EUR 680 million and an operating EBT in the range of EUR 300 million to EUR 400 million, roughly at '24-'25 level. Bear in mind, please, that the EBT level mentioned includes higher depreciation in the order of EUR 50 million. For CSP, we expect an operating EBT of EUR 280 million to EUR 340 million. On the one hand, this range reflects the lower TC/RC level that affected fiscal year '24-'25 only in part and will now affect '25-'26 on a full year basis. On the other hand, besides headwinds from the euro-U.S. dollar rate we anticipate higher costs for footprint expansion due to strategic projects like CRH or Tankhouse expansion Pirdop. Higher depreciation will weigh on the segment's financial performance as well. On the other side, increased material prices, high demand for copper products and improvement in operational performance will offset the challenges but only partially. Still, considering that we are only 10 weeks into the new fiscal year, there might also be scenarios in which the segment's EBT comes in at the upper end of the guidance. For MMR, our expected operating EBITDA range is EUR 80 million to EUR 140 million. From today's perspective, we do not expect negative one-off items like last year and ramp-up cost in Richmond to impact the segment's performance in fiscal year '25-'26. Furthermore, increased metal prices and high demand for copper, as well as an improvement in operational performance should support the segment's earnings level. Regarding the development of recycling raw mat markets, we maintain a more cautious view and higher depreciation at segment level will partially counteract the positive items. Also here, they are still 40 weeks ahead of us in this fiscal year. We anticipate net cash flow in the range of EUR 640 million to EUR 740 million, driven by a strong operating performance and further working capital management, which would translate to free cash flow before dividend at breakeven, reflecting the combination of reduced investments and cash generation improvements. Operating ROCE is expected between 7% and 9% with CSP at 11% to 13% and MMR at 6% to 8%, mirroring the increased capital employed from the investment activities mentioned. Overall, we confirm our previous guidance and expect another solid year. To help you frame the guidance, this slide, which we presented in detail at the CMD, schematically shows how our price change of 10% versus our assumptions for fiscal year '25-'26 would impact our EBT, a 10% change in concentrate TC/RCs, recycling RCs or sulfuric acid prices. Each translates into a low double-digit million euro impact on operating EBT for '25-'26. A 10% change in the euro-U.S. dollar rate or the copper premium would lead to a low to medium double-digit million change of the EBT. The highest sensitivity is visible in the metal result, a 10% price change across the entire metal portfolio would translate into medium to high double-digit million euro impact. Again, this illustrates that the diversified set of drivers influences our results and the drivers that may have been expected to have a higher weight in the earnings composition I refer to TC/RC turn out to be less dominant. At the same time, we actively manage these exposures. On CapEx, we are now moving beyond the peak of our current strategic investment program. More than 75% of the existing EUR 1.7 billion strategic CapEx program has already been spent. And the remaining strategic CapEx will phase out gradually as shown here, basically almost everything of the remainder in the new fiscal year. You can see that total CapEx peaked in '23-'24, declined in '24-'25 and is expected to decline further in '25-'26 as major projects are completed or enter commissioning. Therefore, we are planning with the strategic CapEx in the amount of EUR 350 million, EUR 100 million lower than in fiscal year '24-'25. At EUR 320 million, our expected baseline CapEx falls at the lower end of the EUR 300 million to EUR 400 million range, reflecting our CapEx discipline and the change in our primary shutdown cycle. As strategic projects come on stream, depreciation and amortization will gradually increase, reflecting the higher asset base. As mentioned before, DNA is anticipated at EUR 50 million above the prior year level. And with this, I'd like to hand back over to Toralf. Toralf Haag: Thank you very much, Steffen, for taking us in detail through the financials. The next slide we presented to you at our CMD at our Capital Market Day, and I would like to briefly repeat our path forward to frame the next slide. The decade of metals has begun and megatrends such as electrification, energy infrastructure, artificial intelligence, and global security are supporting long-term demand for our products and capabilities. Our ambition is to forge resilience and to lead in multimetal delivering impact across five strategic pillars: focused growth, innovation, efficiency, commercial excellence and impact from our investments. We are targeting value-creating growth, where we hold a leading competitive position, and we aim to maximize multimetal yields through innovation in metallurgical know-how. We continuously optimize our operations for peak efficiency and strengthen our commercial excellence to deep market access and competitiveness. This is underpinned by three key enablers. Sustainability leadership, our performance culture and financial strength. In the fiscal year, '24-'25, we successfully advanced projects into the in-commissioning phase. Including Bleed Treatment Olen Beerse, Aurubis Richmond Phase 1 and the third Solar Park in Pirdop. BOB has already started commissioning in December '24, and the first phase of Aurubis Richmond celebrated first month in September '25 and is now in the early stages of hot commissioning. Looking ahead to the current fiscal year, important projects such as Complex Recycling Hamburg, Aurubis Richmond Phase 2 and the Tankhouse expansion in Pirdop are planned to go into commissioning and expand our multimetal network. Projects such as Slag Processing in Pirdop and the new Precious Metal Refinery in Hamburg are still further out with commissioning scheduled in the fiscal year, '26-'27. These projects will create impact by enhancing our recycling capacity improving efficiency and supporting our sustainability and growth ambitions. In the next few minutes, I would like to highlight the 3 key projects for '25-'26 in more detail. First, Complex Recycling Hamburg or CRH, is expected to start commissioning in the first half of the current fiscal year and will further optimize the metallurgical network in Hamburg. The facility will show -- will allow for about 30,000 tonnes of additional external recycling input per year, increasing our ability to process complex secondary materials. From a gross margin perspective, the project will contribute to strengthen the metal result, as well as our earnings from TC/RCs and RCs. Second, Phase 2 of Aurubis Richmond in the U.S. will double the intake capacity for complex recycling materials to 180,000 tonnes. Commissioning will be followed by a technical ramp-up phase, after which we expect a material contribution to earnings. Once fully ramped up, Aurubis Richmond will contribute to increasing TC/RCs and RCs, as well as the group's metal result. Third, the Tankhouse expansion in Pirdop will enable us to process Pirdop's entire anode production directly on site, adding around 50% more refined copper production capacity at the site. This additional cathode production will mainly add to the group's earnings from product and premiums, while also supporting the metal result to a lesser extent. Together, these projects support our multimetal strategy, strengthen our footprint in Europe and North America and further enhance our resilience. Our commercial excellence pillar, specifically target strengthening the relationship with our partners, downstream but also upstream in particular. Secure competitive raw material supply is crucial for Aurubis. Here are some of the key agreements we concluded. With Troilus Gold in Canada, we signed an offtake agreement for 75,000 tonnes of copper-gold concentrate based on a positive feasibility study supported by a German government financing package. Our metallurgical capabilities and ability to process complex raw materials allow us to unlock resources and create value together with Troilus. With Viscaria in Sweden, we have agreed on 25,000 tonnes of copper concentrate deliveries from 2028 to 2035, with an option for extension. This mine project has a strong ESG profile and strengthens European supply. With Teck Resources, we signed a memorandum of understanding, collaborate on responsible mining and sustainability, focusing on traceability, transparency of ESG performance and credible certification frameworks, building on our long-standing partnership. In our collaboration with both Viscaria and Teck, our authentic sustainability leadership has been key to building and further strengthening the relationships. These agreements support our long-term raw material security, enhance our ESG positioning and contributes to the resilience and competitive of our supply portfolio. To summarize, 2024-'25 was a successful fiscal year for Aurubis. Despite planned maintenance shutdowns, one-off items and a challenging market environment, we delivered a solid EBITDA of EUR 589 million and an operating EBT of EUR 355 million, which was comfortably within our guided EBT range. Cash generation improved significantly as is reflected by net cash flow of EUR 677 million, and we aim to improve it further going forward. We reached key milestones in our strategic product including the first melt at Aurubis Richmond. The proposed dividend of EUR 1.60 per share represents a payout ratio of roughly 27% and reflects our confidence in the business and its long-term prospects. For 2025-'26, we expect an increased metal result and higher contributions from our product business. This will compensate for challenging raw material markets. With declining annual CapEx, we expect free cash flow generation to improve to a breakeven before dividend, while we confirm our guidance for an operating EBT of EUR 300 million to EUR 400 million, broadly at the '24-'25 level. Overall, we are well positioned to benefit from structural megatrends and to continue delivering on our performance 2030 strategy. Let me close the presentation by reiterating what makes Aurubis stand out. First, we have a strong market outlook. The decade of metals has begun, and megatrends are expected to drive double-digit growth in our end markets by 2035. Second, Aurubis holds a leading position as a top copper and multimetal producer in Europe and the U.S., with a unique setup of capabilities in primary and secondary metallurgy. Third, our strategy focused on growth and resilience, leveraging multiple earning drivers to increase our leadership in multimetal and our impact, efficiency and robustness. Fourth, we deliver strong financials. On the back of a world-class operations and focused investments, we aim for steady EBT growth and a 15% long-term ROCE target. Fifth, we are clearly committed to a shareholder value, combining value-accretive growth projects with an attractive dividend policy and potential additional returns of excess cash. In short, performance, resilience and multimetal leadership define Aurubis investment case. And with this, I would like to hand over to Elke Brinkmann. Elke Brinkmann: Thank you, Toralf and Steffen. I would like to provide you with an outlook on the next event following our Q4 publication. We will publish our Q1 2025-'26 results on February 5, followed by the Annual General Meeting on February 12, '26. And with that, I would like to ask the operator to take over for your questions. Operator: [Operator Instructions] And first up is Boris Bourdet from Kepler Cheuvreux. Boris Bourdet: My first question would be on the recent developments you alluded to in your presentation regarding the recent discussions on TC/RCs. We've heard that the Chinese CSPT was committed to reduce the production by 10%. I was wondering whether that would change your view on TC/RCs marginally. And can you share with us where you would expect the benchmark to land, if any? And also from Slide 11 on TCs, I can make a rough calculation that -- it meant -- lower TCs meant EUR 90 million downward contribution this year. Is it the same kind of contribution you expect next year? That's the first question. Toralf Haag: I'll start with the first question, and then Steffen can take on the second question. Yes, you're right, Boris. There was also a publication that the Chinese smelters plan to reduce the capacity, the production output by 10%. And we have not felt that in the spot TC/RCs. But we expect a slight recovery of the TC/RC level. But again, it's going to be a slight recovery in no major recovery.. But this is positive news which unfortunately only will have limited impact so far. Steffen Hoffmann: And Boris, on your second question relating to TC/RCs, right? We are flagging that also for this year, we see an impact of declining TC/RCs for copper concentrates. So basically low TC/RC levels are rolling into our Aurubis average terms. You do know that, obviously, a big chunk of our contracts is already concluded. So call it, at this stage, roughly 85% of the contracts are concluded. So our exposure to direct spot rates is limited but some of the contract language has a certain link to recent market levels. And yes, the overall impact this year is around in the vicinity, let's say, from a year-over-year impact in an EBT bridge, it's a similar impact as we've seen last year versus the year before. Boris Bourdet: And maybe 2 others. One question would be on yesterday's announcement by the European Commission about the RESourceEU program. It doesn't seem like copper is -- copper scrap is part of what is being discussed at the moment, but could be -- can you share your view on what could be expected from this and discussions you might have with the European Commission? Toralf Haag: Well, as you said, this recently announced RESource program does not have copper in the focus. We are more relying on the Critical Raw Materials Act, which was published a while ago, and we are in constant discussions with the European Union to secure more raw materials in Europe, number one, by focusing and allowing -- permitting more mine projects in Europe; and secondly, to limit the export of secondary material out of Europe. So those are the two cornerstones of increased raw material availability in Europe but these discussions are taking their time. Boris Bourdet: Okay. And regarding the one-offs you mentioned during the call, so the EUR 12 million impairment on the JVs plus the EUR 10 million provision at Lunen. Was that already part of the guidance? Or was that a last minute surprise, meaning that without this, you might have ended up quite above consensus expectations for the full year results? And what exactly is that equity impairment for the JVs? Steffen Hoffmann: Boris the two one-offs that you have alluded to that we disclosed separately have been baked in the full year guidance. For example, when we were exchanging with you and the capital market around the CMD, we included that. So we were not surprised by that. On the equity adjustment or the participation. We have said it's in the MMR segment. It's in the recycling segment. it's related to a battery recycling participation. And in the annual report, you can also find the name. So that's why I don't ask you to go -- to find it out yourself, the company is called Librec, it's a Swiss participation that we are engaged in the battery recycling environment. Obviously, we all know that some of the key premises on the battery recycling market in EU are developing -- are moving time-wise a bit more to the right. So we felt that it was right to take a correction here. Operator: Next up is Bastian Synagowitz from Deutsche Bank. Bastian Synagowitz: My first one is on Richmond. So I'm basically just wondering whether everything so far is going according to plan. And are there any roadblocks which have come up -- which have come up since you started the smelting process? And are you also generally happy with the metal KPIs and the performance from what you're seeing so far? That is my first question. Toralf Haag: Yes, Bastian, yes, Richmond is going according to plan. We are now, as we have said, in Phase 1, we had some charges where we were smelting simple scrap. Now we are in the process of smelting more complex recycle materials. Right now, we don't see any major roadblocks, but it's too early to say if we meet our metal KPIs or not because we are still in the ramp-up phase. So we still need to have experience on two sides on the one -- the material mix we are getting in the U.S. in our recycled materials and number two, the production efficiency, that's still too early to say. But so far, it's on track. Bastian Synagowitz: Okay. Great. And then on your supplier structure and portfolio, is this coming together as well as you were hoping to? And are you still confident that the availability for the materials you're actually looking for is there in the market and as good as you were expecting? Toralf Haag: Yes. I mean we had experience in the U.S. market before because we had contact with suppliers for the supply of scrap material and recycling material for Europe. So they have been long-term relationships. The supplier structure is coming into place. We're getting the mix of different recycling materials in. So normal copper strap, also cables, but also more complex recycling materials like circuit board. So the supplier structure is there. The different materials are there. Like I said before, it's too early to make statements about what result we get out of this material and the efficiency. Bastian Synagowitz: Okay. Great. Then my next question is on cash flow and probably one for Steffen. I guess when we look at cash flow in the fourth quarter, you performed actually quite well. I'm wondering whether this has raised the bar for the target for breakeven this year as well? Has this become more ambitious? Or is this very much as you expected, and you're still very confident to hit that target as well. I know you kept that target for breakeven, I guess, to some extent that answers it, but I wanted to just understand how far this may have become a bit more of a stretched target now. Steffen Hoffmann: Yes. I think I can say that the way we could end the last fiscal year was slightly ahead to what we initially had in mind. So we had small smile on our face, let's put it that way. Now talking about '25-'26 and cash flow, we are expecting a net cash flow of EUR 640 million to EUR 740 million. And we've also said that the cash relevant CapEx would be expected to go down versus last year by roughly EUR 100 million. So depending on the point in the range that is chosen from a net cash flow guidance perspective, free cash flow breakeven could be rather modest or more significant I mean we still have 40 weeks ahead of us in the fiscal year. So let's not nail ourselves down on whether it will be exactly a breakeven before dividend or whether there is a slight upside, we are at the guidance where we are, and we are confident that we will achieve the targets. And that's what I think we can say at this stage. Bastian Synagowitz: Okay. Great. Fair enough. Then my last question is just on, I guess, your maintenance schedule, and I saw that you've been bringing forward the smaller maintenance still set in Hamburg now into November, I think originally, there was scheduled for May. Was there any particular reason behind it? I guess it's a small one, so I wouldn't think so, but just wanted to understand what's been driving this. Toralf Haag: No, Bastian. This is normal maintenance planning where we have different influence factors, the availability of materials for the maintenance. So it's a combination of many factors why the maintenance planning was adjusted, but no major incidents. Operator: And we're coming to the next questioner, It is Adahna Ekoku from Morgan Stanley. Adahna Ekoku: Can you help us with some more detail on the mix picture you're seeing for recycling RCs? How are the levels now as compared to the summer where I think European scraps RCs were at around EUR 250 per tonne. So where do these kind of stand now? And have you seen any green shoots at all to consider going into next year? Thank you. Toralf Haag: Yes, Adahna, we have seen a slight recovery of the recycling markets when it comes to -- also when it comes to scrap when it comes to the tonnage and also a slight improvement of the RCs, but we have not seen a substantial improvement. Adahna Ekoku: And maybe just to follow up on that, is that improvement from kind of any increase in economic activity or slightly lower exports or just kind of general improvement? Toralf Haag: We think it's mainly the function of, again, a higher copper price and therefore, higher availability of copper scrap. Operator: And the next question comes from Felicity Robson from the Bank of America. Felicity Robson: Could you provide some color around timing on commissioning for a strategic project for next year, especially around the second phase for Richmond, please? Toralf Haag: Well, Felicity, as we said in the presentation, we plan the commissioning of Phase 2 in the year -- in the calendar year 2026, it strongly depends on how we process now with Phase 1. So our current assumption is that we will commission it in the mid -- in the summer of 2026. Operator: [Operator Instructions] And we have a follow-up question coming from Boris Bourdet from Kepler Cheuvreux. Boris Bourdet: Thank you again. One broad question and one technical. The first is, what would you say has been the main change since the 8th of October where at the time of the CMD you have observed in the market? That's one question. And the second is on the tax rate, since there is a higher tax rate in Bulgaria. Would you share any guidance for the tax rate into next year? Toralf Haag: Well, on the first question, what was changed since October 8? There are no major changes in our assumptions there's maybe slight changes that we have a little bit improved situation like we discussed before on the availability and on the RCs on the recycling market. And we have some positive news on the concentrate market when it comes down to China capacities but we have not seen a big recovery in the TC/RCs for concentrates. So very slight changes, no major changes. Steffen Hoffmann: And Boris, on the tax rate, absolutely right, in '24-'25, we had a higher tax rate. I was alluding to that, 2 reasons one-off special item related to Buffalo on the deferred taxes. Secondly, a topic that's not a one-off, which is a topic to stay higher tax rate in Bulgaria, according to Pillar 2 now with a 15% minimum tax rate in Bulgaria. All of that resulted with the mix of results that we have from our footprint resulted to a tax rate of 26% and in last fiscal year. And I would assume that we are in the same ballpark also for this fiscal year. Operator: [Operator Instructions] Thank you. There are no further questions. Elke Brinkmann: Okay. Thank you. The IR team will, of course, be happy to answer any further questions you may have. We would now like to close today's conference call, and thank you for your attention. We wish you a pleasant rest of the day and a beautiful Christmas time. Thank you and goodbye.