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Operator: Hello, everyone, and welcome to Burlington Stores, Inc. Third Quarter 2025 Earnings Webcast. Please note that this call is being recorded. [Operator Instructions] I'd now like to hand the call over to Mr. David Glick, Group Senior Vice President, Investor Relations. Please go ahead. David Glick: Thank you, operator, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's fiscal 2025 third quarter operating results. Our presenters today are Michael O'Sullivan, our Chief Executive Officer; and Kristin Wolfe, our EVP and Chief Financial Officer. Before I turn the call over to Michael, I would like to inform listeners that this call may not be transcribed, recorded or broadcast without our expressed permission. A replay of the call will be available until December 2, 2025. We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties. Our remarks and the Q&A that follows are copyrighted today by Burlington Stores. Remarks made on this call concerning future expectations, events, strategies, objectives, trends or projected financial results are subject to certain risks and uncertainties. Actual results may differ materially from those that are projected in such forward-looking statements. Such risks and uncertainties include those that are described in the company's 10-K and in our other filings with the SEC, all of which are expressly incorporated herein by reference. Please note that the financial results and expectations we discuss today are on a continuing operations basis. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today's press release. As a reminder, as indicated in this morning's press release, all profitability metrics discussed on this call exclude costs associated with bankruptcy acquired leases. These pretax costs amounted to $11 million and $0 million, respectively, during the fiscal third quarters of 2025 and 2024 and $28 million and $9 million, respectively, for the first 9 months of 2025 and 2024. Now here's Michael. Michael O'Sullivan: Thank you, David. Good morning, everyone, and thank you for joining us. I would like to cover 4 topics this morning. Firstly, I will discuss our third quarter results. Secondly, I will review our updated fourth quarter and full year guidance. Thirdly, I will provide some early thinking on the outlook for 2026. And lastly, I will comment on the progress we are making towards our longer-range financial goals. Then I will turn the call over to Kristin to provide additional details. Okay. Let's start with our Q3 results. Total sales increased 7% in the third quarter at the high end of our guidance. This was on top of 11% sales growth last year. This means that year-to-date, total sales have increased 8% on top of 11% year-to-date growth last year. Comp store sales for the third quarter increased 1%. We started the quarter well with a strong back-to-school trend, but in September, we saw a significant drop-off in traffic to our stores, driven by warmer-than-usual weather. As we have discussed previously, we have very strong brand equity in outerwear. Many shoppers still think of us as Burlington Coat Factory. Outerwear is a great business and a source of competitive strength. But this means that in Q3, our comp trend is very sensitive to weather, much more so than competitors. In some years, the impact is positive. In some years, it is negative. This year, it was negative. That said, in mid-October, once the weather turned cooler, our comp trend picked up to the mid-single digits. And that momentum of mid-single-digit comp growth continued through the first 3 weeks of November. Finishing up on Q3, I would like to comment on earnings. Despite the weather-driven slowdown in our sales trend in Q3, we still delivered margin expansion that was well ahead of last year and earnings growth that significantly beat our guidance. It's worth calling out that this was despite the considerable headwind that we faced from tariffs. Moving on to the fourth quarter. We are maintaining our previously issued comp store sales guidance of 0% to 2%. We feel good about our recent trend, but it is still early in the quarter. And in the coming weeks, we'll be up against very strong comparisons from last year. So it makes sense to remain cautious. That said, given the strong margin and expense trends that we are seeing, we are increasing our Q4 margin and EPS guidance. To be clear, we are adjusting our full year 2025 earnings guidance, passing along all of our beat to earnings in Q3 and factoring in our higher Q4 earnings outlook. I would like to call out that we started this fiscal year with EBIT margin guidance of flat to up 30 basis points. Our updated full year 2025 guidance now calls for expansion of 60 to 70 basis points. This is despite pressure from tariffs, and it is on top of 100 basis points of margin improvement in 2024. We are excited about the progress we are making on margin expansion. I will return to this topic in a few moments when I talk about our longer-range financial goals. But first, I would like to share our initial thoughts on the outlook for 2026. We are early in the budget process, but as a starting point, we are planning for total sales growth in the high single digits. We now expect to open 110 net new stores in 2026. This is higher than previously discussed, and it reflects the strength of our new store pipeline and the performance we are seeing from new stores. We are excited for these new store openings. For comp sales, we are assuming growth of flat to 2% in 2026. This should sound familiar. It is our typical off-price playbook. There is significant economic uncertainty, and we do not know how this might affect our business in 2026. So we will plan our business conservatively at 0% to 2% comp sales growth and then be ready to chase if the trend is stronger. In terms of operating margin expansion, for budgeting purposes, we are assuming that at 2% comp growth, our operating margin would be flat versus this year, then 10 to 15 basis points higher for each point of comp above 2%. Before I turn the call over to Kristin, there is one more topic that I would like to talk about. I would like to provide an update on our longer-range financial goals. As a reminder, 2 years ago, we shared our objective of getting to approximately $1.6 billion in operating income in 2028. The headline is that we feel good about the progress that we are making toward this goal. We are tracking in line with where we thought we would be at this point. We are especially pleased with the progress we have made in driving operating margin. This means that at the high end of our updated 2025 margin guidance, we will have achieved 170 basis points of the 400 basis points of opportunity that we identified 2 years ago. And of course, we will have achieved this despite the negative headwind from tariffs. Apart from margin expansion, the other drivers of our long-range financial model are new store sales and comp store sales growth. On new store sales, we are even more bullish now about our new store opening program than we were 2 years ago. Originally, we had assumed that we would open 100 net new stores a year in the period 2024 to 2028. In fact, this year, we will open 104. And in 2026, we are now planning to open 110 net new stores. Based on our new store pipeline, there is a possibility that we could sustain or even exceed this stronger pace of new store openings. The other major driver of our long-range model is comp sales growth. As I discussed in the context of our Q3 results, leaving weather aside, we feel good about the underlying comp trends that we are seeing. We believe that we can achieve average annual comp sales growth in the range of 4% to 5% over the remaining years of the long-range plan, in other words, between now and 2028. Of course, we recognize there are a lot of external variables that can affect comp growth. So in the nearer term, as we always do, we will plan our business conservatively and then chase. Now I would like to turn the call over to Kristin to review our Q3 results, updated 2025 guidance and high-level outlook for 2026 in more detail. Kristin? Kristin Wolfe: Thank you, Michael, and good morning, everyone. I will start with some additional color on Q3, then I will talk about our updated guidance. Lastly, I will comment on our initial outlook for 2026. Starting with the third quarter, total sales grew 7%, while comp store sales increased 1%, both within our guidance range. As Michael described, our comp trend in the third quarter fell off significantly after the back-to-school period, driven by warmer weather, but then picked up to mid-single digits in mid-October. The gross margin rate for the third quarter was 44.2%, an increase of 30 basis points versus last year. This was driven by a 10 basis point increase in merchandise margin and a 20 basis point decrease in freight expenses. Moving down the P&L. Our Q3 product sourcing costs were $214 million versus $209 million in the third quarter of last year. Product sourcing costs decreased 40 basis points compared to last year. This was primarily driven by leverage in supply chain through continued cost savings and efficiency initiatives. Adjusted SG&A costs in Q3 levered 20 basis points versus last year. This leverage was primarily achieved in store-related costs. Our store teams drove significant leverage in store payroll through numerous efficiency and productivity initiatives. Q3 adjusted EBIT margin was 6.2%, 60 basis points higher than last year. This was well above our guidance range of down 20 basis points to flat. Our Q3 adjusted earnings per share was $1.80, which came in well above our guidance range. This represents a 16% increase versus the prior year. At the end of the quarter, comparable store inventories were down 2% versus the end of the third quarter of 2024. Let me provide a little more context here. In Q3, we saw a significant slowdown in our comp trends, a weather-driven slowdown. But using our merchandising 2.0 tools, our planners and merchants were able to react very quickly to adjust receipts, especially in cold weather categories. So despite the slowdown, our store inventories are well balanced, current and very clean going into the fourth quarter. Moving on to our reserve inventory. Reserve inventory was 35% of our total inventory versus 32% of our inventory last year. In dollar terms, reserve inventory was up 26% compared to last year. We are pleased with the quality of the merchandise and the values and brands that we have in reserve. And as a reminder, we use reserve inventory as ammunition to chase the sales trend. For example, our reserve includes great outerwear buys that we made earlier this year that we've been pulling out over the last few weeks to fuel the trend since the weather turned cold in mid-October. We ended the third quarter with approximately $1.5 billion in liquidity. This consisted of $584 million in cash and $948 million in availability on our ABL. We had no outstanding borrowings on the ABL at the end of the quarter. During the third quarter, we repurchased $61 million in stock. And at the end of the quarter, we had $444 million remaining on our repurchase authorization. In Q3, we opened 73 net new stores, bringing our store count at the end of the quarter to 1,211 stores. This included 85 new store openings, 10 relocations and 2 closings. We now expect to open 104 net new stores in fiscal 2025, up from our original estimate of 100 net new stores. Now I will turn to our outlook for the fourth quarter and full year for fiscal 2025. We are maintaining our fourth quarter fiscal 2025 guidance for comp sales and total sales. We are guiding comparable store sales to be flat to up 2%, with total sales to increase 7% to 9% for the fourth quarter. We are raising our adjusted EBIT margin and adjusted earnings per share guidance for the fourth quarter. We now expect our adjusted EBIT margin to increase by 30 to 50 basis points. This margin outlook now translates to an adjusted earnings per share range of $4.50 to $4.70, an increase of 9% to 14% versus the fourth quarter of last year. For full year fiscal 2025, after factoring in our actual Q3 results and our improved outlook for Q4, we expect comp store sales growth of 1% to 2%, total sales to increase approximately 8% and EBIT margins to range from an increase of 60 to 70 basis points. As Michael noted earlier, this fiscal 2025 EBIT margin guidance is 40 basis points higher than our original full year guidance at the high end, and this is despite the significant pressure from tariffs. Finally, factoring in Q3 actuals and updated Q4 guidance, adjusted earnings per share are now expected to be in the range of $9.69 to $9.89, an increase of 16% to 18% for the full year 2025. Finally, I would like to touch on our preliminary FY '26 outlook. We are in the early stages of the budgeting process, so this could change. But at this point, we are planning on total sales growth in the high single digits. We are assuming at least 110 net new stores, and we're planning comp store sales in the range of flat to up 2%. For operating margin, as Michael said, we are assuming that at a 2% comp growth, our operating margin will be flat to this year, and we expect leverage of 10 to 15 basis points for each additional point of comp. And now I will turn the call back over to Michael. Michael O'Sullivan: Thank you, Kristin. Before I turn the call over to the operator for your questions, I would like to summarize a few of the key points from today's call. Firstly, Q3 was impacted by warmer weather in September through early October. Once the weather normalized, our trend improved to mid-single-digit comp growth. And we are off to a strong start to Q4 with comps up mid-single digits for the first 3 weeks of November. Secondly, we are pleased with our margin trends. We are updating our full year 2025 guidance to reflect the earnings beat in Q3 as well as our improved earnings outlook for Q4. At this point, we are maintaining our previously issued Q4 comp guidance of 0% to 2%. Thirdly, we are pleased with how we are tracking towards our long-range financial goals, especially the pace of margin expansion. And within this long-range financial plan, we think there may be additional upside in terms of our new store opening program. Now I would like to turn the call over for your questions. Operator: [Operator Instructions] Your first question comes from the line of Matthew Boss of JPMorgan. Matthew Boss: So on relative performance, your comp this quarter came in below both of your off-price peers. This is a clear reversal from results in the second quarter and over the last year. Clearly, you cited weather was a factor, but how concerned are you by this change in your relative comp versus peers? Michael O'Sullivan: Thank you for the question. You're right. Just to lay out the facts, we ran a 1% comp in Q3. Our peers were 6% and 7%, very impressive. That's a very significant difference. I can't give you a complete bridge, but at a high level, let me try and dissect that gap. I'll start with the obvious. We know that weather was the biggest driver of our slowdown in Q3. That's not an excuse, but it is a partial explanation. We changed our name some years ago, but shoppers still call us Burlington Coat Factory. So mild weather in September and October has a huge impact on our business. This is a real thing, and it is unique to us, I think, versus our peers. Now in September and October, cold weather merchandise balloons to more than 20% of our assortment. In the third quarter, our comp sales for ladies and men's coats, jackets, boots and cold weather accessories, all these important categories were down double digits. Now they bounced back in mid-October once it turned cold. But by then, it was too late to really drive the quarter. Let me go a little further and try to quantify the weather impact on our comp in Q3. If you strip out the drag on our overall comp from cold weather categories, the categories I just listed, and if I make an adjustment for the impact that lower weather-related traffic had on the rest of the store, then I can get to the low end of a mid-single-digit comp. In other words, I do not get to 6% or 7% comp. So in my view, weather only explains half of the gap versus peers. Now usually, in off-price, when your comp is lower than your peers, it's just the customer telling you that they preferred the value and the assortment that they found elsewhere. In the second quarter, when we ran a 5% comp growth ahead of our peers, the customer was voting for us. But in Q3, that changed. And we have some hypotheses on why, but we have more work to do to really tear that apart and then aggressively go after that performance difference. But before I leave the question, let me just call out a silver lining. The comp numbers that our peers have just reported reaffirm that the off-price shopper at all income levels is alive and well. Leaving aside the weather, the major implication for us is that we need to take better advantage of that than we did in the third quarter. Matthew Boss: Great. And then, Kristin, as a follow-up, could you provide more color on the 60 basis points of operating margin expansion in the quarter, particularly just given as we think about the pressures that you faced from tariffs and the 1% comp? Kristin Wolfe: Matt, thanks for the question. Yes, first, it's worth reiterating that we really are pleased with the 6.2% operating margin in the quarter, up 60 basis points versus last year on a 1% comp, as you noted in your question. Let me provide the major puts and takes. Starting with gross margin. First, our merchandise margin increased 10 basis points. And within merchandise margin, there was a lot going on. Tariffs had a negative impact on markup, but we were able to offset this impact through numerous actions such as negotiating with our vendors, adjusting the mix and driving a faster turn. The net impact of all this was much more favorable than we originally guided back in August. This was really driven by our tariff mitigation strategies. Now staying in gross margin, freight levered by 20 basis points. This was due to greater efficiencies and cost savings initiatives, particularly in transportation. So our overall gross margin increased 30 basis points versus the third quarter of last year, all this despite the impact from tariffs. On product sourcing costs moving down the P&L, we drove 40 basis points of leverage here. This was driven by supply chain and efficiency initiatives in our DCs. We're excited about the consistent progress we've made in streamlining our supply chain costs. And moving on to SG&A, we showed about 20 basis points of leverage here on a 1% comp, and this was driven by efficiency initiatives in stores such as speeding up checkout times at point of sale. Offsetting this leverage was higher depreciation, which delevered about 20 basis points, driven by increased CapEx in supply chain and new stores. So taken all together, this drove the 60 basis points of EBIT expansion in the quarter. Operator: Next question comes from the line of Ike Boruchow of Wells Fargo. Irwin Boruchow: I guess my question kind of piggybacking off of Matt's. So the comp growth in Q3 was lower than peers, but the margin and earnings were actually pretty much better. How should we reconcile that? And then really more importantly, are there choices that you made during the quarter that may have driven the higher margin in Q3 at the expense of sales? Michael O'Sullivan: Well, I'll take that, Ike. Thank you for the question. It's a good question. I think the direct answer is yes. There were decisions or choices that we made that helped drive our margin in Q3, but may have had a negative impact on our sales. And I'll give you a couple of examples, but maybe I should just preface what I'm going to say with a couple of points. Firstly, our margin and earnings performance in Q3 was very strong. Margins were up 60 basis points and adjusted EPS grew 16%. We've also taken up full year earnings guidance. In other words, we've rolled right over tariffs. Secondly, on comp sales, to reiterate, the biggest driver of the slowdown that we saw was weather. If I adjust our comp for weather, we probably would have been pretty happy with the outcome. But as I explained a moment ago, that only explains half of the gap between our 1% comp growth and our peers' 6% and 7% comp. So if I come back to your question, yes, there were choices that we made that might explain our relatively strong margin and earnings performance and our weaker comp growth in Q3. Now these were choices that we made as part of our tariff mitigation strategies. And let me describe two specific examples. When -- firstly, when tariffs were introduced -- first introduced, we reduced our sales and receipt plans for categories where the margin impact was too significant. We did not feel like we could raise retails in those categories, and we did not want to accept the margin compression. That meant that in some businesses, especially some categories in home, our inventory levels and assortments were -- they were very light in Q3. And we saw that in terms of the sales in those categories. The sales were lower. Now that wasn't an error. It was a deliberate decision. I would say it was an economically rational decision, and it worked. It may have hurt sales, but it drove our earnings in Q3. Now I should add that as tariff rates have come down, we've gone back and we've taken up sales and receipt plans in most of the categories that were affected. So I would expect this impact to be less significant in Q4. A second example, as Kristin described a moment ago, another step that we took to help offset tariffs was to trim inventory levels in many businesses across the store and force a faster turn. Again, this helped to offset the margin pressure from tariffs. Now we only really took that step in Q3, not in Q4. We already turned very fast in Q4. So we didn't want to try and force a faster turn going into holiday. But again, in Q3, that approach drove earnings, but it may have hurt sales. So -- for both of the examples I've just given, at a high level, those decisions worked. We fully absorbed tariff pressure on our margin, and we drove very strong margin and earnings growth in Q3. And all this happened actually despite a slowdown in comp sales due to weather. Normally, a slowdown like that would drive deleverage. Anyway, with that said, we really need to do a full after-action assessment on Q3. Now that we have our competitors' comp results, we need to go back and hindsight our performance and identify anything we could have done or should have done differently. Irwin Boruchow: Got it. And then maybe, Kristin, just to elaborate maybe a little more on the 2026 initial outlook, key risk opportunities in the outlook, anything else you could share? Kristin Wolfe: Yes. Great. Thanks, Ike. We're still -- it's still somewhat early in the process. We're actively working through the budget for 2026. But let me give some headlines or how we're thinking about it. The outlook for next year is pretty hard to predict with significant economic and political uncertainty that could absolutely affect consumers' discretionary spending. There are potential tailwinds like the possibility of higher tax refunds in the early part of next year. And then there are potential headwinds like tariff-driven price increases, which could put additional inflationary pressure on our core customer. Michael spoke to this earlier, but given this uncertainty, we're planning to stick with our off-price playbook. That really means planning comps at flat to 2% and positioning us to chase the trend if it's stronger. In terms of new stores, we mentioned this in the prepared remarks, but it's worth reiterating, we feel very good about the new store pipeline. We are planning to open at least 110 net new stores in 2026. So combined with our comp guidance, this should drive a high single-digit increase in total sales. On the operating margin side, as we said, we're modeling operating margin flat to last year at the 2% comp. We do expect 10 to 15 basis points of leverage for every point above a 2% comp. And then there's a couple of things in the margin, a couple of puts and takes. We are planning for slightly higher merch margin as we look to offset any impact of tariffs, particularly as we lap the fall season next year. We're planning for continued supply chain productivity gains next year, but there will be offsets here due to the start-up costs and the initial ramp-up of our new Southeastern distribution center, which we plan to open in the first half of 2026. And finally, we do expect fixed cost leverage on the high single-digit total sales growth, but we also are expecting higher depreciation, which creates deleverage. The higher depreciation is really due to the higher CapEx spend in supply chain and our increased number of new stores. Those are really the main call-outs for 2026 at this point. Operator: Your next question comes from the line of Lorraine Hutchinson of Bank of America. Lorraine Maikis: Michael, one of your off-price peers is accelerating comps with more focus on marketing, more in-store inventory and a store refresh. Do you see any risk that Burlington will lose market share? Michael O'Sullivan: Lorraine, thank you for the question. It's a good question. I'm going to avoid talking about any specific competitor, but I think I can still try to answer your question maybe in more general terms. I'll start by saying that actually, we like innovation and fresh ideas. We believe in off-price retail. And anything that drives off-price awareness and excitement is a good thing. In fact, I'd go further and say that a strong off-price sector is important for us. So it's good that our off-price peers are achieving very strong results. But your question was more about potential risks to Burlington. So let me come at it from that angle. I think there are 2 important points that I would make here. Firstly, when we talk among each other -- to each other and when we talk to analysts and when we talk to investors, I think we sometimes talk about off-price as if it were a separate isolated ring-fenced segment of retail. But the customer does not think of it that way. The customer does not respect the boundaries of off-price. If she needs a pair of pants or a dress, she might shop Burlington or one of our off-price peers. But we know from our own research that she also cross-shops department stores, specialty retailers. In fact, any retailer where she likes the assortment, she doesn't care about our off-price business definition. She just cares about finding a great deal and great value in the categories, brands and styles that she's looking for. Now if you're an off-price -- if you're an investor in off-price, I think it's very important that you understand this. This is not like the retail market for office supplies. We aren't 3 companies just scrapping it out for market share in a limited space called off-price. It's bigger than that. We compete in a very large and competitively fragmented market for apparel, accessories, shoes, home, beauty and so on. Off-price is really just a small part of that overall market. Our opportunity is to take share from non-off-price retailers. That's what has been happening over a long period of time. So I mean, just to bring it up to -- just to throw in some numbers, today, we announced 7% total sales growth in Q3 on top of 11% growth last year. At those growth rates, it's self-evident that we are taking market share, but so are our off-price peers. These share gains are not coming at the expense of each other. Mathematically, that wouldn't be possible. These share gains are coming from non-off-price. And I think that the shift from traditional full-price retail to off-price is unlikely to end anytime soon. So that's the first point. The second point I would make is that despite everything I've just said, I think it's very important and useful for us to pay close attention to our off-price peers. They matter. They operate a similar business model to us. They've been very successful over the years, and we can learn a lot from them. So if our off-price peers come up with new ways of doing things, new processes in stores, new innovative marketing programs, then we need to pay close attention. Now not all of those ideas will work, of course. And certainly, not all of them will make sense for us, but we need to be open to new ideas that could help drive our business and actually drive off-price retail in general. Let me finish up. Again, your question was about risk to Burlington. Right now, I see off-price as a whole as being very healthy. For 2025, we now expect to grow total sales by 8% on top of 11% last year. And at the high end of our guidance, we now expect to achieve EPS growth of 18% on top of 38 -- sorry, 34% last year. Those are -- by any metric, those are very healthy numbers. I anticipate that our off-price peers are going to be successful, too. But I don't see that as a risk. In fact, it's better for us if the off-price segment as a whole continues to perform well. Lorraine Maikis: And I wanted to follow up on pricing. Did you take price in 3Q? And what impact did that have on your comp? And then what's your strategy on pricing for the fourth quarter? Michael O'Sullivan: Yes. That's a good question. I would sum up our pricing strategy in 3 words. Be very careful. We recognize that because of tariffs, prices are going up across the retail industry, but we will not raise prices unless we've seen them go up elsewhere. And even then, we will test and monitor the impact of those price increases. We've said this many times before, we have a very price-sensitive customer. We know that the reason that they shop at Burlington is that they're looking for a great deal. Our core strategy is to offer great value. And of course, that means keeping prices low. Now our approach to tariffs this year has been to avoid retail price increases and to focus instead on finding other margin and expense offsets. Kristin described those actions earlier. We're very pleased with how that approach has worked. It's allowed us to avoid price increases, but still to grow margin and earnings this year. Now of course, we have tested some things. We've tried some higher prices. And in Q3, when we saw other retailers take prices up, we tested higher retails in some categories. But I would say that those pricing tests were in a very limited number of areas. And mostly the higher retails worked. We saw very little resistance from customers. So going forward, I would say that we will probably get more aggressive, but we kind of have to see what happens in Q4. And also, of course, we need to see what happens with tariff rates going forward. Operator: Your next question comes from the line of John Kernan of TD Cowen. John Kernan: Michael, sounds like you see an opportunity to take up the number of new store openings and the cadence of growth. Can you expand a bit upon this? What are you seeing in terms of the new store pipeline, both from a real estate perspective and also potential new store productivity? Kristin Wolfe: John, it's Kristin. I'll take this one. We're really pleased with the performance of our new stores across the board, they've been delivering results that are in line or better than expectations as well as our financial hurdles. It really reinforces the strength of our site selection process and the appeal of Burlington really across markets. And it's worth pointing out just some data. Our Q3 comp, of course, was at the midpoint of our guidance, but our total sales growth in Q3 was at the high end of our guidance, up 7%, and this was driven by new stores. And based on our Q4 guidance, our total sales increase is planned at 9% at the high end as we benefit from the slew of new stores we just opened in the third quarter, 73 net new. Now as I mentioned in the prepared remarks, we now expect to open 104 net new stores this year. This is a modest step-up from our original plan of 100 net new. And this increase reflects really two things. First, the ability to pull forward some openings that were originally slated for 2026; and secondly, the strength of our real estate pipeline. Looking ahead to 2026, we're raising that new store target to at least 110 net new stores. This is supported by this robust pipeline, but also by 45 leases we secured from the Joann Fabrics bankruptcy. These incremental sites really give us confidence in sustaining the high level of growth next year. And as for the pipeline for 2027 and beyond, it's still early to provide specific numbers, but I will say we feel very good about the long-term opportunity. Our real estate team continues to identify attractive locations, and we already have a very healthy pipeline for new stores beyond 2026. John Kernan: Got it. Maybe as a follow-up, obviously, all 3 off-price retailers are resonating strongly with consumers. I liked how Michael framed the industry's opportunity. You're clearly feeling more bullish on the number of stores, maybe a little bit more cautious on comp sales, but more bullish on the potential margin expansion potential for the business. Is that the right way to think about it? Kristin Wolfe: Great. Yes. John, thanks for that question. It's a good question. So 2 years ago, we shared our objective of getting to approximately $1.6 billion in operating income by 2028. The headline is that we feel very good about the progress we're making toward this goal. We're tracking in line with where we thought we would be at this point. And we're especially pleased with the progress we made in driving operating margin at the high end, Michael said this earlier, but it's worth repeating, at the high end of our updated 2025 margin guidance, we will have achieved 170 basis points of the 400 basis points of opportunity that we identified 2 years ago. And we will have achieved this despite the negative headwind from tariffs. So really, to sum up, we're pleased with the progress. But the way you characterized the long-range model and your question is about right. It's true, we're more bullish on new stores, and we are more bullish on margin expansion. On the comp, we still believe we can drive an average annual comp growth of 4% to 5% over the remaining 3 years of the long-range plan, but we recognize that there is external uncertainty, so we are slightly more cautious here. Operator: Question comes from the line of Brooke Roach of Goldman Sachs. Brooke Roach: Michael, I'd like to ask you about the trends that you're seeing with the lower income customer. How did these customers perform in the third quarter? And are there any other callouts in terms of customer demographics that are worth sharing? Michael O'Sullivan: Brooke, thank you for the question. The headline is that we feel very good about the lower-income customer. We've been -- and the trends that we're seeing with that demographic. We've been watching this particular demographic segment very closely all year. This is a critical customer for us. Given the economic uncertainty and the cost of living issues, we've been concerned about lower-income customers. But the good news is that this customer has been very resilient. When we look at our stores in lower-income trade areas, they continue to outperform the chain. This has been true for several quarters now. I should say, as we listen to other retailers, it seems like this is a consistent pattern. Many retailers are reporting strength with lower-income consumers. There is -- in terms of other demographic call-outs, there's one other call out, specifically relating to Hispanic customers. Again, we've been watching this demographic very closely all year. It's an important customer for us. We have many stores across the country that are in trade areas with a high proportion of Hispanic households. You may recall that in previous quarters, we've said that our stores that are in trade areas with a high proportion of Hispanic households have been slightly outperforming the chain in terms of comp growth. While in Q3, the trend in those stores slipped. They've gone from slightly outperforming the chain to trailing the chain. Now the change in trend for those stores varies a lot depending on the specific market and even the specific or the particular location of the store. In other words, it's very localized to what's happening in those particular cities. And of course, it's difficult for us to say how long those localized slowdowns might last. Brooke Roach: Great. And then my follow-up would be for Kristin. Kristin, can you give us more color about your guidance for the fourth quarter, both in terms of comp sales and for earnings? Kristin Wolfe: Brooke, thanks for the question. Sure. Let me repeat a little bit. I think it's worth reiterating some of what we described earlier. On comp store sales and total store sales, we're maintaining our Q4 previously issued guidance. So comp of flat to 2% and total sales growth of 7% to 9%. We do, as we said, feel really good about our recent trend in Q4, but it's still early in the quarter. The critical weeks are ahead of us. And in those coming weeks, we'll be up against very strong comparisons from last year. So we'll continue to take a cautious approach on sales. On the margin side, we are increasing our margin and EPS guidance for Q4. We now expect our Q4 adjusted EBIT margin to increase by 30 to 50 basis points. We do anticipate some tariff-driven pressure on merch margin in Q4 but we expect to more than fully offset that pressure and drive overall operating margin expansion in Q4 versus last year. And the drivers of the margin leverage should largely be similar to what we saw in Q3. We expect continued cost savings in freight and supply chain and in store-related initiatives. And finally, we should also see additional leverage in SG&A given the higher incentive comp accrual in the fourth quarter of last year. Operator: The question comes from the line of Alex Straton of Morgan Stanley. Alexandra Straton: Michael, can you talk about the availability of off-price merchandise as you're heading into the fourth quarter? And then I have a quick follow-up. Michael O'Sullivan: Yes. Alex, thank you for the question. I would characterize the buying environment for off-price as very, very strong. Earlier in the year, when tariffs were first introduced, there were some concerns, a lot of concerns about whether vendors would be reluctant to bring potentially excess merchandise into the country. But frankly, those concerns have just not materialized. Even some of the categories where supply was tighter in the summer, categories like housewares and home also housewares and toys have come back. I think that's probably pretty consistent with what you've heard from our off-price peers. There's a lot of great merchandise at great values, and we're taking advantage of it, both to flow to stores and to build up reserve. Alexandra Straton: Perfect. And then just on the cold weather merchandise in the quarter. Is there any just additional detail you can provide on that dynamic, the impact on the overall comp for the chain? I know you've given a lot of details, but anything else worth highlighting there? Michael O'Sullivan: Sure. Yes. Yes. So after back-to-school, the cold weather merchandise becomes very important to our mix. As I said earlier, it expands to more than 20% of our total assortment during the quarter. Now cold weather merchandise, just to define it, includes categories like coats, jackets, boots and accessories like gloves and scarves. So it's only stuff you need if it's cold outside. And our customer is very need-driven. For September through mid-October, our comp sales in those businesses were down in the negative mid-teens. Then in the last 2 weeks of October, once the weather turned cold, they grew up double-digit comp. Maybe if I step back for a moment, there are 2 ways in which milder weather in September and October affects our business. There is the direct drag on our overall comp growth from lower sales in the cold weather categories that I just mentioned. That's one impact. But there is also an impact on our non-cold weather businesses because if you think about it, if the customer comes in to buy a coat, she's probably going to put some other things in the basket, too. So if -- because the weather is mild, she doesn't come into the store to buy that coat, then this doesn't just hurt our coat sales, it impacts other businesses as well. Now mathematically, the drag on our overall comp from cold weather categories alone was worth about 200 basis points in Q3. If you then add the impact that lower traffic had on other non-cold weather categories, you can easily get up to a few points of comp. And I think that's somewhat consistent with the fact that we saw a bounce back to mid-single-digit comp growth in the second half of October once the weather had turned cold. Operator: Your last question comes from the line of Mark Altschwager of Baird. Mark Altschwager: Kristin, could you give us some more detail on regional trends, category trends as well as any of the detailed comp metrics for Q3? Kristin Wolfe: Mark, yes, absolutely. In terms of regional performance, the Southeast was our strongest region in the quarter. The West, Northeast and Midwest were in line with the chain, while the Southwest trailed the chain. On category performance, we saw the strongest performance in beauty, accessories and shoes. Apparel comp slightly above the chain, while home was softer, comping below the chain in Q3. In terms of the comp metrics, our traffic was down in the third quarter. That was largely driven by September and early October when weather was unseasonably warm. And this lower traffic was offset by a higher average basket size. So for the quarter, we were pleased to see that both conversion and basket size or average transaction size were higher than last year. So this tells us that once she's in the store, she liked what she saw. Mark Altschwager: Excellent. And then, Michael, as we look at the Q4 comp guidance, do you view that as conservative just given typically less weather sensitivity in the fourth quarter? Michael O'Sullivan: Mark, sometimes when we give comp guidance, we'll also sort of signal, if you like, if we think there may be upside. I don't think -- I don't see a lot of upside in our Q4 comp guidance. The reason I say that is that we're up against 6% comp growth from Q4 last year, so 6%. If you take our 0% to 2% guidance, that gets you to a 2-year stack of 6% to 8%. Now we exceeded that in Q2 of this year, but we were well below it in Q3. I should also add that when I look at our off-price peers, the way I'm interpreting their guidance, it looks like they are slightly below us on a 2-year stack basis. So even though we're happy with our recent trends and with how we started the quarter, and we're excited for our holiday assortments. We're not anticipating significant upside to our Q4 comp sales guidance at this point. Operator: I'd now like to hand the call back to Mr. Michael O'Sullivan for final remarks. Michael O'Sullivan: Let me close by thanking everyone on this call for your interest in Burlington Stores. We would like to wish you all a very happy Thanksgiving. We look forward to talking to you again in March to discuss our fourth quarter and full year 2025 results. Thank you for your time today. Operator: Thank you for attending today's call. You may now disconnect. Goodbye.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Zhihu Inc. Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] Today's conference is being recorded and webcasted. At this time, I would like to turn the conference over to Yolanda Liu, Director of Investor Relations. Please go ahead, ma'am. Yolanda Liu: Thank you, operator. Hello, everyone. Welcome to Zhihu's Third Quarter 2025 Financial Results Conference Call. Joining me today on the call from the senior management team are Mr. Zhou Yuan, Founder, Chairman and Chief Executive Officer; and Mr. Wang Han, Chief Financial Officer. Before we begin, I'd like to remind you that today's discussion will include forward-looking statements made under the safe harbor provisions of U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. As such, actual results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in our public filings with the U.S. Securities and Exchange Commission and the Hong Kong Stock Exchange. The company does not assume any obligation to update any forward-looking statements, except as required under the applicable law. Additionally, the discussion today will include both GAAP and non-GAAP financial measures for comparison purpose only. For a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures, please refer to our earnings release issued earlier today. In addition, a webcast replay of this conference call will be available on our IR website at ir.zhihu.com. This quarter, Victor Zhou, Zhou Yuan's AI agent will once again deliver the prepared remarks in English on his behalf. Victor is still in training, so we appreciate your patience as he continues to improve. Victor, please go ahead. Yuan Zhou: Thank you, Yolanda. Hello, everyone, and thank you for joining Zhihu Third Quarter 2025 Earnings Call. I am Victor Zhou, and I am pleased to deliver today's opening remarks on behalf of Mr. Zhou Yuan, Founder, Chairman and CEO of Zhihu. The third quarter marked another meaningful step toward our goal of achieving non-GAAP breakeven on a full year basis. As our structural optimization initiatives continue to take effect, we further refined our service offerings and balanced commercialization with community health. We also maintained disciplined cost control and improved operating efficiency. As a result, our non-GAAP operating loss narrowed by 16.3% year-over-year in the third quarter. At the same time, our community ecosystem continues to strengthen user mix and engagement improved, while MAUs increased modestly from the second quarter. Daily time spent continued to trend higher year-over-year and quarter-over-quarter. Our users and creators remain highly active, supporting improved core user retention and a steady stream of reliable high-quality content on the platform. With our high-quality content, expert network and AI capabilities working greater synergy. We are accelerating our agentic AI upgrades to deliver trusted and differentiated experiences to users, both within and beyond the community. As the AI industry enters a new phase of real-world integration and accelerated deployment, Zhihu as a trusted source of high-quality content and data upstream of Chinese LLMs and AI applications is gaining prominence, creating expanding opportunities for collaboration. With rising high-quality content, a highly active base of professional creators and accelerating AI integration, our community ecosystem radiates vitality. Our competitive moat of trusted content continues to strengthen. In the third quarter, daily creation of high-quality content increased by over 25% year-over-year, with professional AI-focused content up by more than 30% compared to the same period last year. As AI technologies and applications rapidly advance in China, Zhihu remains a go-to platform for frontline engineers and researchers for sharing and lively discussions. AI-focused content covers a range of subjects, including deep technical analysis, innovative product applications, emerging industry trends, personal growth, career development and a growing array of emerging topics driven by rapid AI adoption from the technical debate between MiniMax and Moonshot AI over efficient attention, which sparks heated discussions on Zhihu and highlighted China's diverse approaches to LLM innovation to the in-depth engineering analysis of new models shared by leading companies. Zhihu has become a trusted source for authentic first-hand exchanges. These discussions have made our platform a place where AI innovations are first interpreted, validated and shared. Meanwhile, we continue to strengthen our trustworthy content ecosystem through ongoing improvements to content governance mechanisms and recommendation algorithms. Professional creators are a vital force in our community. In the third quarter, daily active high-tier creators increased significantly on both year-over-year and a sequential basis. The number of verified honored creators also grew by 29% year-over-year. Engagement among AI-focused creators also continues to strengthen. Zhihu now brings together more than 60 million continuous learners and 3.56 million proficient creators in science and AI and 150,000 ecosystem builders. These contributors not only add consistent high-quality input to our AI content ecosystem, but also show significant potential as future service providers for enterprises. Beyond the science and AI, creator activity in humanities and social sciences also remains strong across the platform. In September, we launched the co-benefit co-creation initiative [Foreign Language] in collaboration with leading institutions such as Alibaba Foundation, Tencent Charity Foundation, One Foundation, and Greenpeace alongside the psychologists, medical experts and the writers. This initiative generated a wide range of high-quality content across disability rights, mental health, environmental protection and more joining over 80 million views. We also hosted the 2025 Zhihu Humanities Season, Zhihu Renwenji event, which brought creators together through a blend of online and offline engagement. The campaign attracted nearly 30 influential creators, driving a 7.5% quarter-over-quarter increase in creator activity in the humanities category and generating 5.82 million topic views, reinforcing Zhihu's professional influence and cultural relevance. To better support professional creators, we continue to enhance the content creation and distribution experience. Our ideas product supports knowledge-based expression from high-tier creators and enables more diverse short-form content creation among mid-tier creators. As a result, average daily content volume and interactions increased by 21.7% and 33.1% quarter-over-quarter, respectively. Our Circles product also continues to serve as a focused space for users with shared interests to gather and interact with average daily views more than tripling sequentially during the quarter. We also continue to advance our agentic AI upgrades across the community. From a product perspective, Zhihu Zhida evolved into the agentic mode at the end of September, delivering more accurate and smarter search results. Most notably, Zhihu Zhida now serves as a helpful partner for deep thinking and creativity, capable of understanding user intent, performing multistep reasoning and synthesizing information across research, learning and content creation. Our advancements in agentic AI are also amplifying the value of our creators. By strengthening the attribution of content to trusted creators across the knowledge base and search, AI-generated responses now sites to verify the knowledge during the reasoning stage, significantly reducing hallucination and improving trust. This strengthens creator influence within the generative AI landscape and gives Zhihu a distinct advantage as a trusted content provider in the emerging AI ecosystem. Now moving on to commercialization. In the third quarter, our commercialization continued to recover on a healthier base with total revenues reaching RMB 658.9 million in the third quarter. We also made notable progress in exploring new monetization avenues by leveraging our core strengths. Let's take a closer look at our performance by business unit. In the third quarter, marketing services revenue was RMB 189.4 million. Notably, the year-over-year decrease narrowed, indicating the bottoming out of our adjustment cycle. We expect marketing services revenue to begin growing on a sequential basis in the fourth quarter. During the quarter, we made a solid progress in both optimizing our client mix and upgrading our advertising products. We continue to optimize client mix by deepening our focus on high-value accounts with our brand power and expanding commercial IP, driving strong uptake from enterprise clients, particularly in technology and other high-value verticals. In late September, we hosted the TechClub Conference, bringing together AI experts and some of the most influential tech creators from the Zhihu community to explore the latest developments and future applications of AI. The event showcased the technology's transforming role in everyday life and our unique ability to connect professional content with meaningful brand engagement, further expanding our high-value client base. Through the Zhihu platform, leading companies such as Gree, China Mobile, Huawei and FY Tech further strengthened their brand positioning in technological innovation and product excellence. Backed by the credibility of our brand and strong commercial efficiency created by professional discussions across our community, we made a solid progress in acquiring new clients across diverse sectors such as automotive, consumer and health care. This quarter, we also further upgraded a wide range of our commercial products by integrating AI more deeply across our portfolio. Our dual ecosystem optimization and product efficiency engines drove a significant increase in positive feedback from clients. For example, we launched the upgraded CCS for idea scenarios and introduced the product to more clients. By offering this short content plus precise scenarios format, it bridges authentic experiences and purchase decisions for brands and merchants. At the same time, it makes content consumption and the decision-making for users substantially more efficient. We are also seeing rising demand from clients to improve brand and product presentation in AI-generated answers. Leveraging our trusted content and high citation rate across the Internet, we launched our new GEM marketing solution in early November. This new solution provides core insights such as visibility across AI platforms and citation analytics. Leading technology clients we have worked with include Lenovo, FlightTech, Vivo and Proa. We have received a positive endorsement as we help enhance both their SEO and GEO performance for brands and new products. Looking ahead, with a healthier ecosystem, stronger client base and more robust service offerings, we will continue to leverage AI to drive a steady recovery and long-term growth in our marketing services business. And now for our paid membership business. In the third quarter, average monthly paid members increased by 8.1% sequentially to 14.3 million, with revenue reaching RMB 386 million. Our efforts to boost member retention and ARPU through diversified initiatives continue to generate positive feedback from both creators and users. The Yanyan Story long-form writing marathon came to a successful close in late October after 6 months campaign, generating tens of thousands of submissions in the third quarter alone. This initiative opened up new development pathways for aspiring creators and provided a steady pipeline of content for our library and the future IP development. At the same time, voice live streaming saw a further improvement in paid conversion rates. We also unlocked further commercial potential for our IP adaptations in China and overseas. During the quarter, revenue from IP licensing maintained its triple-digit growth rate year-over-year and generated high double-digit growth quarter-over-quarter. Year-to-date, revenue has nearly doubled compared with the same period last year. In mid-October, Yanyan Story debuted at the Frankfurt Book Fair, showcasing Chinese digital literature on a global stage for the first time. It also draw coverage from the U.K. magazine, the bookseller, which noted the new growth path for Chinese short-form digital literature in the international markets. By the end of October, Yanyan Story licensed more than 100 titles for publication across major Asian markets, including Japan, South Korea, Thailand and Vietnam. A number of works have also been adapted into short dramas for overseas markets and performed well, reflecting the growing popularity of Chinese short-form content abroad. Meanwhile, Yanyan Story has established partnerships with international platforms such as Mobile Reader and GoodNovel to translate works into English, Spanish, Japanese, Korean, Portuguese, Thai, Indonesian and other languages, further expanding its international reach. Going forward, we will pursue a diversified set of initiatives to improve member retention and ARPU. By enhancing content supply, membership benefits and personalized experiences, we aim to strengthen long-term member value. As AI enables more efficient content creation, the potential for IP development and commercialization will expand, unlocking new growth opportunities for our membership business. Starting this quarter, we are simplifying our revenue breakdown and will begin reclassifying vocational training revenue into other revenues to align with our overall strategy. Other revenues were RMB 83.9 million, of which we will continue to adjust our vocational training business with a focus on improving operational efficiency and prioritization. Although our vocational training business has been reclassified, we continue to build on its creator-driven foundation with the development of our column product. Designed primarily to serve super creators, column is intended to enhance the creator ecosystem rather than act as a new commercial growth driver. During the quarter, we enhanced the product by rolling out a PC version and AI tools that help creators generate column descriptions and cover designs. This enhancement drove sequential growth in both the number of leading column creators and creator user engagement. Monetization models for column creators is also becoming more diversified with overall GMV more than doubling compared with last quarter. Going forward, we will continue to operate with discipline, maintaining stability while investing prudently for sustainable growth. With the ongoing enhancements in efficiency and steady cost optimization, we are confident in achieving our full year profitability target. Building on this foundation, we will continue to invest with a long-term view to strengthen our AI capabilities and improve the efficiency of our core operations. Deeper AI integrations will drive greater synergies across content creation, distribution and monetized on Zhihu. Meanwhile, we will further refine our product and marketing strategies to capitalize on new growth opportunities from high-quality users and enterprise clients. With a healthier operating structure and ongoing innovation, we are well positioned to thrive in this next stage of high-quality growth. With that, I will hand the call over to our CFO, Wang Han. Han, please go ahead. Wang Han: Now I will review the details of our third quarter financials. For a complete overview of our third quarter 2025 results, please refer to our earnings release issued earlier today. In the third quarter, we maintained disciplined cost management and drove further improvements in operational efficiency. As a result, our non-GAAP operating loss narrowed by 16.3% year-over-year. We continue to invest in areas that reinforce our long-term growth potential, striking a healthy balance between efficiency and investment. Our total revenues for the quarter were RMB 658.9 million compared with RMB 845 million in the same period of 2024. The decrease was mainly the result of our continued efforts to optimize revenue mix and focus on sustainable, high-quality growth. Notably, the year-over-year decrease narrowed for the third consecutive quarter, in line with our expectations. Our marketing services revenue for the quarter was RMB 189.4 million compared with RMB 256.6 million in the same period of 2024. This decrease was mainly driven by our proactive refining of service offerings and optimization of client mix. Encouragingly, the year-over-year decrease narrowed meaningfully, indicating that our adjustment cycle has bottomed out. Paid membership revenue was RMB 385.6 million compared with RMB 459.4 million in the same period of 2024. While the number of average monthly subscribing members fell year-over-year, they rebounded and grew 8.1% sequentially to 14.3 million. We also continued to enhance retention and ARPU through diversified content and membership initiatives. Other revenues were RMB 83.9 million compared with RMB 129 million in the same period of 2024. The decrease was primarily due to the strategic refinement of our vocational training business. Our gross profit for the quarter was RMB 403.6 million compared with RMB 540.1 million in the same period of 2024. Gross margin was 61.3% compared with 63.9% in the same period of 2024. Our total operating expenses for the quarter decreased by 19.4% year-over-year to RMB 503.5 million. The decrease was primarily due to a more efficient cost structure and disciplined resource allocation across key operating areas. Selling and marketing expenses decreased by 14.9% to RMB 330.1 million from RMB 388 million in the same period of 2024. The decrease was mainly due to tighter control over promotional spending and optimized personnel-related expenses. Research and development expenses decreased by 36.2% to RMB 114.4 million from RMB 179.3 million in the same period of 2024. The decrease was primarily driven by continued improvement in research and development productivity and efficiency. General and administrative expenses were RMB 59 million compared with RMB 57.2 million in the same period of 2024. Our GAAP net loss for this quarter was RMB 46.7 million compared with RMB 9 million in the same period of 2024. On a non-GAAP basis, our adjusted net loss was RMB 21 million compared with RMB 13.1 million in the same period of 2024. As of the 30th of September 2025, we had cash and cash equivalents, term deposits, restricted cash and short-term investments of RMB 4.6 billion compared with RMB 4.9 billion as of the 31st of December 2024. As of the 30th of September 2025, we repurchased 31.1 million Class A ordinary shares for an aggregate value of USD 66.5 million on the open market. Additionally, we repurchased a total of 22.5 million Class A ordinary shares for an aggregate value of USD 34.5 million through the trustee of the company as of the end of the third quarter. Looking ahead, we are on track to achieve full year breakeven on a non-GAAP basis. We will continue to further strengthen our monetization capabilities and pursue new revenue opportunities that leverage Zhihu's strength in high-quality content creator expertise and AI-driven innovation. Together, these efforts will reinforce our business resilience and support sustainable long-term growth. This concludes my prepared remarks on our financial performance for this quarter. Let's turn the call over to the operator for the Q&A session. Operator: [Operator Instructions] We will now begin with our first question, and this is from Vicky Wei from Citi. Yi Jing Wei: Will management share some color about the AI progress of Zhihu? For example, the penetration rate of Zhihu Zhida and the progress of the AI integration with the Zhihu Community. Yuan Zhou: [Interpreted] Thank you for question. This is from Zhou Yuan, Zhihu CEO. First of all, I would like to say sorry about my weak voice because I didn't recover yet from my cold. Anyway, I would just start with your first question. So as you can see, Zhida remains one of our key products. Its overall usage and penetration rate continued to increase in the third quarter with the penetration rate existing 15%, nearly 4x higher than the same period last year. This not only reflects the ongoing evolution of our foundational AI capability across the community, but also demonstrates strong user endorsement of a very strategic depending of AI plus community. This also gives us a very strong confidence to continue upgrading this AI plus community experience updates across more touch points. Now let me just share some recent progress and upcoming plans. First of all, in the search scenario, by late November, Zhida will fully augment our general AI search capability to include Zhida-generated content for all users. Additionally, we will soon launch pilot features such as cross-topic content aggregation and the community trend summaries. This will formally navigate Zhida from secondary entry point to a primary one, further boosting AI adoption across the entire community. And second of all, on the content creation side, we are empowering professionals with strong AI copilot. In this quarter, we launched a suite of AI assistant writing tools for our creation assistant, which includes smart headlines, grammar and fact checking and lead paragraph generation. This will help creators optimize long-form structures and expert-level content. So by the end of 3Q, adoption of these new AI features has already surpassed 20%. Looking ahead, we plan to introduce additional capabilities such as AI-powered multi-model content conversion, intelligent formatting and short-form content generation and et cetera. These tools will significantly lower the barrier to entry for mid-tier creators, enabling more users to express themselves effortlessly to increase posting frequency, creation frequency and engage more actively. In addition, on the content consumption and distribution side, we are also expanding Zhida into high-frequency consumption scenarios. For example, AI-powered daily briefing on Zhihu's training topics and other vertical-specific topics as well as the ability to mention Zhida in threats or to also summarize discussions and surface key insights will help users quickly grasp complex conversations and participate more meaningfully. We believe this will further strengthen user engagements and community stickiness. Thank you. Operator: We'll now take the next question. This is from Luqing Zhou from Goldman Sachs. Luqing Zhou: So my question is on how do you see the current status of Zhihu's user ecosystem? And based on that, could management share more color on the directions for improving Zhihu's future product design and how is the progress so far? Yuan Zhou: [Interpreted] Thank you for your question. This is from Zhou Yuan, Zhihu CEO. We believe, overall, the community ecosystem is very healthy. We do not rely on any single metric to assess its health. Instead, we focus on content quality, user structure and user quality and whether our content creator incentives are forming a virtuous cycle. We have also deployed AI as a core product driver at a strategic level. Over the past few quarters, we have made the synergistic development of high-quality content, multiply expert network, multiply AI capabilities as a core path for driving our ecosystem in a positive direction. From this perspective, our ecosystem is stable and continuously improving. This is fully in line with our expectations as well. First of all, the trustworthiness and professionalism of our content are very crucial. They are crucial indicators of the ecosystem health. Over the past few quarters, we have continued to strengthen our trustworthy content ecosystem and our expert network while also cracking down on low-quality content and traffic to keep the ecosystem healthy at its core and reinforce the virtuous cycle. As a result, we have delivered several consecutive quarters of double-digit growth in daily high-quality content creation. The AI category is the most reflective of this progress with the professional AI-related content regarding double-digit growth for 4 consecutive quarters. On this basis, users' trust in our content has also continued to increase steadily. And secondly, our user structure and user quality have improved and users' need across different scenarios has been addressed. As we can see from last Q4, our MAU has remained stable on a sequential basis for 4 consecutive quarters. And building on that, average daily user time spent, which we believe as a proxy for engagement and retention has delivered double-digit year-over-year growth for 6 consecutive quarters. Our users remain mainly young and focused on learning and growth with user age between 18 to 30, accounting for more than 65% of our total user base. Among them frontline professionals in technology and AI have become one of the most representative groups. They have long-term professional learning, frontier exploration and interest development needs and contribute more content and provide a stronger positive feedback to the ecosystem. And last but not the least, the content -- the creator ecosystem continues to grow and expand. Output from top-tier professional creators have remained stable over 7 consecutive quarters. At the same time, by using AI tools, we are continuously lowering the creation threshold for mid-tier creators and increasing the creation frequency of the entire creator group. This makes the supply side of the community more diverse and keep social interaction within the community growing. So in summary, ecosystem health is foundational to Zhihu. Going forward, we'll continue to invest in trust content and expert network so that as a community scales, it can maintain its professionalism, vibrancy and trustworthiness. Let me just turn to the second question you mentioned. It's about our core product going forward plan. Here, we hold a few key beliefs. First of all, over the next 3 years, people will consume more AIGC content. At the same time, human-to-human interaction will become more valuable. So we believe both trends will coexist. And the second belief we hold here is that stronger AI becomes, the more people will experience a sense of diminished presence, which means the participation, social capital and relationships enabled by community will become increasingly scarce and increasingly demanded. And the third belief here is that high-quality human-generated content and data will become extremely scarce as well as valuable on the supply end. This supply matters on both ends. It's crucial for the advancement of AI as well as for human development. So going forward, Zhida will definitely integrate with our users' functional social needs. For example, when a user wants to ask a question, search or look for resources, AI will dramatically raise efficiency. And Zhida will push the community further towards utility, enabling even the first day users to get a meaningful experience immediately. At the same time, we will double down on the social needs that come from real human connection things like building recognized, growing together and finding people who share your identity. We want to build these things with user feel like a sense of belonging in an environment grounded in real people, real culture and trusted interactions. So our future product direction is built around 2 pillars: utility and identity. My hope is for Zhihu to become the connection layer for humans in AI era as a place where people can use AI tools to understand the world as well as a community where they can find renaissance and understanding from one another. At the same time, we plan to build a trusted content and expert network as 2 foundational layers of infrastructure. Thank you. Thank you again for your question. Operator: We will take next question. This is from Daisy Chen from Haitong International. Kewei Chen: Could management update the progress of the adjustments in each business line? Did you see any signs that the revenue has bottomed out or started to rebound? In particular, how do you expect the future of the advertising business? And also, could you share your outlook on the company's profitability? Wang Han: [Interpreted] Thank you for your question, Daisy. This is from Wang Han, Zhihu CFO. So I will just pick up your second question. Here's a quick take on our profitability outlook. After delivering solid profits in the first 2 quarters, we now see a very high likelihood of achieving our first full year non-GAAP profitability in 2025. So with that buffer in place, we are using Q3 and Q4 as a window to keep fine-tuning and investing where needed. That's why you will see -- you can see a small loss in Q3, which is well within what we can comfortably take. Let me just walk through the adjustments across our major revenue lines. First, about the marketing services. As we mentioned last quarter, this Q3 is -- it will become the bottom. And we expect a sequential recovery starting in Q4. What we see now give us confidence to maintain that guidance. Looking ahead to next year, our goal is for each quarter to stay above the baseline set by Q3 this year. And second, about the pay membership. This segment is still in a transition period. As we said before, even the best libraries and bookstores separate fiction from nonfiction, the real challenge here is how to differentiate and integrate them in a way that feels natural to users. We will continue experimenting here. So we cannot say membership -- pay membership revenue has hit its bottom yet. But even if there is some decline, it will be about products or cohorts with lower ROI and weaker profitability or less than ideal retention. Search is about vocational training. This business is no longer a drag on our overall bottom line. Given this relatively low base or small scale, we have now reclassified it into others. So overall, you've seen us deliver several consecutive quarters of profitability followed by the small loss in Q3. Even though we remain confident in achieving full year profitability. With that foundation, we are taking this period to make necessary adjustments and targeted investments. As we approach our first full year of profitability, we also want to use this moment to shed some legacy inefficiencies and to start fresh. We have no intention of staying where we are and simply just squeezing out profits. We are now operating from a healthier foundation and getting back onto a trajectory that aligns with Zhihu's long-term development. Also, we have a solid -- very solid cash position, and we are not reverting to the old model of spending aggressively just forth go. And this new AI cycle or in this AI era, our focus is on strengthening Zhihu's position in real people interactions, expert network and trusted content areas. And these capabilities are becoming increasingly important and carry real social value. Thank you for your questions. Operator: We will now take the next question. And this is from [ Jing Yi Wang from Guangfa ]. Unknown Analyst: Could management share some more color about the shareholder return pay in progress. Wang Han: [Interpreted] Thank you for your question. This is from Wang Han, Zhihu CFO. We can see over the past 2 years, we've been one of the most active buyback companies among U.S.-listed Chinese names. That conviction came from our confidence in reaching profitability. And this year, we expect to demonstrate that our outlook and the targets set 2 years ago are being delivered. Even so Zhihu's current market cap remains significantly below the cash on our balance sheet. So we believe we are super undervalued. Therefore, we intend to maintain our buyback program and expect to remain one of the most active repurchase in this sector. Thank you again for your question. Operator: That concludes today's Q&A session. At this time, I will turn the conference back to Yolanda for any additional or closing remarks. Yolanda Liu: Thank you once again for joining us today. If you have any further questions, please contact our IR team directly or Christensen Advisory. Thank you so much. Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Ahmed Moataz: Hello, everyone. This is Ahmed Moataz from EFG Hermes and welcome to IDH's Third Quarter of '25 Results Conference Call. I'm pleased to be joined with Dr. Hend El Sherbini, Chief Executive Officer; Sherif El Zeiny, Vice President and Group CFO; and Tarek Yehia, Director of Investor Relations. The company, as usual, will start with a brief presentation and then we'll open the floor for Q&A. IDH management, please go ahead. Tarek Yehia: Thank you, Ahmed. Good afternoon, ladies and gentlemen and thank you for joining us for our third quarter analyst call. My name is Tarek Yehia, I'm Head of Investor Relations. Joining me today, Dr. Hend El Sherbini, our CEO; Mr. Sherif El Zeiny, our CFO and VP. Dr. Hend will begin the call with a summary of latest period main highlights. After that, I will discuss in more details the main macroeconomics and geopolitical trends seen across our markets. Then after my presentation, Mr. Sherif will offer a deeper analysis of our financial performance. Then we will open for Q&A. Dr. Hend will start now. Thank you. Hend El Sherbini: Thank you, Tarek and good afternoon, everyone. I'm Dr. Hend El Sherbini, CEO of IDH. As we approach the end of what has been another very strong year for the group, I'm pleased to report a robust set of results for the first 9 months of 2025. The performance we are presenting today reflects not only healthy market dynamics but also the tangible results of the strategic initiatives we have been implementing over the past 2 years, particularly around network and geographic expansion, operational optimization, digitization and service diversification. Throughout the year, we have continued to strengthen our core business in Egypt and Jordan, while making pronounced progress in newer markets, namely Nigeria and Saudi Arabia. We are also very encouraged by the sustained improvements in our profitability metrics, which confirm the scalability of our model and our ability to translate revenue growth into margin enhancement. We are particularly pleased to see the continued strength and stability of operating conditions in our home market of Egypt, where macroeconomic sentiment has improved and demand for high-quality diagnostic services remain strong. Turning to our performance in more detail. During the first 9 months of the year, we continued to build on the strong momentum established earlier, delivering 41% revenue growth year-on-year, supported by growth across both volume and value metrics. Test volumes increased by 10% with all operation geographies contributing to this expansion, supported by stronger patient engagement, deeper penetration in walk-in and corporate channels and improved referral flows. At the same time, our average revenue per test rose 28%, reflecting a richer test mix, broader uptake of high-value radiology and specialized diagnostics and favorable price adjustments introduced earlier in the year. These trends also helped us further strengthen our average test per patient, which reached 4.6 tests per encounter, demonstrating the continued depth of patient relationships and our success in expanding cross-service utilization across our platform. In Egypt, momentum strengthened further through Q3, supported by solid growth in both volumes and value alongside strong brand equity and stable market conditions. Test volumes in Egypt continued to grow steadily, while average revenue per test saw a significant uplift, owing to favorable mix dynamics and strong -- with strong traction in radiology, specialized diagnostics and corporate channels. Egypt remains the core engine of group performance, contributing 84% of total revenues in the 9 months of 2025 and continued to demonstrate high scalability, resilience and operating efficiency. The ongoing expansion of our physical network in Egypt continues to be a key growth driver. Over the past 12 months, we have added 103 new branches in Egypt, bringing the total up to 670 locations nationally as of September. These new sites have helped deepen our presence, not only in Greater Cairo but also in fast-growing regional cities, allowing us to better serve both corporate and walk-in patients. Our household service remains a strategic differentiator, sustaining its strong contribution of around 20% of Egypt's revenue, continues to demonstrate the effectiveness of our post-pandemic strategy and reinforces our position as an early mover in home-based diagnostics in the region. Al Borg Scan continues to demonstrate strong momentum as a key component of our long-term strategy to build a fully integrated diagnostics platform. Year-to-date scan volumes and patient traffic recovered well following the Q1 of Ramadan slowdown with Q3 recording clear sequential volume growth. The integration of Cairo Ray for radiotherapy, which was consolidated this quarter, is progressing well. This acquisition provides us with direct access to radiotherapy service and strengthens our positioning in oncology diagnostics, a fast-growing and strategically important segment. We expect radiology to play an increasingly prominent role in our growth mix over the coming quarters, supported by continued network expansion, enhanced service capability and rising demand for specialized imaging. Over the past 2 years, a key strategic priority for IDH has been the successful launch and scale up of our Saudi operations. I'm pleased to share that our presence in the Kingdom continues to develop very encouragingly with strong momentum supported by growing demand, deep market visibility and sustained improvement in both volume and value metrics. Year-to-date, we have seen revenues more than quadruple compared to the same period last year, reflecting rising test volumes, improving mix and early network scale benefits. This growth continues to highlight the effectiveness of our ramp-up strategy in the market, which aims to accelerate revenue growth and establish Biolab KSA as a key player in the large but high fragmented Saudi diagnostics market. As part of this plan, we inaugurate our third branch in Riyadh during the third quarter and we remain on track to open 3 additional locations over the coming months. These new branches will help extend our footprint across high potential catchment areas. At the same time, we continue to advance our growth approach, which includes targeted marketing campaigns to build brand recognition, selective promotional initiatives to drive patient acquisition and ongoing discussions with the insurers and corporate health care providers to broaden our referral and partnership networks. While still in the early stages of development, Biolab KSA is demonstrating strong operation traction and reaffirming our belief in the long-term potential of Saudi Arabia as a key pillar in the group's regional growth strategy. As always, profitability remains a core focus for us and we are very pleased to see sustained improvements across all levels of the income statement. We continue to benefit from strong operational leverage, tighter cost controls and better resource allocation across our subsidiaries, including Nigeria, where Echo-Lab remained positive EBITDA throughout the 9-month period, marking a key milestone in its turnaround and confirming the potential of its high -- of this high-growth market. Overall, both COGS and SG&A and share of revenue continued to decline, supported by disciplined cost management and our growing digitization efforts. COGS to revenue fell to 57%, while SG&A declined to 15% from 17% last year, underscoring the success of our optimization initiatives. Consequently, our EBITDA margin expanded to 35% from 30% last year, while gross profit margin rose to 43% compared with 38% in the 9 months of 2024. These efforts, combined with strong top line growth and improved pricing dynamics have translated into meaningful margin expansion and greater earnings quality with adjusted net profit more than doubling year-on-year while excluding FX effects. Before handing the call over to Tarek, I would like to briefly reiterate our full year guidance in light of our year-to-date performance and the momentum we are seeing across all markets. Given the strong results delivered over the first 9 months, coupled with relatively stable operating conditions, continue to expect full year revenue growth to come in at more than 35% in the full year of 2025. On the profitability front, we remain confident in delivering an EBITDA margin more than 30%, supported by sustained cost discipline, stronger operating leverage and the continued improvement in our Nigerian operations. With that, I will hand the call back over to Tarek and Sherif, who will take you through key trends across our markets and a more detailed breakdown of our financial performance of the period. Thank you very much. Tarek Yehia: Thank you, Dr. Hend. This year, we have continued to operation in relatively stable conditions with supportive macro trends and constructive across all our key markets as we approach the end of 2025. In Egypt, we are continuing to see slower inflation compared to prior years with the latest trading of September coming at a multi-month low of 11.7%. [ Decreasing ] increasing inflation pressure have been supported by relative strengthening of EGP versus dollar as well as increased ForEx inflows into Egypt as investor confidence recovers and remittance continue to rise. In fact, in recent weeks, we have seen EGP continuing to appreciate, reaching a low of 47.3 to dollar in October and as low as 46.92 last week. Successful rate cuts throughout the year continued to reach 6.25 points have now brought the overnight deposits to 21%. This will undoubtedly help prop up local investments activity and drive further recovery in consumer spending. Similar to Egypt, Nigeria also has seen relative stability in 2025. Inflation has come down from last year highs and expected to support gradual recovery in consumer spending. Over in Jordan and Saudi, the economic situation remained largely stable despite increased regional uncertainty. While Saudi Arabia economic could be tested by the ongoing global trade tensions, we remain confident that the excellent work done by the Saudi government to build resilience in the economy will help safeguard the country. Turning quickly to our latest results. Egypt continued to deliver strong growth with revenue rising 44% year-on-year, supported by both volume expansion and significant increase in average revenue per test, particularly driven by radiology and high-volume diagnostics. Meanwhile, Jordan continued its solid performance, reporting revenue growth in both AP and local currency terms. Test volume increased by 21% year-on-year, supported by Biolab ongoing promotion campaign and digital outreach initiatives. In a market where volume-driven growth is critical for long-term sustainability, we are pleased to see Biolab's strategy continue to deliver strong volume momentum and patient retention through community engagement and service quality. In Nigeria, Echo-Lab has maintained its positive EBITDA momentum supported by successful implementation of our turnaround strategy launched last year. We are increasingly confident in long-term potential for our Nigerian subsidiary to expand its radiology and specialized testing capability and capture the significant upside of a growing market. In Saudi, the ramp-up progressed ahead of expectations with revenue more than quadrupling year-on-year and [ subscription ] growth supported by increasing brand visibility and network expansion. Finally, in Sudan, operation remains significantly constrained by the ongoing conflict with only one branch partially operating and no material updates to report at this stage. I will now handle the call to Mr. Sherif, who will provide a more detailed overview of our cost and profitability for the first 9 months. Sherif Mohamed El Zeiny: Good morning -- good afternoon, ladies and gentlemen and thank you for your time today. As Tarek mentioned, during my presentation, I will focus on costs, margins, profitability and our working capital position before opening up the floor to your questions. In line with our guidance, profitability for the first 9 months of the year has continued to improve, supported by our group-wide efforts to boost operational efficiency and keep spending at bay. A major focus area over the last 18 months has been digitalization, where we have continued integrating advanced data tools and analytics into our internal platforms, procurement systems and financial planning to enhance decision-making and improve cost discipline. These efforts, combined with a stronger operation leverage and better resource allocation helped drive meaningful improvements in efficiency with both COGS and SG&A as a share of revenue declining versus last year. In parallel, we also -- we are also keenly focused on keeping costs down. Our efforts here have translated in a 9 percentage point drop in our total cost to revenue ratio for that period compared to last year. More specifically, our COGS to revenue ratio improved to 57% in 9 months '25, down from 62% in the same period of last year, supported by disciplined inventory management and stronger purchasing processes. The most notable improvements came within raw materials, which decreased to 19.6% of revenue, down from 21.9% last year, reflecting our scale advantages and smarter procurement practices. At the same time, total wage and salaries as a share of revenue remained broadly stable, underscoring our balance between supporting our staff with appropriate salary adjustment while continuing to optimize headcount. As you can see in the bottom right chart, these efficiency gains translated directly into a stronger profitability with gross profit margin expanding to 43% from 38% last year and EBITDA margins rising to 35% from 30% in 9 months 2024. On the SG&A front, spending remains well contained with SG&A as a share of revenue declined to 15%. The main increase within SG&A was in advertising and marketing expenses, which continued to support the ramp-up in Saudi Arabia and targeted promotional initiatives in Egypt and Jordan. Moving to our bottom line. We reported a net profit of EGP 964 million in 9 months 2025, up 33% year-on-year. As highlighted earlier, last year's reported net profit, including substantial ForEx gains, which distort direct comparisons. When controlling for those ForEx gain, adjusted net profit increased more than 119% year-on-year with an associated adjusted net profit margin of 17% versus 11% last year. As always, we maintained a disciplined approach to working capital management as we supported rising demand while preserving strong liquidity. Similarly, we saw our cash conversion cycle improved further to reach 127 days in September 2025 versus 155 days at the end of '24. It is also important to mention that as expected, we saw a decline in days inventory outstanding, stronger sales momentum and more efficiency inventory turnover during the second and third quarters of the year following the seasonal Ramadan slowdown in March. Finally, as 30th of September 2025, our total cash reserves stood at EGP 1.8 billion with a net cash balance of EGP 271 million. Thank you for your attention. We now welcome any questions you may have. Thank you. Ahmed Moataz: [Operator Instructions] There is one question in the chat on whether you're at a position right now to disclose the planned price increases in Egypt that would start from January of 2026. Tarek Yehia: We're still in the process of preparing the budget, and it's too early to comment on this but of course, will be a price increase for next year. Ahmed Moataz: Understood. The second is on whether you can disclose a time line for the breakeven for Nigeria -- sorry, Saudi operations. And if you have a targeted revenue contribution over, let's say, 3, 5 or even longer than that as a percentage of total revenue. Tarek Yehia: For the EBITDA, we are expecting a breakeven by end of 2026. Ahmed Moataz: Understood. And is there something on the revenue contribution as well? Tarek Yehia: Revenue continued to grow year-over-year and contribution to the top line still less than 1% but by time, gradually will increase. Still Egypt represents 82% and Jordan represents 14%, 84% for Egypt and 14% for Jordan. Ahmed Moataz: All right. Two questions from [ Johannes ]. Can you talk us through the change of ownership of the Actis stake and what you expect from Elliott? That's one. The second is, what is your dividend policy at the moment? Hend El Sherbini: So I mean the Actis stake has been bought by Elliott as a part of a bigger deal. We don't really have any visibility on this right now. And regarding the dividends, as usual, any money that we have, which are not used for investments and for the work, we give it back as -- we give it back to investors as dividends, as long as it's -- we are able to do that. Ahmed Moataz: [Operator Instructions] We'll take questions from the line of [ Darren ]. Unknown Analyst: Dr. Hend, you just -- you commented that the Actis sale is part of a bigger deal. What does that mean exactly? Do you have any other color there you can share? Hend El Sherbini: I know that Actis have [ exited ] private equity and they sold their shares in IDH and other companies to Elliott. But I don't know exactly -- I don't have the exact details of this deal. Unknown Analyst: Okay. Understood. So you're saying there's other businesses that have been sold to Elliott. And you haven't had -- the management team hasn't had any correspondence with Elliott at all? They haven't reached out to you or you guys haven't reached out to them to get a sense of what their plans are? Hend El Sherbini: I've seen them when I was in London. I've met with them. And -- but this was like an introductory meeting, nothing -- no specifics. Unknown Analyst: And do you have a sense, is it their intention just to be passive shareholders? Is it a purely financial investment? Or is there something more strategic? My understanding is they have, I think, interest in another Egyptian diagnostics business, if that's correct? Hend El Sherbini: No, this I don't know. Which other diagnostic business? Unknown Analyst: I think it's a much smaller one but they were part of a transaction in last year, I believe. But I can't remember the name of the firm but anyways. Hend El Sherbini: I haven't heard -- and they didn't mention it, no. Ahmed Moataz: We received 2 questions in the chat. I'll take them one by one. First one is how much CapEx have you got planned for Saudi operations and expansions? Tarek Yehia: For Saudi, we have a plan for the next 5 years with a CapEx of $20 million. Ahmed Moataz: All right. This is 2025 included? Or when you say 5 years, this is 2026 and beyond? Tarek Yehia: This starts from 2026. Ahmed Moataz: Starts from 2026. Okay. Two more questions in the chat. The first one, [indiscernible]. Please, can you share your expectations on growth beyond this year in terms of volume and value? And can you also comment on market-specific growth expectations? Tarek Yehia: We're still in the process of preparing the budget but we are aiming to targeting growth across all the geographies we are working at -- operating in. Ahmed Moataz: Understood. [ Ali Masood ] is asking, how many Actis Board representatives are on IDH's Board? And any expectations on if and when those members will step down? Hend El Sherbini: So there's only one Board member from Actis and he's also representing -- I mean, he's not stepping down because he's -- I think he's going to be also Elliott's representative. Ahmed Moataz: Understood. Can you comment on your expectations for branch additions in Egypt in 2026? Will it be at a similar level to 2025, higher or low? Tarek Yehia: It is -- we're still also the same for the budget. We're still in the process but we will see growth in the number of branches as -- and our growing brand -- ongoing process of growth each year. Ahmed Moataz: Sure. [indiscernible] is asking, how will the growing contribution from Saudi impact group returns and margins when Saudi is in steady state? Tarek Yehia: After 5 years for the 5-year plan for Saudi to represent 7% from the group revenue. Ahmed Moataz: Okay. And the question was more on how do you expect this when it has a 7% revenue contribution to impact your overall returns and margins. I think the question is trying to assess whether Saudi operations by itself is margin accretive or not relative to what you're generating right now and at the same time, return accretive or not? Do you want me to repeat the question? Hend El Sherbini: We're expecting it in the 5 years to be in the vicinity of the 30%, if this is -- if this answers the question. Ahmed Moataz: [Operator Instructions] All right. We haven't received any -- no, we actually did one, sorry, 2 questions. What does the $20 million Saudi CapEx imply for the number of branches in Saudi 2030 Vision. Sorry, one second, I'll re-read the question. Actually, we'll skip this one and I'll go back to it. Are margins at 38% sustainable? Or do you think it's a function of the strong EGP FX taking place this year? Hend El Sherbini: I mean, as long as we have a stable currency, I think this is sustainable. We're getting back to our 40% margins. And the strong FX has nothing to do with our improvement in margin. However, the stabilization of the currency is, of course, is helping in maintaining our margins. Ahmed Moataz: All right. Back to [ Farooq's ] question. How does the $20 million Saudi CapEx imply for the number of branches by 2030? So by the end of the year plan, how many -- or by the end of the 5 years, how many total branches you have in Saudi? That's one. And the second is, is the Saudi strategy branch-focused more? I think he means corporate or wholesale contract focus because [ Farooq ], can you send a clarification on the second part of the question until they answer the branches part? Hend El Sherbini: So we're expecting 45 branches by the end of the 5 years. And this is where the CapEx is going together with, of course, the instruments and everything else. This in terms of CapEx. In terms of revenue, we're expecting a breakdown of 50% corporate and 50% walk-in. Ahmed Moataz: Understood. Could you also please talk us through the outlook on margins for Jordan? Tarek Yehia: Jordan margin for the current year, in the range of 30%. Ahmed Moataz: All right. [ Ali Naser ] is asking, can you please provide details on the Cairo Ray acquisition? What was the investment size? And what is the annualized P&L impact on the consolidated level? And lastly, how much did it impact third quarter results? Tarek Yehia: The total investment cost was around $400 million. sorry, EGP 400 million. Ahmed Moataz: And the rest of the question, please, what is the annualized P&L impact? And how much did it impact third quarter results? Tarek Yehia: For the quarter, it is minimal because we already consolidated for a small portion in Q3. The same will apply for Q4 and more contribution will be done in the full year next year. Ahmed Moataz: Understood. [indiscernible] is asking, what is a stable long-term level for COGS and SG&A as a percentage of revenue? How much more cutting or savings do you expect and the potential uplift to EBITDA margins? Tarek Yehia: For the COGS to revenue ratio, which already improved to 57% in the 9 months, coming down from 62%, we're expecting we can go down 1% or 2 more percent going forward. And also for the SG&A, it already went down from 21.9% to 19.6%. And going forward, we can see 1% or 2% more advantage from recruitment and a lot of cost optimization that we are in process improvement year-over-year. Ahmed Moataz: Understood. [ Marina ] is asking, how do you see the contract and walk-in dynamic play out in Egypt over time, let's say, for the next -- sorry, 3 to 5 years? Do you expect contract volumes to continue growing faster than walk-ins? And what does that mean for longer-term margins? Hend El Sherbini: So yes, we expect the contract contribution to grow. However, we're also seeing increase in the walk-in volumes. So both are increasing. And this -- I mean, this is not -- this is affecting -- this is not really affecting our margins directly because in the corporates, we are seeing increased volumes. So the test per patient in the corporate side is much higher than in the walk-in side. And as this is an economy of scale, we always want both things, the increase in volume as well as the increase in pricing. So this is -- I think this dynamic we have been seeing for a few years now and it hasn't affected our margins. Ahmed Moataz: Understood. [indiscernible] is asking, volume growth in Egypt was solid at 9%. Is this primarily driven by the 103 new branches opened over the last year? Or are you seeing same-store sales growth in the more mature branches? Hend El Sherbini: We are seeing volume growth in both the new and the existing branches on both sides, corporate and walk-ins. Ahmed Moataz: [indiscernible] has a question. Unknown Analyst: Just a follow-up on the question I asked about Cairo Ray. I don't think you answered that. Please again but I know you bought it for EGP 400 million but I wanted to ask about what is the revenue of this company? What's the EBITDA of this company? What's the net income of this company on a trailing 12-month basis or maybe '26 basis? Sherif Mohamed El Zeiny: Our full year estimates on the top line is around EGP 52 million and on the EBITDA level, around EGP 16 million. This translates to around 30% EBITDA margin. Ahmed Moataz: All right. I'll pass it back to you, Dr. Hend, Sherif or Tarek for any concluding remarks. Tarek Yehia: Thank you, everyone. If you have any more questions, you have our contact. We're happy to have a follow-up call, any -- respond to any e-mails. Thank you, everyone, for attending today and thank you, Ahmed, for hosting the call. Hend El Sherbini: Thank you. Thank you, everyone. Ahmed Moataz: Thank you, everyone, and to IDH's management as well. Have a good rest of the day, everyone. This concludes today's earnings call. Tarek Yehia: Thank you.
Operator: Please stand by. Good afternoon. And welcome to the fiscal year 2026 third quarter financial results conference call for Dell Technologies Inc. I'd like to inform all participants this call is being recorded. At the request of Dell Technologies. This broadcast is a copyrighted property of Dell Technologies Inc. Any rebroadcast of this information in whole or part without the prior written permission of Dell Technologies is prohibited. Following prepared remarks, we will conduct a question and answer session. If you have a question, simply press star then 1 on your telephone keypad at any time during the presentation. I'd now like to turn the call over to Paul Frantz, Head of Investor Relations. Mr. Frantz? You may begin. Thanks everyone for joining us. With me today are Jeff Clark, David Kennedy, and Howard Johnson. Our earnings materials are available on our IR website and I encourage you to review these materials. Also, please take some time to review the presentation, includes additional content to complement our discussion this afternoon. Guidance will be covered on today's call. all references to financial measures During this call, unless otherwise indicated, refer to non GAAP financial measures. Including non GAAP gross margin, operating expenses, operating income net income, diluted earnings per share, free cash flow and adjusted free cash flow. A reconciliation of these measures to their most directly comparable GAAP measures can be found in our web deck and our press release. Growth percentages refer to year over year change unless otherwise specified. Statements made during this call relate to future results and events are forward looking statements. Based on current expectations. Actual results and events could differ materially from those projected due to a number of risks and uncertainties, which are discussed in our web deck and our SEC filings. We assume no obligation to update our forward looking statements. Now I'll turn it over to Jeff. Jeff Clarke: Thanks, Paul, and thanks, everyone, for joining us. Before we get started, I'd like to congratulate David on his appointment to CFO. We worked together closely for the past couple of decades, and I look forward to what's ahead. Now moving to our results. We delivered a strong third quarter. With a record for both revenue and earnings per share and an all time high in AI server orders. Total revenue reached $27 billion, up 11%. CSG and ISG combined were up 13%. Year to date, total revenue was up 12% with ISG revenue up 28%. EPS was up 17% to $2.59 driven by improved profitability in AI and storage and continued operational scaling. Our strong performance and operational led to continue robust cash flow and significant capital returns for shareholders. Now let's move to AI, where momentum has accelerated meaningfully the second half of the year building on an already strong first half. AI server demand remained exceptionally strong. We booked $12.3 billion in orders in the quarter, bringing year to date orders to $30 billion, both record figures. The large scale customer base continues to broaden with expansion across Neo Clouds, which tier two CSPs and sovereigns. Our strong orders and customer base expansion clearly shows customers value unique ability to design, deploy, and maintain large at scale AI factories especially our engineering and rapid deployment capabilities. We have AI racks operational within twenty four to thirty six hours of delivery with up time exceeding 99%. We shipped $5.6 billion in AI servers during the quarter for a total of $15.6 billion year to date. We ended the quarter with a record backlog of $18.4 billion. Our five quarter pipeline continue to grow sequentially across Neo Cloud sovereigns and enterprises and remains multiples of our backlog even when accounting for the robust demand we've seen. As expected, AI server profitability improved sequentially. Moving to traditional servers. Overall demand grew double digits with growth accelerating sequentially in both EMEA and North America. We saw growth across units, TRUs, our buyer base, and the mix of the sixteenth and seventeenth generation reflecting customers preference for dense, high performing compute configurations. Traditional x 86 compute demand continues to benefit from workload expansion and AI driving broader IT modernization and consolidation. Moving to storage. While revenue declined 1% year over year, demand for our Dell IP portfolio remained strong. For two consecutive quarters, our all flash array portfolio has from power store, delivered double digit demand growth supported by strong double digit growth PowerMax, ObjectScale, and PowerFlex. PowerStore demand has now grown for seven consecutive quarters with six quarters of double digit growth. Profitability improved as we increased both the mix and margin of Dell IP offerings underscoring the differentiated value of our platforms. In CSG, we saw momentum continue. CSG revenue increased 3% with commercial up 5%. International growth accelerated sequentially, up double digits year over year. North America also showed improvement. Demand for small and medium business remained strong, and we now have five consecutive quarters of P and L growth and seven consecutive quarters of commercial demand growth. Consumer revenue declined 7%, although the demand environment turned to growth. As we refocused on expanding where we play in the market. Commercial profitability was stable, while consumer and education were competitive. The PC refresh cycle remains durable, supported by an aging installed base and a significant portion of system not yet upgraded to Windows 11. And before I wrap up, I'd like to briefly touch on the commodity supply environment. We are well positioned across our commodity basket. Q3 was the and our outlook for Q4 is largely unchanged from last quarter. Looking ahead to next year, there will be dynamics that we will have to navigate, but we are confident in our ability to secure supply and adjust pricing as needed. As always, we'll leverage our world class supply chain to deliver the best outcomes for our customers and shareholders. In closing, we delivered a record third quarter. With strong performance across all segments and continued operational discipline. Revenue and EPS reached Q3 highs. Supported by growth in ISG, CSG, and improved profitability in AI, and in storage. AI momentum remains exceptional with record orders, backlog, and a growing diverse customer base. Our competitive edge in AI is our ability to engineer bespoke high performance solutions deploy large scale clusters rapidly, and support them globally, all backed by an unmatched ecosystem and flex financing offerings. This end to end capability is why Dell continues to win in AI. We are well positioned to capitalize on AI infrastructure build outs, expanding traditional infrastructure demand and the ongoing PC refresh cycle. Now let me turn it over to David to talk more about Q3 in detail. David Kennedy: Thanks, Jeff. I'm pleased with the team's strong execution this quarter. Delivering Q3 records for both revenue and EPS along with strong cash generation and above trend capital return. Total revenue was up 11% to $27 billion ISG and CSG combined grew 13%. Gross margin was up 4% to $5.7 billion or 21.1% of revenue. Gross margin rate was driven primarily by a mix shift to AI servers with shipments doubling year over year partially offset by improved profitability in storage. Operating expense was down 2% to $3.2 billion or 11.8% of revenue as we continue to drive scale within the P and L. Operating income grew 11% to $2.5 billion or 9.3% of revenue. The increase in operating income was driven by higher revenue and lower operating expenses partially offset by a decline in our gross margin rate. Q3 net income was up 11% to $1.8 billion primarily driven by stronger operating income. And our diluted EPS increased 17% to $2.59 a Q3 record. Moving to ISG. ISG revenue was a Q3 record $14.1 billion up 24% marking seven consecutive quarters of double digit revenue growth. Servers and networking revenue reached a Q3 record $10.1 billion up 37% and is up 43% year to date. AI server demand accelerated. With a record $12.3 billion in orders dollars 5.6 billion in AI server shipments, and a record ending backlog of 18.4 billion. In traditional servers, we saw demand improve throughout the quarter and stability within the P and L. Storage revenue was $4 billion down 1% with strong demand across parts of our Dell IP portfolio. PowerStore continued its double digit growth trajectory with seven consecutive quarters of growth. ISG operating income a Q3 record $1.7 billion up 16% marking six consecutive quarters of double digit growth. This was driven primarily by higher revenue. Our ISG operating income rate was up three sixty basis points sequentially to 12.4% of revenue. This improvement was driven by mix of AI servers, sequential improvement in AI server margins, and stronger profitability from storage. Turning to CSG. CSG revenue was up 3% to $12.5 billion Commercial revenue grew for the fifth consecutive quarter up 5% to $10.6 billion while consumer revenue declined 7% to $1.9 billion CSG operating income was $700 million or 6% of revenue. Commercial profitability was stable, driven by steady pricing sequentially as customers prioritize rich config AI ready devices. In consumer, profitability improved year over year and demand returned to growth. Moving to cash and the balance sheet. We delivered another strong cash quarter, with cash flow from operations of $1.2 billion This was primarily driven by profitability and working capital improvements. We ended the quarter with $11.3 billion in cash and investments, up $1.6 billion sequentially. Our core leverage ratio is 1.6 x. We returned $1.6 billion of capital to shareholders, including 8.9 million shares of stock repurchased at an average price of $140 per share. And paid a dividend of approximately $0.53 per share. Through 3 quarters, have returned $5.3 billion and repurchased over 39 million shares. With record Q3 results in hand, I'll now walk you through our outlook for Q4. a record. In ISG, we expect to ship roughly $9.4 billion of AI servers in Q4, Bringing full year shipments to roughly $25 billion or over a 150% year over year. Our Q4 outlook for traditional server and storage remains unchanged from last quarter supported by continued data center modernization and consolidation and above market growth in Dell IP storage. In CSG, with the ongoing PC refresh cycle, we are improving our execution to drive revenue growth and gain market share. Given that backdrop, we expect Q4 revenue between $31 and $32 billion up 32% at the midpoint of $31.5 billion ISG and CSG combined are expected to grow 34% at the midpoint with ISG growing mid-60s and CSG up low to mid single digits. Operating expenses will be flat sequentially. We expect operating income to be up roughly 21% with continued sequential improvement in ISG operating income rate. We anticipate a diluted share count of roughly 672 million shares and an 18% non GAAP tax rate. Our diluted non GAAP EPS expected to be $3.5 plus or minus $0.10 up 31% at the midpoint. Our Q4 guidance implies a strong FY 2026 with revenue of $111.7 billion up 17% and non GAAP EPS of $9.92 up 22% at the midpoint both well above our long term framework. And briefly on FY 2027, it's still very early in our planning process, We wanted to give you some context on how we are thinking about next year. We have strong conviction in our AI business, supportive of what we see in our backlog, the pipeline, and ongoing customer discussions. We've proven we can execute and deliver for our customers in this space. For the rest of the business, the long term framework we outlined at our Securities Analyst Meeting remains a solid starting point as you think about next year. We are highly confident in our ability to drive EPS growth, supported by multiple levers including leveraging our go to market engine, improving gross profit, scaling operating expenses, and ongoing share repurchases. In closing, we delivered a record Q3, with revenue of $27 billion and EPS of $2.59 both quarterly highs, driven by strong execution across ISG, CSG and disciplined cost management. ISG continues to see sustained double digit growth, and accelerating AI demand, evidenced by $30 billion in AI server orders over the past three quarters. We are focused on capitalizing on the ongoing PC refresh and expect continued growth from CSG. We remain focused on driving shareholder value through strong cash generation and capital returns. Thank you all for your time. I'll turn it back to Paul to begin our Q and A. Paul Frantz: Thanks, David. Let's get to Q and A. In order to ensure we get to as many of you as possible, please ask one concise question. Operator, let's go to the first question. Operator: Thank you. We'll take our first question question from Samik Chatterjee with JPMorgan. Samik Chatterjee: Hi. Thanks for taking my question. Jeff and David, I mean, maybe since this is sort of the topic of investor conversation mostly at this point, if you can flesh out your thoughts on the kind of reaction you expect from customers in relation to the pricing discussions by sort of the product categories do you think it's more sort of easier to take some of those pricing actions versus not relative to your overall portfolio? And David, if I heard you correct, you're saying to sort of use your invested targets for about mid teens EPS growth as still a starting point for next year despite those sort of dynamics of headwinds on the memory side. If Can I just clarify that as well? Thank you. Jeff Clarke: Sure, Samik. Let me, wade my way through that. I it will be the first question this afternoon. Or the only question I should say. Look, we're in a very unique time. It's unprecedented. We have not seen costs move at the rate that we've seen. And by the way, it's not unique to DRAM. It's NAND, It is hard drives. Leading edge nodes, across the semiconductor network, There is a if you will, I'd categorize it as demand is way ahead of supply. And as we wait our way through that, we're gonna lean on the things that we've always done. We we have a lot of experience at this. This isn't our first DRAM cycle. There have been seven, I think, in the last forty years. Michael and I have been here navigating the organization in various ways. Through that time. Our senior leadership team and our supply chain has been through everyone this decade. First rule of our supply chain is to get the parts. Supply matters. Mix matters. And as we get to supply and mix, our job is to minimize the impact of that to our customers. But clearly, we're in a situation that is not typical. We've learned a a great deal since COVID. Since previous cycle of this last super cycle of this magnitude was 2016 through 2017. And we're gonna do everything we can to minimize the impact, but the fact is the cost basis is going up across all products. No one more unique than others, Everything uses a CPU, has DRAM, has storage in it. So with that said, we're gonna do things we've always done. We're gonna work on configurations. We're going to work on availability, adjust mix, Our direct model allows us to move demand where supply is. Our direct model allows us to act to the market signals it gives us quicker than anybody else, allows us to price, accordingly, reprice when needed, and we will make our way through that across consumer PCs, commercial PCs, in the server storage, and through our AI servers. No no product category is not going to be impacted in terms of the aggregate cost basis moving. Again, our number one rule is get parts. Secure supply, secure the mix we need, to meet the customer demand. The world needs more computational intensity, needs more compute, If you're in the world of AI, token growth is going. We see a consolidation in servers. Consolidation in servers is dry driving denser servers with more DRAM, more storage. And we're in the middle of a PC refresh that's not complete. So I I don't see how we will not, what's what's best way to do describe? I will not I don't see how this will certainly not make its way into the customer base. We'll do everything we can to mitigate that. As we mentioned earlier, our cost outlook for Q4 is largely unchanged. And David just gave you what our guidance is that we believe that you'll see sequential profitability improvement in our company across the broad portfolio. While managing an increased in our cost basis. That's what we're gonna do. That's what we know how to do, and we have all of the tools in our company to be able to do that effectively and fast. David Kennedy: Yeah. Hey, Samik. Yeah. Like we said, it's very, very early in our planning process, obviously. But the framework from our security analyst meeting is is a good reference point to start with. Know? So I think EPS included in that is the ZIP code will be in. We'll be looking out to leverage our go to market engine, which is differentiated. All the things Jeff has just outlined there in relation to our supply chain, We'll continue to drive significant scale in our OpEx. And then obviously stay committed to our capital return KPIs, right, whether it's share repurchase, or staying committed to our dividend. So look, we feel we have many tools in that toolbox that allow us to stay agile and deliver on our EPS numbers. But like I said, it's still very, very early in the the planning process here. You. Thank you both. Thank Paul Frantz: Thanks, Eric. Operator: And we'll take our next question from Mark Newman with Bernstein. Mark Newman: Hi. Thanks for taking my question. Congrats on a great quarter, particularly impressive on the AI server orders. I I wondered on AI servers, if you could talk about some of the recent comments that have been coming from NVIDIA around the potential vertical integration that they're doing, getting a little bit more involved in in in the supply chain, and how that may impact on how or how Dell is navigating around that. And, also, on AI servers, any any color on the mix of AI servers, any change on the mix, for example, enterprise as a portion of AI server orders would be useful. Thanks very much. Jeff Clarke: For Mark, let me make my way through that. I mean, first of all, as we look forward to the new technologies that are in front of us, we remain excited We think there's ample opportunity for us to continue to differentiate. These large scale deployments are very complex. Our value add is at the rack level, is at the solution level, l 11 and beyond. That differentiation, we believe, remains for the next several cycles easily. In fact, the our ability to engage with customers early, which we can on the next generation technology, to work through their needs to bring these very complex offers to the marketplace fast in it, scale with a significantly better uptime and outcome, we believe is a differentiation. We focus on optimizing performance per watt. Performance per dollar at the data center level, We focus on our services, our value add and deployment, our financing side, the ecosystem that we bring to our customer base, none of that changes in the next generation of technology. And I to be honest, I I I think the opportunity for us gets greater in the future as we head towards 500 kilowatts of rack of power density moving to a megawatt in beyond, the engineering skill required to do that at rack scale is significant. We've invested in that ahead of the curve and we believe that gives us the opportunity to differentiate remain the leader in time to market, drive broad installation and deployment capabilities ahead of our competition at a higher level, uptime of 99% or better. And that's why we win, and I don't see that changing. When I look at the mix, two forms of the mix that I'll address is we saw a change in the quarter towards GB 300. So in our backlog of $18.4 billion there's been a significant shift towards GB 300 as expected. And then lastly, we continue to see great build on our five quarter pipeline around sovereigns and around enterprise and remain very encouraged about the opportunities in both. Thanks, Mark. Great. Thank you very much. Of course. Operator: And the next question will come from Ben Reitzes with Melius Research. Ben Reitzes: Hey. Great. Good with the commodity environment guys, and I'll try to be concise for Paul. The question is around your AI server margins. You mentioned it was up sequentially. Was wondering if you guys can talk about, you know, order order of magnitude there. And is that gonna continue into the four q? And are you starting to see more product attach, more high margin attach? To that end? Thanks. Jeff Clarke: I'll take a run at it, Ben, and then David can certainly add to this. Clearly, we made reference in Q2 that we had some onetime cost elements that hit us. If you recall, we talked about expedites and supply chain reconfiguration. Those went away in Q3 as expected. We also talked about shipping a lot of the early aggressive GB200 deals in the quarter. Those went through the system. And we continue to now see the ability to add differentiation as I just mentioned in in the previous question that we see in the GB two hundred and three hundred designs. And our margins move to safe right in that range that we've talked about, mid single digits. We see that continuing as part of our long term value creation framework that we laid out eight weeks ago. It's what we'll continue to talk about here, and we we believe that we can operate going forward in that range. In fact, we're very confident of that. And then we also had a mix change or, if you will, a change in customer mix to the good. When you look at the broad portfolio and diverse customer set that we have within the AI portfolio, portfolio shipping to a broader set of customers across a greater range of solutions helps margin. Hope that answered your question about AI margins. Yeah. Thanks a lot, Jeff. Appreciate it. Of course. Thanks, Ben. Operator: And our next question will come from Eric Woodring with Morgan Stanley. Eric Woodring: Hey guys. Thank you for touching my question tonight. I wanted to touch on PCs. Jeff, you sound very bullish on the PC opportunity into year. Some of the channel partners earlier in earnings were talking about maybe the seventh inning of a PC refresh. And I'd love to just get your comments because you sound more bullish So where do you think we are on the PC refresh? And is that still Windows end of life upgrades that still need to get done? Or are there new factors that you think could elongate the PC cycle well into 2026? Thank you. Sure, Eric. I mean, I mean, a couple of things. One, we we have not completed the Windows 11 transition. In fact, if you were to look at it relative to the previous OS, end of service. We are 10, 12 points behind at that point with Windows 11 than we were the previous generation. So we still have ample opportunity to convert. If memory serves me right, the installed base is roughly $1.5 billion or dollars. 1.5 billion units. We have about 500 million of them capable of running Windows 11 that haven't been upgraded. And we have another 500 million that are four years old that can't run Windows 11. Those are all rich opportunities to upgrade towards Windows 11 and modern technology. Equally important AIPCs. Small language models, more capable applications, improvements in operating systems and their capabilities in the embedded AI there, the use of an MPU, the capability of an MPU and future piece PCs, gives me the view that the PC market will continue to flourish going forward. Now let's define flourish. We have the PC market in our outlook roughly flat year over year. That's after a year that we grew mid to high single digits, I think it's flat as we look into next year's planning horizon, and we're building plans accordingly that would take share against that outlook. Thanks, Eric. Awesome. Thank you, Jeff. Of course. Operator: And the next question will come from Wamsi Mohan with Bank of America. Wamsi Mohan: Yes. Thank you so much. I was wondering if you could just, maybe give some color around this AI business. You noted very strong conviction going into fiscal twenty seven. Obviously, you you just raised your your guide here from 20 to 25 billion. Can you just put that in context of some of financing issues at NeoClouds? And how much of of your conviction and growth is predicated on some of these neo clouds being able to procure financing versus maybe other customers that you might have visibility into? And Jeff, if you could just clarify, you mentioned the cost base moving up across the product portfolio, and I was wondering if you could maybe share at the highest level how much of that conceptually could you recover from pricing how much of OpEx reductions are are possible to offset some of these pressures? You so much. Maybe I'll start once and Jeff can add some color. Look. I think if you start answer first, you look at our Q4 guidance, $9.4 billion. That represents $25 billion obviously for a full FY '25. So you look at that appetite for AI demand, and it's across the neo clouds. Sovereign opportunities, and obviously within the enterprise. shipments of $5.6 billion in Q3, orders of $12.3 billion. That's year to date at $30 billion. Backlog at $18.4 billion. And as Jeff referenced in his opening remarks, the next five quarter pipeline is multiples of that. So every conversation we're in which is also being very aware of all the opportunities that are out there, It's about demand. It's about opportunity. And eagerness to to work and see the opportunities in front of us. So we actually see huge scale to come Every opportunity, reality is we're not going to win them all. But we love our momentum that's there, and we think we're well positioned to meet the expected needs of the customer base. Yeah. I I would add to that maybe some color. $25 billion this year. 150% increase over last year. On the guidance that David called out, we will ship nearly as much in Q4 as we did all of flash year. I think that gives a on the need for compute The need for and what we see as token generation increasing at an incredible rate. And the corresponding compute that has to be behind that to generate those tokens. It's reflected in that five quarter pipeline that David said that is up across all three customer types. Neo Clouds, sovereigns, as well as enterprises. And we're seeing progress in all three. So I think that's very important for us to make sure that we communicate that the momentum as we head into Q4 continues. You saw that in orders in Q3. The backlog building and significant shipments in Q4. If I flip to the other question about the cost basis and our ability to recover that's an interesting question. We we would we've said over the years in normal times, when our input costs go up, we can recover roughly two thirds of that cost in a ninety day period. I would tell you this is not normal times. This is extraordinary times, and we put extraordinary actions in place weeks ago as we saw this to be able to mitigate the impact upon our company our customers, and our shareholders. And, again, it goes back to our business model. Direct Direct signals, we understand the demand, our long term partnerships and agreements with our partners to make DRAM and make band, the agreements we have in place around capacity, those relationships are meaningful and impactful as we navigate these types of situations that again, that are unprecedented. And then our model gives us tremendous flexibility. Whether that is to reprice whether how we set up quotes, whether that's to reconfigure, redirect to different products, the ability to determine how long price will be in effect, the ability to understand where we're gonna drive demand to and change our demand generation vehicles to drive that. It's important that our engine and the way we run, I think, is very different than others in our ability to respond. Those of you that took note, you saw that in COVID in a very similar situation. The experience that we had there where there was material shortages and increased cost, our ability to navigate that I think, was unmatched in the marketplace. Our supply chain is very good at this. And we're gonna lean on them. Those lessons learned from the COVID time and most recently what happened with tariffs. I think show that we can operate with the right sense of urgency We're managing this real time actively managing it. I was on three pricing calls today alone. And we're driving to get a better outcome. So our our belief is we will do better than our normal twothree in a ninety day period given the actions that we've put in place and our understanding of demand and our understanding of supply. Thanks, Wamsi. Thank you. Operator: And our next question will come from Amit Daryanani with Evercore. Amit Daryanani: Thanks a lot for taking my question. Know, I guess, maybe you could just spend a little bit of time on i's margins that improved rather well by about 350 basis points sequentially. Can you just touch on like what drove the strength in ISD margin in Q3 versus Q2? And then, you know, your guide, I think, reflects the largest AI server revenue number you guys gonna put up in Q4 at $9.4 billion plus. How should we think about that impacting your P and L? And do you think gross margins should remain in the Q2 levels, or is there kind of further movement from there, as we think about the P and L impact from the I s from the AI numbers in Q4? Thank you. Yes. Thanks, Amit. Yes, look, really pleased with the team's execution in Q3 around ISG, ARP Inc, at 12.4%, like you said, up three fifty basis points quarter on quarter, so a lot to like here. I guess a couple of things to call out First, on the storage side. Look, Q3 was no different than what we've seen year to date. Where we've seen demand growth at a premium to market for our Dell IP storage portfolio. You know, probably a strong call out there will be PowerStore also. Six consecutive quarters with double digit growth. So obviously, that Dell IP portfolio gives us better operating margins as you'd expect. So there's a natural mix effect that creates a tailwind there. Secondly, in storage, our pricing discipline was something I was very pleased with also. And then thirdly, look at the focus of the teams looking to find improvements at a by product level within the portfolio also. So again, like I said, a lot to like on the storage side. Also within that, on the AI margins, like Jeff said earlier, Q3 on track to what we've consistently committed to mid single digit up ink here. In relation to that. And we obviously didn't have those And then your reference, I think your question was Q3 into Q4 then from a guidance Q2 one timers that were there, and we'll keep that consistency as we go into Q4. perspective, If we expect to continue to make progress. Our Q4 profit guidance is anchored again through the storage P and L. With the Dell IP storage growth, we expect to make it four for four in terms of quarterly growth. In that portfolio. That should allow us to grow at or likely slightly ahead of normal sequentials which will allow us to see an uptick in our op inc rate sequentially also into Q4. Yes, Mam, and I'd just again to emphasize that. AI shipments 5.6 to 9.4 quarter over quarter. Our strategy of focusing on Dell IP storage, the mix is up the rate is up, and increased velocity of our traditional sore server business is the recipe for the performance that we expect to have in Q4. While increasing AI shipments significantly as we mentioned. Thanks, Amit. Operator: And the next question will come from Aaron Rakers with Wells Fargo. Aaron Rakers: Yes. Thanks for taking the question. I want shift gears a little bit away from the AI to the more traditional server business. Jeff, I think in your prepared comments, you've mentioned double digit demand growth. I think if my math's correct, I don't think revenue grew necessarily at that clip. So I'm curious if you could talk a little bit about what you're seeing as far as the aged installed base, where we're at in the upgrade cycle. For traditional servers? And do you think double digit growth is a good baseline that we could think about going into fiscal twenty twenty seven as that demand follows through to revenue? Sure. A couple of comments, yes. So the double digit was demand, the P and Ls certainly didn't track that, but we obviously would have built backlog as a result. We talked about North America recovered or improved quarter over quarter and that the international market demand were double digits, and that's two in a row now off last quarter's double digit performance. We continue to see modernization in the data center consolidation in the data center, which is reflected in the fact that our TRU's continue to go up, our content continues to go up, the number of cores, how much DRAM, how much NAND per server, is corresponding with that. And we still see a pretty significant opportunity with roughly 70% of our install base is still the older generation servers. That we have shipped many years ago. So the ability to continue to upgrade them modernize them, is the opportunity that we have in front of us. And then we see that cycle continuing into next year. This has been a longer consumption cycle. We're encouraged by what we see. That's reflected in the Q4 guidance that we just talked about. And that momentum as we update you on '27, we'll give you the the best look we have. But right now, that momentum of consolidating, modernizing, refreshing old servers to new one continues, and we're working on making sure our pipeline grows and we can convert it into orders as quickly as we can. Thank you. Of course. Thanks, Aaron. Operator: And we'll take our next question from Michael Ng with Goldman Sachs. Michael Ng: Hey, good afternoon. Thank you for the question. I just wanted to follow-up on the commodity costs recovery point, which was encouraging to hear. When you talk about the actions that you've taken to help mitigate the impacts I guess, do you expect to see a benefit from below market costs, strategically purchased commodities and you know, if if so, you know, how long can that be you know, a benefit for And, I I think you may have alluded to opportunities to maybe, like, reprice longer term commercial contracts. In response to the rising commodity costs. Just wanted to see if that was the case or are there any kinda longer term contracts that might inhibit your ability to price at all? Thank you very much. Well, I mean, maybe working backwards towards the the first parts of your questions. And clearly, we have to do what's right by customers. And where we have contracts, we have contracts and we we will honor those contracts and work through the situation. I I think what maybe I didn't convey correctly or to the right balance that's needed is we tend to talk about the commodity cost here. There's a commodity scarcity too. In other words, there's not gonna be enough parts. So there's a combination of the demand that's in the marketplace, one's ability to procure the part, which is why job one of our supply chain is to get the material never run out of parts, and then price it to the commensurate value with having that material. That's what we're gonna work our way through. We're I think, very skilled at this. The last two cycles have certainly honed our skills. And we'll use all of the tools available from configurations. It's not uncommon in the PC industry to see configurations come down. That's happened before. Likely to happen again. That tends to happen in the lower price bands. You tend to see mixed where what comes out of the factory isn't necessarily what was forecasted. We think we have a unique ability to adjust our demand faster than anybody. We think the ability to navigate how you price with a very large transactional business selling to small and medium businesses, selling to the day to day needs of many corporations, we can adjust that to what's available. Those are all skills and techniques that being a direct manufacturer and a direct seller, we believe us an advantage and will help our partners and customers through that as well. And all of these tools that I've mentioned in one of the previous answers are in effect now. Our special pricers know the cost for all of next year our best guess for next year, what's available. Our Salesforce, our product business leaders all know and we're acting working as one team to collectively work this real time, as I mentioned before, to get the best outcome for the company, our shareholders, and customers. That's what we'll work through. So our ability to recover I think, is better than the normal times. And I think that's probably amplified or improved by the fact that there'll be a scarcity of parts. Thanks, Mike. Operator: And our next question will come from Asiya Merchant with Citigroup. Asiya Merchant: Great. Thank you for taking my question. Just looking ahead into storage, seems like that business, you know, is doing perhaps, you know, a little bit better than what was previously expected. As you look into the server demand that is driving up the revenues for this the core server, And as you look into next year, just given all the, obviously, the backdrop of commodities, headwinds here, how are you thinking about storage from here on? And if we can get that inflection towards more Dell IP storage, which is obviously positive for your margins, quicker relative to some of the unwinding of the HCI storage, if that can happen faster than what was previously communicated at the Analyst Day. Thank you. Yeah. I think, again, just to clarify, I guess, in Q4, what we're looking at in terms of guidance, Continuing to show that Dell IT storage growth and seeing that sequentially hopefully above our expected to be above normal sequentials. That'll allow us, along with the pricing discipline, keep that margin improvement coming along for the p and l. On the server comment again, strong demand in Q3, particularly in month three. So to Jeff's point earlier, building a bit of that backlog. So I think you can expect you know, high single digit growth in that business for Q4, which would you know, end us on a high point as we exit the quarter. That said, look, as we head into FY twenty twenty seven, still very early. Obviously, it's a lot happening in the market and changing. I would still reference you back to the long term framework that we've got. I think it's a good reference starting point. We'll work from there. And then, obviously, be agile as we assess and and see how it it evolves. But yeah, for now, I I think it's still a little early for for FY '27. But strategy wise, we we made the pivot to Dell IP. Not looking back. It is serving us well. The mix continues to increase. Across our storage revenue dollars. The margins within the portfolio continue to improve. We talked in our comments about the all flash portion of the portfolio growing double digits for the second quarter. So thank PowerMax, PowerScale, PowerStore, Object Scale, and PowerFlex all growing. We've talked about PowerStore in seven quarters of growth, six of those double digits. The buyer base is growing. The net new customers buying Dell Storage with PowerStore is up. The strategy that we've flipped to, which really drives this notion of three core areas where the Dell private cloud which is really open, disaggregated and automated storage. It's our three tier storage with our Dell automation platform. Our AI and unstructured storage assets, so think of those as the construct of the AI data platform and cyber resilience, is really data domain and power Those are all Dell IP assets. That's what we're driving. That's what the Salesforce is incented to do. And we're seeing nice results from it. Thanks, Assia. Thank you. Operator: And our next question will come from Simon Leopold with Raymond James. Simon Leopold: Thanks for taking the question. I wanted to see if you could maybe unpack the elements that contribute to the roughly $5 billion of incremental AI revenue for the full year. I I guess what I'm trying to get at is how much is this about your ability to get key components new orders, or existing orders occurring earlier? Just help us unpack what factors led to the raised forecast for AI. Thank you. Well, at the highest level, $12.3 billion of new orders and a growing backlog and then a supply chain that I think is unmatched that finds materials and gets materials lined up with customer availability. This is equal parts customer readiness. Buildings, power, direct liquid cooling, So we've used the word lumpy before, which we purposely didn't use here, but it's really driven by a customer's readiness and our ability to deliver matched up with the supply chain's ability to get the material and matched up with our sales force out winning new opportunities across the Neo Cloud customer base. The sovereign customer base, and enterprise customer base. So it's that combination and why you see one quarter five billion dollars, 1 quarter $9 billion in shipments. It really is equal parts customer readiness customer delivery acceptance, that drives that. And The stars align in Q4. With the amount of orders with the GB 200 and GB 300 business that we have booked that we'll be able Deliver at that rate in Q4. Thanks, Simon. Operator: And the next question comes from David Voigt with UBS. David Voigt: Great. Thanks, guys. Maybe just one for David. So you talked about margins and commodity pressures quite extensively. Can we look at your purchase commitments as barometer for how you're thinking about margins going into next year? I know a big chunk of that is probably tied to the AI server business. But is there anything in sort of those purchase commitment numbers that we could look at as sort of evidence of how you're thinking about where DRAM and NAND prices could be? And I think last quarter, you exited the queue north of $5 billion but most of that is for this fiscal year. So if you can give us any update on kind of how to think about purchase commitments going into fiscal twenty seven, and as an indicator, that would be great. Thanks. Yeah. Sure. Look, have no discernible change in the pattern of our you know, purchase commitments. Or in relation to positioning on things like inventory, etcetera. So if you think of AI, and this is a good kind of litmus test for us within the finance side as well as we observe it. You take that $12.3 billion that Jeff just referenced, sequentially, we actually took down our inventory values about $300 million. If you look at it in the year on year, the year on year inventory is roughly flat, give or take. Yet our year to date demand is up over $19 billion in that period too. So obviously, we have our normal supply chain procurement processes kicked in. As part of it. So no no real discernible change from last quarter. Or anything to read in as we look into FY twenty seven just yet. Yeah. Thanks a lot, David. Operator, we'll take one more question, and then we'll hand it over to Jeff We're closed. Operator: We'll take our final question from Tim Long. With Barclays. Tim Long: Thank you for squeezing me in. Two parter, if I could, on on gross margins. First part, talking about the mix in AI servers, as you start to convert more of the Neo Cloud and sovereign and enterprise, to revenues, would you expect to change to that mid single digit operating margin? Could that move higher? Or how meaningful would that be? And the second part, on the PC side, think there was a comment at the analyst day about you know, really doing well in the high end commercial but trying to recapture share in other parts of the PC market. Is that something that we could expect might impact operating margin on the on the PC business? Thank you. Yes. Maybe let's let's start with the AI side. Look. We're gonna stay consistent on our single digit delivery in terms of operating profit. You will stay within that range Yep. While we'd like to in every deal, the reality is we won't write on a lot of those can be competitive, particularly the larger ones. So look, we'll remain judicious as we manage the profitability and the ongoing activities there. Some will flow slightly lower. Other deals will be slightly higher, but we'll stay pretty consistent as an objective within that mid single digit. Momentum. As we kind of go forward. And that's if you like, the bedrock of which we'll build it on. The other element for me is which is part of it, is making sure every deal is accretive from a dollar perspective too. So, again, cash flow is something that at the forefront of all our operations. We think that's a good thing. In fact, we think it's a great thing. We wanna make sure we keep it front and center as we look at the at the activities. And Tim, your second question on PCs, when we were last together, you're exactly right, I talked about the PC business being a scale business. And our share had slipped in the non premium segments. And we leaned in this past quarter. We leaned in with our Dell Pro Essential and education boxes in commercial, and we were more aggressive in the holiday in the consumer and the results are encouraging. International growth accelerated sequentially up double digits in demand year over year. That's exactly where Dell Pro Essential is targeted. And while it is a very competitive marketplace, we made a slight reference to it, but I'm going to call it out specifically. We return to demand growth in consumer for the first time in three years. We returned to growth in the consumer business for the first time in three years. We're gonna continue to work on our cost position, tuning the products so they're the right products at the right cost for the right price span, We went into the market with what we had. We'll continue to refine that. Lots of changes in the road maps going forward, and you have our commitment that we can grow while balancing the profitability within the operating ranges that we've given. Thanks, Tim. And to you, Jeff, to close this out. Jeff Clarke: Thanks, Jim. Sure. Thank you all for joining us today. A few a few as we wrap up. First, we achieved record Q3 results across both revenue and EPS underscoring disciplined execution and the strength of our business models. Second, our AI momentum remains exceptional. We saw record orders in Q3 and have booked $30 billion through the first three quarters of this year. Our pipeline and customer base continues to expand and we remain well positioned to capitalize on accelerating demand for AI solutions. And lastly, we saw improved profitability and strong cash generation enabling above trend capital return to shareholders. We are set up well to close the year strong and to drive long term value. Thanks for joining us today and happy Thanksgiving everybody. Operator: Thank you. This concludes today's conference call. We appreciate your participation. You may disconnect at this time.
Operator: Good morning, ladies and gentlemen, and thank you for standing by for Baozun's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I will now turn the meeting over to your host for today's call, Ms. Wendy Sun, Senior Director of Corporate Development and Investor Relations of Baozun. Please proceed, Wendy. Wendy Sun: Thank you, operator. Hello, everyone, and thank you for joining us today. Our third quarter 2025 earnings release was distributed earlier before this call and is available on our IR website at ir.baozun.com as well as on PR Newswire services. We have also posted a PowerPoint presentation that accompanies our comments to the same IR website where they are available for your download. On the call today from Baozun, we have Mr. Vincent Qiu, Chairman and Chief Executive Officer; Ms. Catherine Zhu, our Chief Financial Officer; Mr. Junhua Wu, Director and Chief Strategy Officer of Baozun Group, and Mr. Ken Huang, Chief Financial Officer of Baozun Brand Management. Mr. Qiu will first share our business strategy and company highlights. Ms. Zhu will then discuss our financials and outlook, followed by Mr. Wu and Mr. Huang, who will share more about our e-commerce and brand management segment, respectively. They will all be available to answer your questions during the Q&A session that follows. Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of the U.S. Securities Act of 1933 as amended, the U.S. Securities Exchange Act of 1934 as amended, and the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the United States Securities and Exchange Commission and its announcement notice or other documents published on the website of Stock Exchange of Hong Kong Limited. All information provided in this call is as of the date hereof and is based on assumptions that the company believes to be reasonable as of this date, and the company does not undertake any obligation to update any forward-looking statements, except as required under applicable law. Finally, please note that unless otherwise stated, all figures mentioned during this call are in RMB. You may now turn to Slide #2 for the executive highlights for the quarter. It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Vincent Qiu. Vincent, please go ahead. Wenbin Qiu: Thank you, Wendy. Hello, everyone, and thank you all for your time. I'm pleased that Baozun is advancing its strategic transformation with steady momentum, delivering a strong quarter marked by 5% total revenue growth and a big improvement in profitability. Fueled by strong gross margin expansion, our non-GAAP operating loss narrowed to RMB 11 million from RMB 85 million a year ago. These results show that our transformation is effective and demonstrate the strength of our business model. Both of our 2 core engines are driving this success. BEC's solid execution and growing agility continue to deliver strong results this quarter. Building on the 56% year-over-year increase in adjusted operating profit from Q2, BEC achieved its most profitable third quarter in recent years with non-GAAP operating profit of RMB 28 million compared with operating loss of RMB 30 million a year ago. This significant improvement in profitability, along with 6% services revenue growth and strong gains in creative content and marketplace connectivity shows that BEC is now more agile and efficient. BBM continued with strong top line growth with revenue up to 20% year-over-year, driven by impactful merchandising and marketing initiatives. This quarter, we engaged our first Gap China brand ambassador, a top-tier actor with 30 million followers on Weibo and 8 million on Douyin. We also launched a series of marketing campaigns and themed products to deepen emotional connections with local consumers. Hunter continued its brand momentum and opened our new store in Qingdao, bringing Hunter's total offline stores to 8, including 5 in China and 3 in Southeast Asia. These efforts contribute to sales growth, stronger gross margin and improved overall profitability for BBM. In summary, we are firmly on track with our strategic transformation. With a resilient e-commerce foundation, accelerating brand management momentum and the technology as our catalyst, we believe 2025 is a highly productive building phase. We anticipate 2026 to mark our inflection point, shifting from transformation investment to sustained profitable growth. Now I will hand the call over to our team for a deeper dive into our financials and the business performances. Catherine Yanjie Zhu: Thanks, Vincent, and hello, everyone. Now let me provide a more detailed overview of financial results for the third quarter of 2025. Please turn to Slide #3. Baozun Group's total net revenues for the third quarter of 2025 increased by 5% year-over-year to RMB 2.2 billion. Of this total, E-Commerce revenue grew by 2.4% to RMB 1.8 billion, while Brand Management revenue rose by 20% to RMB 396 million. Breaking down E-Commerce revenue by business model, services revenue increased 6.3% year-over-year to RMB 1.4 billion. This increase was driven by revenue growth in online store operations and digital marketing and IT solutions. BEC product sales revenue decreased 8.9% year-over-year to RMB 413.4 million, mainly due to decline in Appliances, and Health and Nutrition categories. BBM product sales totaled RMB 395.2 million, representing a 20% year-over-year growth. This growth was mainly driven by the strong performance of the Gap brand. Please turn to Slide #4. From a profitability perspective, our blended gross margin for product sales at the group level was 34.3%, an expansion of 620 basis points year-over-year. Gross profit increased by 26.1% year-over-year to RMB 277.4 million for the quarter. Breaking this down by our key business lines. Gross margin for E-Commerce product sales expanded to 13.1%, reflecting a 300 basis point improvement compared to 10.2% a year ago. This margin expansion was primarily driven by product mix diversification consistent with our progress throughout the year. Gross margin for BBM was 56.5% compared with 52.8% a year ago, reflecting the success of merchandising and marketing initiatives of BBM. Now please turn to Slide #5 for a walk-through of our OpEx. Sales and marketing expenses increased by 10.7% to RMB 886.6 million. This included an increase of RMB 67.5 million for BEC, which was mainly due to higher spending on creative content on Douyin and RedNote, and more revenue contribution from digital marketing for BEC during the quarter. BBM sales and marketing expenses increased by RMB 18.8 million due to higher front-end expenses from expanded offline network and more marketing initiatives for BBM during the quarter. Fulfillment cost for the quarter was reduced by 4.5% to RMB 495.9 million, reflecting our ongoing efforts in cost optimization. Technology and content expenses decreased by 18.2% to RMB 115.2 million as we continue to enhance tech monetization efficiency. G&A expenses decreased by 4.4% to RMB 168.9 million, primarily attributable to our ongoing efforts in efficiency enhancement and cost optimization. Turning to bottom line items, please refer to Slide #6. During the quarter, our non-GAAP loss from operations was RMB 10.8 million, a sharp improvement from RMB 85.2 million in the same period of last year. BEC's adjusted non-GAAP income from operations was RMB 28.1 million, while non-GAAP loss from operations was RMB 29.8 million a year ago. BBM reported a non-GAAP operating loss of RMB 38.7 million, an improvement of 30% compared to the same period of last year. As of September 30, 2025, our cash and cash equivalents, restricted cash and short-term investments totaled RMB 2.7 billion. Lastly, I'd like to quickly address an accounting update on the balance sheet to reflect expiration of options related to the Cainiao minority investment in Baotong, our warehouse and logistics business. According to the agreement with Cainiao, if certain triggering events occur, Cainiao had the right to exercise a put option requiring Baotong to redeem Baotong's shares within 12 months starting from August 2024. As a result, this investment was originally recorded as redeemable noncontrolling interest, which is a complex financial instrument classified between liabilities and equity. With these options expiring during the third quarter, the investment has now been reclassified as noncontrolling interest and equity item. Following this accounting adjustment, our total equity increased to RMB 5.5 billion compared with RMB 4 billion in the previous quarter. Importantly, this adjustment has no impact on our warehouse and logistics operations. Let me now pass the call over to Junhua to update you on BEC, our E-Commerce business. Junhua Wu: Thanks, Catherine, and hello, everyone. I'm pleased to share our progress and achievements for the third quarter. Building on the momentum established in the first half of the year, we continued advancing our strategic priorities with a clear focus on sustainable profitability and growth. As previously outlined, our 2025 roadmap follows a clear progression, Q1 for adjustment, Q2 for stabilization, and the second half for acceleration. I'm pleased to report that Q3 delivered meaningful progress across key business segments. BEC posted solid performance with a stabilizing revenue based a significantly improved revenue mix and quality, leading to a notable improvement in profitability. On a non-GAAP basis, operating profit reached RMB 28 million, making the most profitable third quarter in the recent years for BEC. Please turn to Slide #7. BEC product sales declined by 9% this quarter, reflecting our transition strategy towards a quality-driven portfolio, optimizing selected clients in the Health and Nutrition category and shifting certain clients in Beauty and Cosmetics category from a DC mode to a service model. In the Appliances category, top line softness persisted as we prioritize profitability over volume. These adjustments followed a thorough review of each segment's market dynamics and have led to stronger profitability under a distribution model. As a result, BEC delivered a 300 basis point improvement in gross profit margin to 13.1% for product sales. Just as importantly, enhancements in procurement discipline and turnaround management drove nearly a 20% improvement in inventory turnover days, enabling us to maintain a healthy and efficient inventory levels. In addition, we remain focused on building a more sustainable and quality-driven distribution portfolio. During the quarter, we achieved healthy growth in Beauty and Cosmetics, Alcohol and Apparel categories. Notably, we are expanding our pipeline into nonstandard categories, including Apparel within distribution mode. By leveraging our Brand Management expertise in our core category, we are increasingly able to apply deeper expertise and a more brand owner-oriented mindset. Looking ahead, we expect BEC product sales to return to top line growth in 2026. Turning to Slide #8. Our services revenue grew by 6% in the third quarter, primarily driven by strong performance from online store operations, which saw 16% growth and a 6% growth in DM and IT solutions. Within online store operations, the core apparel and accessory category was a key driver with all key segments generating encouraging top line growth. The strong performance of our services mode reflects how we have advanced the brand empowerment by utilizing our data-driven insights and expertise, and capturing opportunities from ever-changing industry dynamics. We remain committed to leading innovation in creative content as these are critical for consumer engagement and traffic attraction. On RedNote, we plant content seeds to drive interest and brand awareness, which enhances emotional connection and refines the consumer shopping experience. Furthermore, by leveraging enhanced connectivity between marketplaces such as the Tmall Red Cat and JD R.E.D. Jean collaborations, we help brands to generate better marketing conversion and sales performance. This quarter, we were accredited as a premium service partner, further validating our leadership position on this viral live platform and building on our earlier designation as one of the first batch of Red partners in February. On Douyin, we continue to pioneer live stream content and formats, including scenario-based showcases and celebrity collaborations to drive quality business contribution to our brands. In mid-September, we successfully partnered with a leading international electronics brand to launch its flagship stores to further enhance the brand's cultural engagement and product promotion. This initiative was immediately effective. Within a month, we helped the brand gain 3 million consumer followers and achieved the #1 GMV ranking in its category. We are proud to continue setting new industry benchmarks for Douyin brand e-commerce. Overall, this quarter is another solid quarter for BEC, marked by a return to profitability in a lower seasonality quarter, which demonstrates the effectiveness of our strategic focus on sustainable and high-quality growth. We are actively driving the bottom line through efficiency enhancing measures, including the ongoing application of artificial intelligence and automation tools as well as our lean cost control initiatives. We are confident that the foundation built throughout 2025 will continue to accelerate our momentum and deliver long-term value. Now I'll pass to Ken for an update on BBM. Ken Huang: Thank you, team, and hello, everyone. Please turn to Slide #9 for BBM's performance in the third quarter of 2025. I'm pleased to share that BBM maintained its strong growth momentum this quarter with total revenue growing 20% year-over-year to RMB 396 million. The strong growth was driven by improvements across key operating metrics, including same-store sales, traffic, average transaction value and network expansion. Overall, Gap's same-store sales growth was 7% for the quarter. Gross profit for BBM totaled RMB 223 million, an increase of 28% year-over-year, with gross profit margin expanding to 56.5%, up 370 basis points from 52.8% a year ago. This margin expansion, along with strong top line growth, highlights the effectiveness of our merchandising and marketing initiatives. The higher gross profits, combined with improved operating efficiency, further enhanced our overall profitability. As a result, BBM's non-GAAP operating loss for the quarter improved by 30% to RMB 39 million from RMB 55 million in the same period of last year. Now let me expand on our key initiatives for Gap China in the third quarter. First, marketing, as we made a major leap forward in brand storytelling and culture engagement this quarter. On September 15, we announced the appointment of Cheng Yi, one of China's most acclaimed actors, as the inaugural brand ambassador for Gap China. In accordance, we launched Mind the Gap, Bridge the Gap campaign using music as a bridge to engage younger audiences and reintroduce Gap as a comfort, confident, modern lifestyle brand. We also introduced the Gap Club Capsule collection and upgraded the brand image in our offline stores to reflect stronger creative energy and local relevance. To provide immersive experiences, we hosted 2 pop-up experience stores, one in Shanghai's Anfu Road and one on Shenzhen COCO Park, both featuring live performance, vinyl shops and art collaborations, successfully merging lifestyle and fashion. In this campaign, we also introduced innovative interactions with social PGC and UGC content. These efforts helped us attract more customers, strengthen brand awareness and deliver meaningful business results. In total, the campaign had more than 1.2 billion impression, 9 million interactions and 176,000 new followers. These efforts also drove a 25% increase in young customers and strengthened Gap's position as an authentic and aspirational brand for China's younger generation. Meanwhile, we continue to work closely with Gap Inc. to capitalize on its global marketing assets and upward momentum. This August, Gap Inc. partnered with KATSEYE on the Better in Denim campaign, blending Gap's iconic timeless denim with KATSEYE's contemporary and education sensibilities. And China is one of the few countries that offer KATSEYE's exclusive products to the market, also achieved a very satisfying result. Second, merchandising, which remains the core engine of our growth. We continuously sharpened the product offerings and introduced a higher mix of online exclusive and segmented products across different marketplaces over the summer and fall. We also deepened the collaboration with major platforms through exclusive assortments and joint marketing programs such as Tmall Fashion Show and Douyin Super Brand Day. This tailored e-commerce strategy, coupled with our participation in platform promotional events, accelerated traffic and conversion growth. At the same time, our improved supply chain ensured fast and localized fulfillment. We believe that our agility and flexibility in shifting between online and offline channels has become an important competitive advantage. From a channel perspective, we continue to expand our physical presence. For Gap, we opened 11 new stores in Tier 1 and Tier 2 cities, including Guangzhou and Yichang, while closing 4 low productivity stores. We also started to remodel existing stores in Wuhan and Wuxi this quarter to upgrade our store image, visual merchandising and the customers' experience. This brought the total number of Gap stores to 163 by the end of this third quarter. Together with Hunter's network expansion, our Baozun brand management offline portfolio now stands at 171 stores. In addition, we hosted a National Partner Conference in September, convening a dozen top-tier business partners, which cover all important provinces. Notably, half of these partners were new with strong brand portfolio and operating expertise in their regions. Cooperations with these new partners also aligned with our expansion plan by enhancing our business in the key cities in North, Southwest and South China. This event allowed our partners to directly experience our ascending brand influence and our marketing product and channel strategy in the coming year. Their positive feedback reaffirmed the strong partners' confidence in our brand direction. In summary, BBM delivered another quarter of healthy growth and brand revitalization. Furthermore, our integrated marketing campaigns have laid a solid foundation for the Gap brand to further unlock market potential. This was evident in the big improvements in brand rankings across all key divisions, men's, women's and kids during the most recent Double 11 campaign. This success places us on track to achieve Gap's first breakeven quarter in the upcoming fourth quarter. With both Gap and Hunter building stronger emotional relevance and culture momentum, we are confident in sustaining our growth through year-end and beyond. That concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session. Operator: [Operator Instructions] Our first question comes from Alicia Yap with Citigroup. Alicis a Yap: Congrats on the solid results. Two questions. First, can you provide some observations on the latest consumer sentiment? So have you seen any shift of the consumer spending behavior recently, especially with the recent Singles' Day promotions? Any change of the consumer preference in terms of the purchase willingness? And then categories that you have seen doing better than you previously expected, and also categories that performing worse than you anticipated? And then also, what are the brands -- how are the brands' willingness to spend on the marketing budget during this year's Singles' Day? How should we be thinking about the impact from the Singles' Day to the fourth quarter outlook? And then second question is, I know it's a little bit early, but then any comments on the 2026 outlook in terms of your different business segments? And also, what are your top strategic priorities? For example, is there any target for margin expansions or any of these brand expansions? And also, how AI will play a role in helping you to achieve some of your 2026 priorities? Junhua Wu: Okay. This is Junhua. So let me address your first question, and maybe Vincent can address the second one. So in terms of the latest consumer sentiment, from our perspective, according to the just finished Double 11, so we realize that the consumer sentiment is getting better. So you can see a lot of consumers, they are paying for value. So they are not just -- they are being very targeted. They know what they want and they wait until all those kind of the values and profitabilities from the brand and all those coupons are addressed. So especially with the recent promotion, we can definitely expect a very strong finish for the Double 11 this year. And from the preference, so as far as our observation, so it's still towards the sports category and apparel category and the FMCG category follows. So if you're talking about some kind of the categories performing worse than we anticipated, I would say, after the pullback of the subsidiaries of the home appliance category, so consumers rather to wait for another kind of benefit from the platform and from another support when their subsidiaries are supported. But the willingness of the consuming power is still getting stronger and the willingness of the brand in spending marketing budget and allocate our new inventory is getting stronger. So after 6/18 this year and after Double 11, we are saying that we definitely can expect a stronger support in terms of the marketing fee from the brand perspective and the inventory allocation for the new year. A lot of brands during this past Double 11, they are focused on their P&L rather than the GMV growth. So a lot of our brand partners, they have increased their P&L to several point percent and which maybe lead better results from their global strategy. So that's my answer for the first question. Wenbin Qiu: Okay. Thank you for the question. This is Vincent. And I think your second question about our strategies is a very important question. Basically, we have 2 business divisions or units, BEC and BBM. One by one, for BEC, I think next year, the most important job for them to do is to expand the margin, and in the meanwhile, to optimize the cost efficiency. I think these 2 are very important. So for the margin expansion part, we are doing more and more distribution model. We are taking more ownership in the process of the sales, trying to get better margin. That is one side. The other side is that we are initiating a lot of these kind of lean operation initiatives to help us to get a better cost. So it is to do more with less strategy for BEC. On the other hand, we have the BBM business, which the priorities are quite different. So firstly, for the existing brands like Gap, Hunter and others, we are trying to make every brand to be successful business operations. That is very important, not only for the quarter-to-quarter business performance, but also for the future potential of how many and how well we can work with the other brands. So the first priority for the BBM is doing well for each brand. The second thing is that we are trying to develop the synergy between BBM and the BEC, trying to convene more and more knowledge, experiences and mechanisms to BEC to enable them to have more ownership in the distribution business. More ownership always means more margin and puts more potential on profitability. So that is very important. Because in the past 3 years, we spent a lot of time and energy in BBM and we gained, as a group, a lot of solid experiences, how to do higher ownership business. So this kind of knowledge, experience and mechanisms can transfer to BEC to make them a better potential to do this kind of high-quality distribution business, especially in the softer goods sections categories. So in the past more than 1 year, we have some of the experiments. We have several projects, which is quite more, apparel, fashion products, distribution model. They are very successful. So next year, we're trying to expand this model into more brands. So we are expecting a huge potential of growth for this soft goods distribution model. So this gives us a huge potential space to grow the business, not only the top line, but more importantly on the margin expansion side. So that is basically our plan for 2026 and the years ahead. So for the -- of course, we are actively looking for brands for the BBM portfolio. But I think we'll be very careful in bringing new brands in to make sure we have a good chance to be successful each brand, as I mentioned, for the first priority. And also, we are investing in data warehouse, AI, all these kind of technology factors, and we are seeing yields from these efforts and investments. We are going to do this in the future as well. So all these kind of technology, AI capability and data warehouse can contribute in the future. So synergy between BBM and BEC is very important. Just like what Ken just said, Mind the Gap, Bridge the Gap, yes. So BEC and BBM are getting more and more as one. Operator: And the next question comes from Yin Jiawei with CITIC. Jiawei Yin: Congratulations on this quarter's strong performance. I have 2 questions regarding BEC. The first question is that, as we have seen recently, premium consumption has shown signs of stabilizing and recovering. Has the company's relevant categories benefited from this trend? And my second question is, in recent years, the growth gap between content e-commerce and traditional e-commerce has narrowed. Meanwhile, China's online traffic and sales channels has become more diversified. With emerging platforms like RedNote and Bilibili, how does the company view the strategic shift brands should make? And how is Baozun adapting to this change? Junhua Wu: Okay. Let me address your 2 questions. The first one is a very positive answer. So yes. So premium luxury category is still taking the lead of the result, especially after Double 11. So I can make one example about a leading American premium brand, which maintains a 60% Y-o-Y, and the pattern keeps going for the past 3 years. So in this category, if you want to drive a higher margin, a higher GMV, it's not relied on listing more products online, it relies on the content-driven, how do you want to just set up the emotion linkage before making transactions. So I cannot review a lot of details, but if you have the chance to go to our live stream studio for that brand, you can see that. They are scenario-based. They are building a lot of different scenes for selling total look instead of a single article for top or for bottom. So the luxury and premium category, they can provide a very big value for consumers to purchase, and they can provide a lot of history, the brand storytelling, a lot of things. So this is very much promising in the future. And we realize that the consumer shopping is pay for value. So they rather wait until the good momentum and a good window to shop in all those premium and luxury brands. And the second question is related to content e-commerce and traditional e-commerce. So I mean, for the past 2, 3 years, there's no such thing to separate the content with the traditional e-commerce. They are merging together. They are interweaved with each other. You need to just build up the content before making transactions, not just getting the traffic to your store and let them convert. So the RedNote, before they had the Red Cat initiative, they were the UGC platform. That was the pure content. And in the past 6/18, their initiatives, all those RedCat initiatives link all those content to the transaction, which makes that the brands are shifting their strategy, putting a lot of marketing fee and marketing spending into an ROI-driven kind of the initiatives. So more and more brands realize that investing in content and getting more investment into the content creation, set up the emotion linkage is the key, because we can trace all those content, how much ROI can be driven from those content to the transaction. So we are providing -- the platforms are also providing a lot of tools and mechanism to validate all those kind of investments from the marketing to EC operations. So if in the future we believe that in that marketing and EC operation they are going to be rebudgeting for the future growth, from the brand perspective, you need to just harmonize the marketing spending and the EC operation, not just inside performance marketing driving traffic, but also invest in the content to drive from the content to transactions. Yes, that's my answer for 2 questions. Operator: And the next question comes from Joanna Ma with CMBI. Joanna Ma: Congratulations on a strong quarter. So I have 2 questions. The first is regarding what can management share with us regarding your revenue and profitability outlook in the last quarter and also for the full year '26. While my second question is, can management share with us your development plan for BBM business in the full year '26, both regarding Gap, Hunter and other new initiatives? Wenbin Qiu: Okay. This is Vincent. Let me answer these questions. For the first one, right now, we are already in late November. So we can see that from day-to-day business management and updates, we are quite confident for both BEC and BBM results in the coming quarter. We are trying to deliver another solid quarter in the near future. So, so far, I think it is quite on track, and we are quite confident for the results. For the coming year, 2026, we are hoping that both business with its performance and also with the synergy in between to be developed, we are expecting a big improvement in profitability for the whole business. Separately, BEC, we are expecting big improvements and also BBM because we are developing synergy. So in general, we are expecting big improvements for profitability. For the BBM business, as I just mentioned, the priority is that we just make each of the single brand to achieve the expectations and plan we made for this year and next and in the coming 3 years. And also, we are developing a synergy between BEC and the BBM. Certainly, we'll be actively looking for new opportunities, but we'll be very careful in bringing in new brands. So that is about the BBM strategy. Yes. Operator: [Operator Instructions] Our next question comes from [ Tao Xiaoming ] with Huatai Securities. Unknown Analyst: I have 2 questions. The first question is about quick commerce. Driven by the traffic from Taobao's quick commerce on the main app, Taobao's DAU recorded a noticeable year-on-year increase in third quarter with further momentum continuing into 4Q. Have we observed any positive impact from the increase in Taobao main site traffic on our third quarter performance, and in which aspect is this mainly reflected? And looking ahead to fourth quarter, should we expect any sustained positive influence or some potential action on the quick commerce? And my second question is about the recent new regulation on advertising spend and tax. Some of our brands under our portfolio in the beauty category, the new tax policy introduced updated requirements on advertising spending. Have we seen any impact on our advertising operations so far? How should we assess the potential magnitude and extent of this policy's impact on revenue and profitability going forward? Junhua Wu: Okay. Thank you for the question. This is Junhua. Let me address your 2 questions. The first one is related to the instant shopping, quick commerce. So when you're talking about the instant shopping, you need to talk about the categories. The category really just have that business nature, like FMCG, food, wine, some kind of category, they are more related to the instant shopping. So this is not our majority battlefield in the Baozun BEC business growth. We are in the fashion business, in the luxury business, electronic devices. Some of our FMCG and wine brands, they are pilot run and they devote themselves into the quick commerce. But it's very hard for us to imagine a premium luxury brand listing their products next to, for example, like birth control products. So that scenario is not our majority part of the battlefield. And this is the second one. The second one is the traffic pool from the instant shopping to the Tmall and Taobao, they are very different. So they are personalized to a very targeted traffic into different brands. So we are not targeting all those instant shopping traffic rather than we just targeted the OAIPL. So we need to just spend our money wisely in the big pool. So we are focused on more the top tier, I mean, the 300 million among the 800 million traffic among all the Tmall, for example. So this is our target traffic, not the instant shopping traffic. That's the first one. The second one, you mentioned about especially the cosmetics category because we realize that in that category, the marketing spending is mostly bigger than the other categories. But after the pandemic, all the brands are spending their money wisely. So even in the cosmetics brand, the brand doesn't really just spend that much pie like years ago. So within the regulation and policy, we have not realized any kind of impact about the regulation to us. So the brands in that category, also the other categories also still maintain a decent and very logical investment proportion among their GMV. Operator: And the last question comes from Yin Jiawei with CITIC. Jiawei Yin: I have one question regarding BBM. In September, Gap has signed a top-tier brand ambassador, and the Brand Management business also delivered a strong growth this quarter. So what impact has this collaboration had on Gap's brand awareness and user profile? And has there been any synergetic sales growth in other business lines like children's wear? And what is the company's long-term view on Gap's profit potential and the development vision? Ken Huang: Thank you for the question. This is Ken. I will answer your question. Firstly, as I mentioned before, in this campaign, we attracted more customers from the younger generations, 25% increase. It's not only increase in the young generation, but in the whole customer base, we see a big increase in all the AIPL customer base. And more importantly, we see a lot of new UGC content in the social media. Our brand and our products are discussed within the young generations and our consumers. And this campaign also helped us to promote our key category products, especially denim and sweatshirt. Our ambassador wears different colors, different fit, style, logo sweatshirts during the campaign. It helped us further strengthen the brand awareness and the key product awareness to the market. And second, for the kids and baby business, we do see that synergy, because kids and baby is a very strong division of Gap brand. And it's also our advantage because nearly all our stores sell both adult and kids and baby products. So this can be proved from our increase of our units per transaction. So we see more family customers also shop both adult and kids products at the same time. And for your last question about Gap's future profit potential, I think by capitalizing this marketing asset of this full campaign, we will continue using our winning formula to continue to expand our customer base, brand and sales in the coming quarters and the coming year. So we expect to continue our double-digit growth in Q4, around 20% increase. And for next year, we also expect a continuous double-digit increase in our sales. In Q4, we will also introduce our new store image. So with this new store image, we expect a bigger store sales productivity in our new store format in next year. So we will further accelerate our store expansion, keep the momentum of sales growth in both scale and unit stores, which in total, I think, will help us to improve the profit. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Wendy Sun for any closing remarks. Wendy Sun: Thank you, operator. On behalf of the Baozun management team, we'd like to thank you again for your participation in today's call. If you require any further information, feel free to reach out to us. Thank you for joining us today. This concludes the call. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome, everyone, to Accsys Technologies plc Interim Results Presentation for the 6 months ended September 30, 2025. Today's speakers are Dr. Jelena Arsic van Os, Chief Executive Officer of Accsys Technologies; and Sameet Vohra, the company's Chief Financial Officer. Jelena and Sam will take you through an overview of the business and financial performance for the year before we open the floor to questions. Please note that we will prioritizing questions from analysts. [Operator Instructions] With this, I would like to pass over to our speakers. Jelena Arsic Os: Good morning, everybody, and welcome to Accsys' interim results presentation for the 6 months ended September 30, 2025. I am very pleased to report that we have delivered an excellent first half with a significant improvement in profitability. Our growth across all regions is beating the underlying market trends, showing our FOCUS strategy is effective and that the company is delivering on its promises. Accoya has seen strong growth across its sales regions with a 22% increase in total sales volumes, gaining market share from competitive and alternative materials. Our premium market positioning is proving resilient against continuing macroeconomic challenges. Group revenues increased by 23% on a like-for-like basis compared to the prior year. This comparison adjusts for the transfer of North American sales from the group to Accoya USA, our joint venture with Eastman Chemicals after it commenced operations toward the end of H1 last year. Accoya USA has had an excellent H1 performance. It has shown rapid volume growth with North American sales up 61% and positive momentum throughout the period. This demonstrates the strength of our technology, the Accoya brand and our customer relationships in the sizable North American market. Joint venture reported close to breakeven EBITDA for H1. This translates to Accsys joint venture equity accounted a modest EBITDA loss of EUR 0.3 million. This marks substantial progress compared to the equity accounted losses of EUR 4.3 million last year, and we are all excited about what's to come. Accsys maintained gross margin above our target of 30%, maintaining pricing discipline. We also continue to maintain cost discipline and have retained EUR 2.3 million in benefits from the business transformation program that we began in FY '24. We increased adjusted EBITDA for the half year by 160% to EUR 10.4 million. This is just slightly lower than the EUR 10.8 million we reported for the full financial year 2025. With our EBITDA margin at 11.6%, Accsys is almost at the level of our Phase 1 FOCUS strategy target. Crucially, we have made solid progress on deleveraging the balance sheet, a key strategic priority. Net debt has decreased by EUR 2.8 million since 31st March 2025, driven by improved operating cash flow, and we have improved our leverage ratio from 2.5x to 2.1x at September 30, 2025. During the period, we achieved operating cash flow of EUR 8 million. In October 2025, outside of this reporting period, we successfully negotiated new improved terms for financing our debt with ABN AMRO and HSBC. This refinancing strengthens our capital structure and further derisks our profile, positioning us to execute our strategy with greater confidence. Our good performance is a clear signal of our continuous progress. Accsys is delivering on its commitments and is laying a solid foundation for further growth. I want to take this opportunity to sincerely thank the entire team across Accsys and Accoya USA as well as our customers and partners. Thank you for your dedication. Your efforts continue to drive our success and position us very well for the future. We are progressing our FOCUS strategy, transforming Accsys into a fundamentally strong operationally efficient, customer-centric united, safe and sustainable business. Together, these efforts are creating a strong and lasting platform for growth. Compared to the first half last year, we have significantly derisked the company, having no exposure to large unfinished CapEx projects and significantly improved financial performance. The company now operates 3 production sites, Arnhem, Barry and the Accoya USA and has secured future growth funding on improved terms with the extended maturity to October 2029. We are operationally more efficient with like-for-like gross margin improvement of 1.1% compared to the prior period, driven by efficiency measures, amongst them, improved utilization of acetic anhydride in production. In addition, we have retained EUR 2.3 million of benefits from the business transformation program. As a growth company, we nevertheless continue to invest in volume expansion. We are investing in a new acetyl storage in Arnhem and have more than doubled our Accoya Color capacity in Barry from 6,000 to 14,000 cubic meters. Accsys aligns all its initiatives, investments and growth plans around maximizing customer value. With our fantastic products, we have customer centricity at our core and we continue expanding Accoya availability, adding 3 new distribution partners in the period, and Accoya projects continue winning awards, like a recent DNA Paris Design 2025 award for Casa Angra coastal home in Brazil. Accoya is gaining market share globally despite relatively soft overall market sentiment in the building material industry. An organization is only as strong as its talent. We are strengthening our workforce across sites through ongoing investments in revenue-generating commercial head count and strengthening our site teams. Last, but certainly not least, in the first half, we invested in health and safety and environment, improving working conditions in our Stacker hall in Arnhem. We also established our sustainability strategy, staying true to our purpose and values, and reaffirmed our commitment to building a better, more sustainable future. Accsys Cares sustainability plan introduced our first decarbonization commitments and targets, enhancing the already strong sustainability credentials of our products and our business. Before I hand over to Sam to discuss our financials, I wanted to share a short video of one of our projects highlights from this period, Accoya being used for the new roof and public space at a landmark NEMO Museum building in Amsterdam. [Presentation] Sameet Vohra: A truly remarkable project. Thank you, Jelena. Over the next few slides, I'm going to talk you through the financial results for the half year in more detail. This slide summarizes the strong financial performance for the first half of the financial year. I'll go into more detail on the financial performance in the next couple of slides by highlighting some of them now. Group sales volumes were up 1% to 30,575 cubic meters compared to the prior period. However, when you exclude the 3,802 cubic meters of sales made by the group to North America in the prior period before the Accoya USA joint venture commenced operations, the group sales volumes were up by 15%, with strong demand in all regions. Total sales volumes, which includes all of the sales volumes from the JV and more clearly shows global demand for Accoya increased by 22% to 38,618 cubic meters with 8,043 cubic meters coming from the JV. Group revenue increased by 5% to EUR 76.1 million for the first half of the year. However, like-for-like revenue, which adjusts for the group North America sales made in the prior periods increased by 23% year-on-year. Aggregated revenue, which includes 60% of the revenue of the JV was up 21% to EUR 89.9 million. Gross profit was EUR 1 million higher than the prior period at EUR 23.2 million, and the gross profit margin remains above our target level of 30%. Underlying EBITDA, which excludes the results of the joint venture increased by 29% to EUR 10.7 million compared to EUR 8.3 million in the prior period with a 260 basis point increase in the underlying EBITDA margin to 14.1%. This reflects a strong sales volume and revenue growth, maintaining a gross margin above 30% and the tight cost control discipline we have over operating costs. It was really pleasing to see that the Accoya USA JV was close to EBITDA breakeven for the first half of the year compared to a loss of EUR 4.3 million in the prior period. Sales are accelerating in North America, and we expect the joint venture to be EBITDA positive for the financial year. Adjusted EBITDA on a profitability performance measure was up by 160% to EUR 10.4 million, with an impressive 620 basis points increase in the margin to 11.6%, which is just below the target that we set for the end of Phase 1 of our strategy. The EUR 10.4 million adjusted EBITDA is also slightly lower than the EUR 10.8 million that we reported for the whole of the last financial year. Net debt at 30th of September 2025 stood at EUR 39.8 million, lower than the prior period and the figure at the end of March 2025. The leverage ratio improved to 2.1x. I'll discuss the changes in revenue, profitability and net debt in more detail in the coming slides. Going into more detail on our revenue performance for the year. As I previously mentioned, group revenue increased by 5% to EUR 76.1 million in the prior period, excluding the EUR 10.3 million of revenue from sales made to North America before the joint venture starts operations, like-for-like revenue growth was 23%. The sales growth we've seen in H1 across all regions has fully replaced the North America volumes transferred to the JV. Despite the challenging macroeconomic environment, we have maintained strong pricing discipline with a 1.7% increase in average Accoya sales price for the period. As Jelena previously mentioned, we doubled capacity in our Barry Color facility during the period due to increased demand for our color product. We saw a favorable product mix effect for this with the Accoya Color now making up a high proportion of group sales volumes through the prior period. Accoya Color also undertakes tolling for the JV and sales in the period increased by EUR 2.8 million from this. License fee and royalty income from the JV was EUR 1.6 million higher than the prior period as the group receives a royalty based on sales made by the JV. The final license fee payment was also received during the period, following successful completion of the performance test of the Kingsport plant, thereby granting exclusivity for the North American market to the joint venture. Other represents Tricoya panel sales and sales of acetic acid which are broadly in line with the prior period. Aggregated revenue, which includes 60% of the joint venture's revenue, increased by 21% to EUR 89.9 million. On a constant currency basis, aggregated revenue grew by 23%, given the weakness of U.S. dollar against the euro. On the face of it, the gross margin decreased by 20 basis points to 30.5% for the period. However, the prior period includes sales that were made to North America prior to the joint venture commencing operations. These sales amounted to 3,802 cubic meters, which represented 13% of group sales volume in the prior period. They contributed EUR 4 million of gross margin in the prior period and EUR 2.9 million of EBITDA as the average sales price in North America is higher than all other regions. Therefore, a more representative way to look at gross margin progression in the first half of this financial year is to exclude the EUR 4 million from the comparator, resulting in the like-for-like gross margin improving by EUR 5 million to EUR 23.2 million and 110 basis points to 30.5%. This EUR 4 million gross margin reduction has been offset by sales volume growth, favorable sales mix and higher average sales price from other regions, together with the receipt of royalties and license fees from the joint venture. Our main production costs related to raw material spend on raw wood and net acetyls. Raw wood costs are in line with the prior period as higher appearance grade raw wood costs have been offset by lower wood chip grade costs. We saw an improvement in gross margin arising on net acetyls from improved utilization of acetic anhydride in the production process, change in the supply mix and favorable FX as the U.S. dollar weakened against the euro. The increase in other costs reflects the investment in talent and headcount in operations to support sales growth, the effect of the annual salary increase and higher inventory handling costs. The gross margin at 30.5% continues to remain above our strategic level of 30%. This slide shows the adjusted EBITDA progression during the year, reflecting the strong financial performance. From an overall perspective, we saw a 160% increase in adjusted EBITDA from EUR 4 million to EUR 10.4 million and a 620 basis point increase in the adjusted EBITDA margin to 11.6%. This is already very close to the 12% target that we set for the end of Phase 1 of our FOCUS strategy, and it's very encouraging to see. The gross margin benefit to EBITDA amounted to EUR 1 million or EUR 5 million on a like-for-like basis, and we tightly controlled operating costs, which only increased by EUR 0.2 million compared to the prior period. EUR 2.3 million of the benefits from the business transformation program in FY '24 have been retained even after the investments we've made in sales and marketing and operational headcount and strengthening local management teams in key areas. There are no further costs associated with Hull after the business was placed into liquidation in December 2024. The joint venture is close to EBITDA breakeven for the period with our 60% share of the EBITDA loss amounting to only EUR 0.3 million as the Kingsport plant ramps up with accelerating North American sales growth. This is an improvement of EUR 4 million compared to the EUR 4.3 million loss recorded in the prior period. From a segmental perspective, EBITDA from our Accoya segment increased from EUR 10.7 million to EUR 12.7 million with healthy margin of 16.7%, up from 14.8% in the prior period. This growth is primarily due to the strong sales growth, the improvement in gross margin and tight cost control discipline on operating costs. Corporate costs amounted to EUR 2 million and were EUR 0.4 million lower than the prior period. Therefore, underlying EBITDA, excluding the joint venture increased by 28% from EUR 8.3 million to EUR 10.7 million. The margin improved by 260 basis points to 14.1%, reflecting the strong underlying profitability of the group. As I mentioned before, adjusted EBITDA increased by 160% from EUR 4 million to EUR 10.4 million. This slide shows the evolution of net debt during the year. Net debt at the end of September 2025 stood at EUR 39.8 million, a decrease of EUR 2.8 million compared to the start of the financial year. Debt reduction and deleveraging the balance sheet remains a key priority for us, and net leverage reduced from 2.5x to 2.1x at the end of September 2025. We experienced an increase in net working capital of EUR 4.2 million in the period, which is primarily related to higher inventory levels. This increase in inventory was planned to ensure product availability to support strong demand and customer service as well as building up inventory ahead of the annual maintenance stock, which took place in Arnhem in October. Accordingly, operating cash flow conversion was 75%, in line with our Phase 1 target. Tight working capital management remains a key area of focus for us. CapEx is EUR 2.9 million during the period, and this included expansionary growth CapEx on increasing our acetyl storage and making health safety and environmental improvements in the Stacker hall in Arnhem. Interest paid and accrued amounted to EUR 2.3 million, of which EUR 1.1 million related to accrued interest on the convertible loan notes. Tax received was EUR 0.7 million in respect to previous tax years. We recently completed the refinancing of our debt facility with a new EUR 55 million facility with ABN AMRO and HSBC on improved financial terms. The refinancing strengthens our capital structure, enhance its financial flexibility and further derisks our profile, positioning us to execute our FOCUS strategy and growth plans with greater confidence and resilience. The refinancing demonstrates continued strong support from ABN AMRO, and we are delighted to partner with HSBC, a bank of significant strength and reputation. So in summary, we've had an excellent first half of the year with a significant improvement in profitability. We saw strong total sales volume growth of 22%, with accelerating sales in North America, which increased by 61%. The joint venture was close to breakeven EBITDA in H1. Adjusted EBITDA was EUR 10.4 million, with a 11.6% margin, close to our Phase 1 target of 12%. We have continued to focus on deleveraging the balance sheet with net leverage decreasing to 2.1x and the recently completed refinancing strengthens our capital structure and enhances financial flexibility on improved terms. I'd like to now hand you back to Jelena, who will take you through the business review. Jelena Arsic Os: Thank you, Sam. In January 2025, we set out our FOCUS strategy, which will be delivered in 3 phases. The first phase to FY '27 focuses on resetting operationally, maximizing returns and cash flow from our existing operations and reinforcing the fundamentals, including reducing the debt and optimizing our capital structure. Our half year results demonstrate good progress against our Phase 1 targets. Our strong sales growth put us on a good trajectory to meet run rate target of 100,000 cubic meters by the end of FY '27. We have also significantly improved profitability moving from 5.4% in adjusted EBITDA margin from last year to 11.6%. We are very close to our adjusted EBITDA margin target of 12%. We are also in line with our operating cash flow conversion at 75%. Importantly, we are deleveraging and derisking the business, placing the company in a stronger position for growth. Our successful October refinancing gives us more favorable payment terms with a reduction in quarterly repayments going forward. Global demand for our products has been strong. We had outstanding growth in the U.S., which I will provide more details on in the coming slides. We saw very good growth in our key European markets despite continued macroeconomic uncertainty. The European market landscape reflects a mix of cautious recovery signals and ongoing challenges across key regions, shaped by economic pressures, regulatory changes, and involving demand in the construction and timber industries. Europe grew 22% in the reporting period. We saw growth in Germany, driven primarily by strong demand in the outdoor living market, high energy costs and slowing housing permits weigh on German outlook, but commercial and renovation segments remain more resilient. European growth was also supported by a good performance in Benelux where we had positive momentum in Belgium after onboarding a recent distributor. Government initiatives for energy-efficient building materials continues to favor sustainable timber products. We achieved 14% growth in the U.K. and Ireland, our most established market as we continue to build a strong reputation for joinery applications and gain more facade specifications. The softwood market in the U.K. remains weak with subdued import volumes and merchants limiting stock positions, pending market clarity with the U.K. budget approaching. The U.K. budget is being announced tomorrow with uncertainty of governmental measures to address the fiscal gap that is estimated between GBP 20 billion and GBP 50 billion. Across the rest of the world, we saw 28% growth with bright spots in Australia and New Zealand, as our partnerships with our distributors continue to develop and expand our presence. Accoya for Tricoya sales grew at a more moderate pace, with sales weighting towards the start of the period. Finally, we will be launching a new finished decking products in the second half with a phased market rollout. This will be the first time that we offer a finished product to the market and is an exciting new development for Accsys. We also continue to see Accoya specified for incredible projects worldwide. The start-up of Accoya USA last year was a significant milestone for Accsys. And I am very proud to share that it has got off to an excellent start. In North America, the joint venture grew sales volumes by an impressive 61% with sales acceleration across the period, driven predominantly by our existing distributors, many of whom we have a long-standing relationship with. The local availability and production provide them with the confidence to run faster. While a 10% tariff was announced in October on imported lumber, we have taken proactive steps to manage the impact of this going forward. So let's look at the more detail at the U.S. market developments. Our sales in the U.S. are outpacing overall market growth, allowing us to gain share from competitors. With forecast indicating strong and sustained demand for modified wood over alternative materials, we are confident that Accoya USA will continue to expand its presence in the growing market. Our main drivers in the U.S. are cladding and decking. These markets both have strong growth rates for modified wood with double-digit growth forecast for decking. Traditional timber products are seeing sharp declines in demand as customers opt for higher performance modified and engineered solutions. Furthermore, increased regulation on the import of hardwoods ipê and cumaru from Brazil has had a positive benefit for Accoya in the U.S.A., and it has limited the supply of these woods. As you can see in the table, the hardwood market for decking is expected to contract. Our growth in the U.S. predominantly came from our existing distributors. In addition, we have added 3 new distributors in the period, including one of the largest in the U.S. hardwood specialty products, GMX Group, a wholesale distributor with a focus on retail customer, and our first Mexican direct distributor, Klinai and expect to see these new channels contribute strongly in H2. We continue to strengthen our relationship, both with the direct distributors and our approved manufacturing partners. Our products are extremely well regarded in the marketplace, that this testimonial from Delta Millworks featuring the owner and CEO, Robbie Davis, and Baker Donnelly, regional sales manager, one of our long-standing Accoya manufacturing customers testifies. [Presentation] Jelena Arsic Os: This fantastic Delta video highlights value that resonates strongly with us: quality, performance and the long-term reliability. These principles are at the core of how we strive to build and maintain our customer relationship, and they are something I'm incredibly proud of. A big part of our FOCUS strategy is to maximize returns from our existing assets, driving sustainable profitable growth from our core sites in Arnhem and Barry. During this period, we have invested EUR 2.5 million in Arnhem to expand our acetyl storage capacity. From December 2025 onwards, we will gain improved logistical flexibility and increased uptime, enabling us to complete more batches per month. Furthermore, our logistical costs will reduce as we can now unload more acetyls during the week rather than in the weekend. On top of that, we are less vulnerable to interruptions in the chemical supply chain. In Barry, in response to strong demand for Accoya Color globally, we have taken steps to double our capacity. This includes introducing the second shift, expanding our own storage capacity and outsourcing some external drying. This builds on the planning facilities we added last December to be able to produce finished decking boards. We expect Accoya Color and finished decking boards to continue to be important demand drivers. Growth for this product range, including volumes sold out to the joint venture showed an increase of 56% year-on-year. We are very proud today to launch Accsys Cares, our first sustainability plan, which aims to deliver long-term value from all of our stakeholders. The plan highlights our commitments across 4 key pillars: people, planet, profit and governance. It introduces our first decarbonization commitments and targets, further enhancing the already strong sustainability credentials of our products and our business. Finally, wrapping up today's messaging, we have delivered a strong H1 and we entered the second half of the year from a position of strength. Our trading remains robust going into H2, supported by sustained global demand for our premium differentiated products. We expect continued sales acceleration in North America, and notwithstanding the impact of the recently announced tariffs, we expect the joint venture to be EBITDA positive for the financial year. While noting continuous macroeconomic challenges, the Board is confident the company will continue to deliver further growth and profitability improvements for the year ahead, consistent with expectations and to make further progress towards our strategic targets. Looking ahead, we remain confident in the long-term potential of our technology and strategy. We have a clear road map, market-leading products in attractive growth markets and a fully funded manufacturing base that position us to deliver significant shareholder value. I continue to be very excited by the prospects for our business. We are transforming we are delivering, and we are growing. Thank you all for your attention. With this, I will hand over to our operator now for the Q&A session. Operator: [Operator Instructions] We will now take the first question from the line of Martijn den Drijver from ABN AMRO. Martijn den Drijver: I have 4 questions, and I'll take them one by one, if I may. To start off on the U.S., just to give us a bit of a sense on where the existing -- so not the 3 new ones that you mentioned, but the existing distributors, can you give some color on where they stand in terms of ordering levels versus assumed potential? Just give us a sense of what -- with the existing distributors, what type of growth lays ahead? Jelena Arsic Os: Well, Martijn, our existing distributors are already active in the U.S. for a very long time. And as we know, the Accoya sales are pretty technical sales. You need to pursue the market that you do have, by far, the best product in terms of performance, stability and the long-term durability. We are seeing in this period significant growth. Most of the U.S. growth that you are seeing in this result is actually coming from our existing distribution partners. They are today placed on the East Coast of the U.S., West Coast and in Texas. We are working on increasing our presence in the Texas area because there, we do have big OEMs like Delta Millworks that you just saw the video about, they are located in Texas. But we do believe that, that area could provide us some more opportunity to grow. So new distributors that we put in place in this half of the year, they are all starting to take the inventories and to push the market predominantly gaining the market share and not fighting for the same business that our existing distributors are already having. So there is a lot of efforts from our side going into education, specification selling and helping the new distributors predominantly to actually focus on the new business generated and creating the Accoya pie to be bigger in this very sizable and profitable North American market. Martijn den Drijver: Just 1 follow-up, Jelena. The total distributors now, how much do you think you need more in terms of distributors to have a full national coverage, perhaps both in the U.S. and in Mexico? Jelena Arsic Os: I think in Mexico, this Klinai is quite a large player. So I believe we are going to give them an opportunity to deliver what we think that they can deliver. In the U.S., we do believe that today, we have a quite good mix of large regional players, and they have also quite a good network of secondary distributors that are working with them. So we do not expect that we will be adding a large amount of new distributors in the U.S. We would like the distributors that we already now appointed to actually prove that they can deliver on the expectations. And so we have a quite defined KPIs in place that we follow very, very clearly. So for the next half of the year, we are going to give the existing and the new ones chance to fully deliver. Martijn den Drijver: Got it. Got it. Then the second question on the U.S. for Sam. The breakeven has been achieved faster than expected. You're now guiding for profitable EBITDA levels for the full year. Does this have an impact on the planned/forecast equity injections from the group into the JV? I seem to remember that where guidance was still for EUR 4 million in fiscal 2026. Does that still stand? Or should we assume a different amount now? Sameet Vohra: Yes. Thanks, Martijn. Good question. So yes, I mean, as you saw the JV was very close to breakeven for the first half of the year, and we do fully expect it to be profitable for the full year. Our initial expectations were and in terms of what your modeling has in terms of capital injections going into the JV, that's all to do with growth. We -- the business needs wood and it effectively needs a high level of working capital to meet that significant level of growth that we're seeing, not just for this financial year, but also coming financial year because really, our strategy is about filling up that plant, and having it operating at full capacity within the 5 years of our strategy, so by the end of Phase 2. So any additional capital injections that we may need to put into the business will be all to do with providing it with additional working capital to fund growth. Martijn den Drijver: So it might actually end up a little bit higher than the initial guidance. Sameet Vohra: No, I don't think it will be any more than EUR 4 million that you've already got factored in. Martijn den Drijver: All right. Then moving on to Europe. I was just wondering, you mentioned good developments in the Benelux, Germany, already very strong in U.K. and Ireland. But you mentioned plans to support France. Can you elaborate a little bit on your plans in France? And perhaps on Germany, what type of -- where does Germany stand relative to prior sales levels? Are they approaching it? Or are they still far away from it? Jelena Arsic Os: Well, we saw -- as I told you, the levels in Germany are increasing. Of course, if you look from the period of a couple of years ago, we still have a space to develop. But if you look at the previous year, we do have quite a significant growth, and this is coming predominantly from the demand coming from outdoor living markets and with the outdoor living market, that is really decking, what we are seeing that it is taking off with our Accoya Color range being available in Germany. So we are continuing to work with our existing -- we have a very large distributor in Germany. We are continuing to work with them, but we are also working on expanding that distribution network as we go into H2. Looking at France, we are predominantly now looking to strengthen our team in France, and we need to add commercial headcount to help us to cover this quite large and still unexplored market for Accoya. We had a couple of very nice projects that we deliver in the country, but certainly with the size of France, there is quite a large opportunity to grow there. So we have good distributors in place, but we are adding a headcount -- commercial headcount in the region to help us grow this market share. Martijn den Drijver: Great. Then one final question on Color. Can you shed some light on what you produced in H1 in Color, given the capacity expansions that would probably help us to understand what could be expected going forward? Jelena Arsic Os: Well, what we said, we actually increased almost more than a double capacity of Color in Barry, starting from 6,000, what we had last year, and now we should be having certainly capacity of -- we could be able to produce up to 14,000. We do believe that in the -- given the good strong demand for Accoya Color, we certainly could be doubling what we actually produce, so 6,000 to up to 12,000 in this financial year. Of course, decking season is a seasonal -- so demand is quite seasonal. We do see that the season starts in spring and our distributors are starting to build inventories starting from beginning of our Q4. So that's why also our Q4 is one of the larger quarters that we have as a company due to this specific effect. Martijn den Drijver: All right. And my really final question is on your EBITDA -- adjusted EBITDA margin, close to your FOCUS one target already. If I look at Bloomberg consensus, it's considerably higher for fiscal '26, '27, around the 16% level. Is that something you feel comfortable with given these very positive developments, both in Europe and the U.S.? Sameet Vohra: Sorry, can you just repeat that percentage that Bloomberg is showing? Martijn den Drijver: Yes. Bloomberg is -- I think it says it's not quite clear whether that is now group or adjusted, but it's 16% level. Sameet Vohra: Yes. I mean, that's probably around group. I mean, we're already at group level. We are already -- I mean, as you saw for H1 at 14% underlying margin with the group at what adjusted being just over 12% target. So I mean, we're very confident, and we firmly believe that we're on track to deliver the margin targets that we laid out in our Investor Strategy Day earlier this year by the end of Phase 1 of our strategy. Operator: We will now take the next question from the line of Johan van den Hooven from Edison Group. Johan van den Hooven: Only 3 questions is for me for now. If you look at the volume growth was, of course, strong. We already talked about U.S.A Looking at the volume growth of Accoya for Tricoya that is, well, only 6%. Is there a special reason that there's a bit of a slowdown or is it just a mix effect or a different focus on the U.S.? That's the first question, and we'll do the others later. Jelena Arsic Os: Yes, you're absolutely right, Johan. As we reported, Accoya for Tricoya volume grew 6.4%. This is also lower than percentage-wise, what we also put in our market update in September, where we saw at the time, 25% growth of Accoya for Tricoya. The reason for it is basically slower demand from our customers for Tricoya that is also linked to the season, but also overall subdued soft market sentiment in the -- they all operate in that MDF space. So we are seeing this demand increasing and starting to pick up as of December this year. So they were really running through the inventory reduction going towards the end of the calendar year. And now we are seeing the order book for Tricoya starting to fill in as we go into December. Johan van den Hooven: Okay. That's clear. Another question about your sort of guidance for EBITDA. EBITDA for the full year is in line with your expectations. But I seem to remember that previously, sometimes we refer to consensus or in different words, is it too simple to just double the EBITDA of the first half -- for the full year, I mean? Sameet Vohra: So I think when you look at seasonality in terms of our business, quarter 4 is our largest quarter by sales volumes really because from a decking and cladding perspective, a lot of sales take place ahead of that spring season. So quarter 4 being our largest by volume, quarter 3 ultimately being our smallest because you've got the effect of December, our customers effectively stop ordering and taking collections just after mid-December, the Christmas shutdown. And then obviously in October, we have the annual maintenance stop in Arnhem, where we're selling out our finished goods. So you could think -- despite that revenue and volume seasonality, I mean, profitability is going to be very similar to 50-50 between H1 and H2, and that's why we're seeing it in line with our expectations. Johan van den Hooven: Okay. But then -- okay. So we can look at the doubling. But in the first half, of course, you had EUR 2 million license income, which might not reoccur in the second half, which also then not helps EBITDA? Sameet Vohra: No. I mean, you've got -- I mean, it's not just license income. You also get the royalty. The largest part of that EUR 2 million is actually the royalty that we get from Accoya USA sales. So we get a fixed percentage on their revenue. So as you've seen, as their sales are accelerating, we're getting a higher royalty fee from them. Johan van den Hooven: Yes. Last question for now, just about the import tariffs. It's only 10%, and you've said you've taken some actions, but can you tell us a bit more? Is it just raising prices, lowering costs or a mix? Jelena Arsic Os: Well, it is predominantly raising the prices, Johan. We already put it in place and we didn't receive too much of the pushbacks from our customers. I think everybody in the U.S. market is now getting accommodated to the tariffs having impact on the price inflation of overall materials, if you like. So we put a price increase in place starting from 1st of November. And we also have, of course, an ongoing dialogue with the sawmills where we are actively tracking what is the sentiment in the U.S. market and also looking with them how we can, if you like, share the pain, if that pain become larger. But so far with the 10%, we do believe that we can manage this quite well. Operator: [Operator Instructions] Our next question comes from the line of Alastair Stewart from Progressive Equity Research. Alastair Stewart: Two or three questions. First on the U.S.A., given that you've now got what tends to be a very solid distributor base and enthusiastic uptake by customers, have you any sort of -- can you give us any sort of guidance when you could be looking at further reactors from the U.S. facility? So that's the first question. Secondly, interested to see a new distributor in Mexico. But what sort of size do you think that -- what proportion of U.S. output could Mexico be? And is that -- is it in a similar sort of mainly decking and cladding markets? And looking above the bar, are there any plans for Canada or any indications of how Canadian uptake could develop? Jelena Arsic Os: Yes. Thank you, Alastair. Thank you very much. Good questions. So if you look at our distribution base in the U.S., we do believe that with capacity of the plant today at 43,000 cubic meters, we do have enough capacity for at least next 2 years to feed demand and growth in this region. So we are focusing the organization, and we are focusing basically everybody to get more returns from the existing assets in the next year or 2. So this is -- this was a part of our Phase 1 of the FOCUS strategy. So we just continue working on it. Now we are going to see in next -- in the next half of the financial year and also in the beginning of the financial year '27, which is a key year for the company because this marks end of our Phase 1 FOCUS strategy, how things are developing. And in order to start talking about second reactor, you need at least 12 to 16 or 18 months from the design to basically ordering the equipment and putting it in place. Today, we have enough space in the U.S. and already a foundation put in place for the next reactors. So that should speed up that process when the time comes. So we do have enough space in the U.S. to put additional 6 reactors if that is necessary but I would like to really spend next year, 1.5 years, next 18 months, utilizing what we already have. And we do believe that we have enough capacity to meet the demand from a broader North American market, not only U.S. but also talking about Canada and Mexico as well. Now your comment on -- does this answer your question? Alastair Stewart: Sorry, I would just add -- I was asking about Mexico again, sort of potential growth there. Is it the same sort of end market that decking and cladding -- and while I'm on also, it was interesting to hear about France as well. They seem to be slightly late to the party as it were. What's driving the uptick in demand from France? And that will be all my questions. Jelena Arsic Os: Okay. So let me go back to Mexico and Canada because I think that those were the other 2 questions. So the Klinai is a quite a large distributor that also have significant milling capacity. So they are also capable of making some of the end products. So they will be focusing on cladding and decking predominantly. And the market in Mexico is large. We also are supporting the Caribbean region from the U.S. So -- and we do have already a couple of very nice projects that are happening there. Is Mexico going to be bigger than the U.S.? I don't so. Alastair Stewart: No, I don't think I was suggesting that, but how big could it be as part of the U.S. output? Jelena Arsic Os: Well, we do have a quite ambitious expectations from them, but we just signed off that agreement with Klinai. I would like to give them at least half a year to see what they can deliver in order to start shaping an expectations and certainly communicating those expectations internally. They are quite capable professional company with the milling capacity that could be important for us. But for us, our U.S. market, is by far the fastest growing, the most profitable and certainly more than 90% of the Accoya USA sales should come from the U.S. itself. Looking at the Canada, we do have one of our largest -- well, actually, the largest distributor we have in the U.S. is a U.S. Canadian company with the roots in Canada. So we do sell Accoya in Canada already for some years. With the tariffs, import tariffs from Canada and between Canada and the U.S., some of the trade is being slowing down. But nevertheless, we also have an opportunity, if necessary, to ship smaller amount from Europe directly to Canada, if that is going to serve customers better. So as said, we do expect U.S. plant predominantly to serve U.S. market, but we do have now today established partners in Canada, Mexico and Caribbean as well. So in France, also decking and cladding market, we had a couple of good projects that were done in the country. And we also have a good collaboration with the architects in France. But you know, it is a huge country and with Accoya Color now being more available, also coming with the new decking collection, we do need more feet on the ground to educate and push growth to the faster pace. So predominantly, cladding and decking and Accoya Color is one of the most wanted products we see in France. Operator: We will now take the next question from the line of Adrian Kearsey from Panmure Liberum. Adrian Kearsey: Well done on a good set of results, guys. A couple of questions for me, although I have some more, but most of them have been asked already. Could you perhaps give us sort of a bit some more color in terms of the pricing environment across different territories? Are we seeing greater pricing in certain territories rather than the others? And then to go back to the question on distributor relationships. Would you be able to sort of give some indication about how conversations are progressing in certain territories with signing additional distributor clients? Jelena Arsic Os: Yes. So pricing, as we already reported today, the average sales price in the reporting period went up with 1.7%. We are not reporting specifically per country or per region. But in average, this was the good, I would say, marker for you to look across -- both across Europe and the U.S., very, very similar price increase. We do -- of course, we are very careful, and we know that what we are selling is the value. So we are very careful of keeping that premium place in the building materials. So we are reacting on the tariffs in the U.S. We are reacting on the inflationary pressures in Europe and U.K., and we will continue to do that. And it looks to us that market is actually accepting that as well. Looking at the distributors, adding new distributors across the region. As I already mentioned, we are talking with the distribution partners in Germany. We are also talking with the new distribution partners in Central and Eastern Europe. I'm not ready to announce anything yet but we do expect that we will be expanding our distribution base predominantly in the next half year in the markets where Accsys is providing Accoya and we do believe that as of today, the number of distributors and coverage in the U.S. is good, and we want to give our new distribution partners chance to actually deliver on the expectations that we have for them. I hope this answers your question, Adrian. Operator: I would now like to turn the conference back to Dr. Jelena Arsic van Os for closing remarks. Jelena Arsic Os: So thank you very much. As I said in the last page of our presentation, we are remaining confident in the long-term potential of our technology and strategy. Company is transforming. We are growing, and we are delivering, and we have a very clear road map in front of us with a market-leading product in very attractive growth markets. So we will continue to do what we are doing and then hopefully, next half year when we hear each other, we will just confirm the expectations that we all have. So thank you very much. And with this, we will close our results call for today. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good day, and welcome to the Yiren Digital Ltd. Third Quarter 2025 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Keyao He. Please go ahead. Keyao He: Thank you, Operator. Good morning and good evening, everyone. Today's call features a presentation by our Founder, Chairman, and CEO of Yiren Digital Ltd., Mr. Ning Tang, and our CFO, Mr. Ka Chun Hui. There will be a Q&A session after the prepared remarks. Before beginning, we would like to remind you that discussions during this call contain forward-looking statements made under the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Such statements involve risks, uncertainties, and factors that can cause actual results to differ materially from those contained in any such statements. Further information regarding such risks, uncertainties, or factors is included in our filings with the U.S. Securities and Exchange Commission. We do not undertake any obligation to update any forward-looking statements as required under the relevant law. During the call, we will be referring to certain non-GAAP financial measures and supplemental measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. For information about these non-GAAP financial measures and reconciliation to GAAP measures, please refer to our earnings press release. I will now pass it to Ning Tang for opening remarks. Thank you all for joining us today. Ning Tang: This past quarter presented a more challenging operating environment than we have seen in recent periods, driven primarily by heightened regulatory uncertainty and a more cautious credit backdrop. While these factors weighed on parts of our business, we moved quickly to adjust our risk posture and protect asset quality. I am pleased to share that these actions have been effective. At the same time, our Internet insurance segment continued to deliver solid growth, reinforcing the resilience and diversification of our platform. As we look ahead, we remain focused on disciplined execution and positioning the company for the next generation of fintech with AI and blockchain. As part of our ongoing transformation, we continue to advance our agentic AI capabilities to enhance process efficiency and strengthen unit economics. These innovations are helping us offset the margin pressure associated with rising credit risk. Our agentic platform, MagicQ, is already demonstrating meaningful impact, improving sales conversion, elevating risk controls, and driving greater overall productivity. With that, let me walk you through the key business highlights for the quarter. First, turning to our financial services segment. We facilitated RMB 20.2 billion in loan origination during this quarter, up 51% year over year. Our repeat borrowing rate remained at a record high of 77%, in line with last quarter and 16 percentage points higher than a year ago. While the number of our total borrowers decreased by 11% to 1.3 million compared to the same period last year due to the tightening of credit policies, our total cumulative borrower base increased by 21% year on year to 14 million. We also continued to see healthy structural improvements across our borrower base. The average size for new loans from our lending platform rose from RMB 7,000 to RMB 10,100, driven by our ongoing shift towards higher credit quality customer segments and better credit predictability from repeat borrowers. We expect this favorable mix trend to continue as we continue to trade up for better quality borrowers. Our agentic AI has delivered a remarkable boost in our operations. For marketing, our AI-driven marketing agent continues to deliver strong results. It enhanced customer profiling accuracy and expanded the pool of identified high-intent users by 38% quarter over quarter. In addition, our proprietary AI agent now generates tailored responses across a wide range of customer inquiries, effectively reactivating dormant users and driving a 15% increase in their ATP engagement. For customer service, our LLM-powered service robot continues to strengthen its performance, with response accuracy rising from roughly 80% to over 92%. Meanwhile, the rate of inquiries requiring escalation to human agents declined by nearly 15% quarter over quarter. For quality control and risk management, we continue to optimize our multi-model models. Fraud detection coverage increased from a weekly manual sampling of 450 cases to 5,800 by agentic AI, while accuracy improved to 91%. Now let's turn to capital allocation. As of September 30, 2025, our total outstanding loan balance is RMB 34.2 billion, representing 10% quarter-to-quarter growth. Our funding cost rose by 55 basis points during the quarter, in line with the sector trend. We are now included in the YBASE of nearly 30 compliant funding partners under the new regulatory framework, positioning us as one of the leading players in the market. Asset quality and credit risk, we continue to see industry-wide pressure this quarter. Although we proactively tightened our credit policies, our risk indicators edged up in Q3. As of September 30, our one to thirty-day delinquency rate stood at 2.7%, while the thirty-one to sixty-day and the sixty-one to ninety-day delinquency rates were 1.7% and 1.4%, respectively. The good news is that we see that risk indicators for the loan portfolio from new borrowers begin to trend down in November, which is proof of the effectiveness of our upgraded credit strategy. However, from a conservative point of view, we expect the industry-wide impact on the overall asset quality to continue in the fourth quarter and that the recovery is likely to begin early next year as the market stabilizes. Our AI-driven collection capabilities play an important role in mitigating early-stage synthesis. This automation drove productivity growth, reducing labor costs by an average of RMB 5 million per month, up from RMB 2.7 million in the second quarter, while improving service quality. Turning to our overseas business, our Indonesian operations launched on schedule in September 2025, and we expect this segment to contribute significant growth in 2026. Now turning to our insurance brokerage business. After navigating significant regulatory headwinds and commission pressure in 2024, we entered 2025 with a transformed operating model. Our insurance business has shifted from a high-touch, high-cost brokerage approach to a digital, low customer acquisition cost, high-margin model by tapping into new insurance demand within our existing customer acquisition channels on the platform. This has allowed us to focus on a healthier, more profitable customer base that is contributing meaningfully to segment margins. In 2025, gross written premium reached RMB 1.15 billion, an increase of 35% quarter over quarter. Revenue from the segment was RMB 84.2 million, up 45% from the prior quarter. Our Internet insurance business continued its rapid expansion, delivering RMB 196 million in annualized premium, representing 204% quarter over quarter growth. Total customer numbers rose 93% quarter over quarter to 229,353, driven by more precise marketing and still low penetration within the target segment. We expect the Internet insurance business to sustain strong momentum over the coming quarters. Finally, while we continue to strengthen and scale our core business, we are also investing strategically into the future. Building on our technology capabilities and our position within the broader fintech ecosystem, we are exploring new ways to better serve customers and manage assets through AI and blockchain-enabled solutions. We see AI and blockchain as core strategic pillars for the future of our business, especially as we expand our footprint globally. We are investing in the systems and capabilities needed to build our next-generation fintech infrastructure while deepening partnerships with key industry players. In October, we signed an MOU with TrainUp, a leading crypto solutions provider in Singapore, and we also announced our plan to launch an Ethereum staking service, which is currently undergoing testing. This initiative marks an important milestone in our journey toward delivering seamless 24/7 global financial services. Over the next few quarters, we look forward to introducing additional products designed to enhance financing efficiency and asset monetization for our customers. To conclude on the quarter, while the third quarter brought its share of challenges, the progress we have made demonstrates that our diversification and forward-looking strategy are working. We have built a stronger, more resilient foundation that positions us well for sustainable growth and value creation in the quarters ahead. I am confident that by staying disciplined and continuing to execute on our priorities, we will emerge even stronger. With that, I will now pass it over to Ka Chun Hui, who will provide more details on the financials for the quarter. Ka Chun Hui: Thank you, Ning. Hello, everyone. I will now walk you through our financial performance for the third quarter this year. Please refer to our earnings release and IR deck for further details, both available on our website. For the third quarter, total revenue grew by 5.1% year over year to RMB 1.55 billion, mainly attributable to 70% growth from the Financial Services segment. It was partially offset by the decline in revenue from the consumers and lifestyle segment, as we announced the mid-decommission of the business in 2024. In the Financial Services segment, total loan facilitation volume increased by 51% year over year. The increase was driven by growth in average loan ticket size, the growth of repeated borrowers, and an increase in loan referral revenue. The loans from repeat borrowers account for 77% of the total loan volume facilitated in the third quarter this year, up 16 percentage points compared to the same period last year. As the credit from repeated borrowers is more predictable, it allows us to extend the credit without substantially affecting our portfolio risk. The average size for new loans from our lending platform increased by 44% to RMB 10,100. Overall, the revenue from this segment increased by 70% year over year to RMB 1.4 billion in the third quarter. The revenue growth is driven by our loan guarantee services revenue, which reached RMB 1.4 billion in the third quarter, up nearly 2.4 times year over year, driven by higher loan facilitation under the risk-taking model. As our service revenue and loan facilitation from the risk-taking model increases, our provisions for contingency liability also increased by 68.8% year over year to RMB 460 million. But as the economic benefits of the guarantee services are recognized over the next few quarters, the total of guarantee liabilities of RMB 930 million will be recognized as revenue over the next few quarters. The contribution margin for the entire Financial Services segment improved from 5.2% in 2024 to 23% in the third quarter, driven by a 27.1% decrease in the origination expense while the revenue grew by 70%. In the insurance segment, our gross written premium in the third quarter was RMB 1.15 billion, up 35% from the second quarter this year. It is showing a sign of recovery for this business. Compared to the third quarter of 2024, the premium is still down by 15%. The total premium is slightly down by 1.5% year on year. We have successfully turned around the business. The main growth contributor is the Internet insurance line that we launched in the first quarter. In the third quarter, the gross premium from the Internet insurance line was RMB 196 million, representing 204% growth quarter over quarter. We expect this growth momentum will continue in the next few quarters and have significant revenue contribution to the overall insurance line. One thing to highlight is that the margin and the take rate for the Internet insurance business is much higher than the traditional brokerage line because the clients for this segment come from our customer traffic from insurance and other business segments. These customer segments are of better risk quality than traditional insurance carriers are not able to reach. As such, the Internet insurance business has lower customer acquisition costs, better revenue sharing with the carriers, and no commission cost. The margin is expected to increase as the premium scales, which will benefit the bottom line. On the expense side, sales and marketing expenses in the third quarter decreased by 1.2% year over year to RMB 332 million. The marketing expenses decreased while our total loan facilitation increased by 51%. This is the result of better AI-assisted precision marketing that drives a higher sales conversion, effectively lowering the borrower acquisition cost. Research and development expenses decreased by 39% year over year to RMB 92 million. This is because, during the same period last year, there was a one-off large system development project. The origination, servicing, and other operating costs decreased by 27% year over year to RMB 150 million because of the 27.1% decrease in the origination expense from the financial services business due to the improved collection efficiency driven by AI and lower commission costs from the traditional insurance brokerage line. General and administrative expenses for the quarter increased by 30% year over year to RMB 104 million, primarily due to increased personnel-related costs to strengthen our risk management and to fund the plan for new business initiatives such as the development of the next-generation fintech that we mentioned in the announcement in October. The allowance for contract assets and receivables and others for the quarter increased by 142% year over year to RMB 229 million. This is driven by higher receivables from loan facilitation services and guarantee services as the loan volume has grown with particular strength from the risk-taking model that generates higher service revenues. Along with the increase in the self-funded loan balance in 2025, provisions for contingent liability this year increased by 69% year over year to RMB 460 million because of the increase in loan volume facilitated under the risk-taking model. Net income for the third quarter was RMB 318 million, translating to RMB 3.65 per ADR share or USD 0.51 per ADR share. This represents a 12% decline from the second quarter of this year. The pressure on profitability is attributed to multiple reasons, including the substantial upfront provisions under our risk-taking loan facilitation model, industry-wide volatility in asset quality, a declining fee rate for the loan facilitation business following the new regulation, as well as the decreasing commission rate in our traditional insurance brokerage line. Our net margin declined slightly from 22% in the prior quarter this year to 20%. However, we maintain a very good cash position. The net cash outflow from operations in the third quarter was RMB 1 million, and our balance sheet remained robust with a total cash equivalent and restricted cash of RMB 4 billion. This will position us well to address any future challenges and to capture new opportunities. Looking ahead, we remain cautiously optimistic about our business. While we anticipate volatility in the credit and regulatory risk environment, our disciplined credit policy, enhanced risk management capability, and effective risk revenue model will position us well in this market environment. Our international business and Internet insurance segments are expected to drive higher revenue growth and margin growth in the next few quarters. For 2025, we are projecting revenue to be in the range of RMB 1.4 billion to RMB 1.6 billion, reflecting our disciplined approach to growth and risk management. That's the end of my part of the presentation. Thank you very much. Operator: Thank you. And operator, we are open for Q&A. We will now begin the question and answer session. The conference has now concluded. If you have any questions, you are welcome to contact the company's IR team. Thank you for attending today's presentation. You may now disconnect. Ka Chun Hui: Thank you.
Operator: Hello, ladies and gentlemen. Thank you for standing by, and welcome to Pony AI Inc's Third Quarter twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. After the management's prepared remarks, there will be a question and answer As a reminder, today's conference call is being recorded. And a webcast replay will be available on the company's Investor Relations website at irpony.ai under the News and Events section. I will now turn the call over to your host, George Shao. Head of Capital Markets and Investor Relations at pony.ai. Please go ahead, George. George Shao: Thank you, operator. And hello, everyone. We appreciate you joining us today for Pony AI's third quarter twenty twenty five earnings call. Earlier today, we issued a press release with our financial and operating results. Which is available on our Investor Relations website. An earnings presentation, which we'll refer to during this conference call, can also be accessed and downloaded on our Investor Relations website. Joining with me on the call today are doctor James Tong, chairman of the board and chief executive officer. Doctor Tianqin Luo, chief technology officer. And doctor Liu Wang, chief financial officer of the company. They will provide prepared remarks followed by a q and a session. Before we begin, please refer to the safe harbor statement in our earnings press earnings release which applies to this call as we'll be making forward looking statements. Please also note that we'll discuss non GAAP measures today. Which are more thoroughly explained and reconciled to the most comparable measures reported under GAAP in our earnings release. Available on our Investor Relations website. And filings with the SEC and Hong Kong Stock Exchange. I will now hand it over to our chairman and CEO, Doctor. James Peng. Please go ahead. CEO Remarks (James Tong) James Tong: Thank you, George. Hello, everyone. Thank you for joining our earnings call. I'm excited to share that we have successfully completed the dual primary listing on the Hong Kong Stock Exchange. Under stock code 2026. On November 6 just one year after our Nasdaq listing. With strong support from both international and the domestic investors, We secured the largest IPO in the global autonomous driving sector this year. Raising more than 800,000,000 US dollars. This significantly strengthens our balance sheet and provides the dry powder to accelerate mass production and the largest scale commercialization. We now expect stronger growth surpassing 1,000 robotaxis fleet plan by year end and expanding to more than 3,000 vehicles for 2026. We have already seen the flywheel. In action. Expanded fleet is driving higher user adoption. Shorter wait time, more orders, and a strong revenue growth. After launching Gen seven Robotaxi, we have already sync a citywide unit economics breakeven This in turn gives us more room to increase fleet size. The capital we raised also fills our business development research and development, market making strategic investments in new markets, new applications, and attracting world class AI talents. All these are set to further propel our technology leadership and the long term growth. Our Hong Kong IPO also powers our core mission bringing autonomous mobility to everyone around the world. We're firmly delivering on this commitment Earlier this month, we officially launched fully driverless commercial service. For gen seven robo Texas across Guangzhou, Shenzhen, and Beijing. Today, our management team, including myself, actually arrives at our Shenzhen office in a fully driverless gen seven robotaxis to host this conference earnings call. This is more than just a normal ride for us. It actually marks a giant leap in autonomous driving's advancement. We are making level four autonomy more accessible than ever to a much broader user base. I'm excited to share a critical milestone Our gen seven robotaxis have reached city level UE breakeven in Guangzhou. Shortly after their official commercial launch. This is pivotal to validate our viable business model It not only gives us strong confidence to further scale our fleet, but also attract more and more third party partners enabling them to fund our fleet. And the support. Our asset light model. The scaling up of a fleet is key to our growth. As large scale operational footprint drives efficiency through the economy economy of scale. Our robotaxi vehicles are moved essentially moving billboards. In fact, many new users discover and download our Pony pilot app after spotting our vehicles. On the road for daily operation. To lead fleet expansion serves as a highly efficient self reinforcing marketing engine facilitating user adoption and strengthening brand recognition. This creates a powerful upward spiral more vehicles, generate greater visibility which attracts more users and establish network effects. The results are already evident. Building on that momentum, new registered users nearly doubled within just one week of launching gen seven from late October. Reflecting robust user demand and effective go to market strategy. Now let me highlight some key advanced advanced we made in recent months in executing our scale up strategy. First, we have ramped up production at a accelerating pace. Since the start of production in the middle of this year. By November, more than 600 gen seven robotaxis had rolled off our assembly lines bringing the total fleet size to be over 900 vehicles. Thanks to the streamlined production process, we now expect to outperform our full year target of 1,000 vehicles. Delivering ahead of schedule. This gives us increasing confidence to sustain robust momentum. Driving speed size, to surpass 3,000 vehicles in 2026. Second, in Q3, our robotaxi revenue surged by 90% year over year. With their charging revenues delivering over 200% year over year growth. This was fueled by rising user adoption across all four tier one cities, improved fleet operational efficiency, and tailored pricing strategy for diverse user segments. We have seen that the higher order density leads to lower users average waiting time. And in turn, higher vehicle utilization rate. This allows us to continuously optimize our pricing strategy. Third, we have continued to expand our operational footprint. For example, in Shanghai, we became the city's first company to launch fully driverless commercial global taxi operations earlier this July. Covering the Jingqiao and the Huamu areas of Pudong. In Shenzhen, we extended commercial fully driverless operations to more and bigger city areas. Including Circle and Overseas Chinese town. We're taking major steps toward scale up strategy. So following our collaboration with Hehu in June, we recently forged another partnership with Sunlight Mobility This alliance reflect growing market recognition of our business model, with increasing number of third parties wanting to fund fleet deployment. This actually enables us to speed up further fleet expansion. Now let me turn to our global expansion. We are deeply dedicated to advance global taxi services while strategically expanding our international fleet. Now we have robotaxi presence established in eight countries across China, The Middle East, East Asia, Europe, and The US. We entered a new market in The Middle East. Qatar. Through a partnership with Nova Salet in third quarter. Nova Soleil is the country's largest transportation service provider. As part of this collaboration, our robotaxis have recently begun testing on public roads in Doha the capital of Qatar. We have also advanced our presence in South Korea by securing nationwide robotaxi permits enabling operation across the country's autonomous testing and operational zones. Our collaboration with local partners continue to deepen We're closely with Comfort Air World, the country's largest transportation fee transportation service provider. To begin road testing in Luxembourg, we plan to deploy testing vehicles based on the perjury eTraveler through our alliance with the Stellantis. It's a European leader in light commercial vehicles. This effort will initially focus on vehicles designed for Europeans diverse mobility need to enable a range of use cases. In addition, we have partnered with global ride hailing platforms that also participated in our Hong Kong IPO. Those platforms include Uber, and Bolt. A boat is a Estonia based mobility company operating in over 50 countries and 600 cities. Built upon our collaboration with Uber, we aim to leverage Uber's robust ecosystem to in enter The Middle East and then scale into additional international markets. Last but not least, we recently released our fourth generation robot truck. With production and the initial fleet deployment expected in 2026. Featuring fully automotive grade components, optimized software hardware integration, and the transition from internal combustion engine vehicles to electric vehicles. The Gen four Robotex robotruck delivers a significant more efficient cost structure and a greater energy saving. The new platform fully leverages the technological foundation and operational expertise developed through our gen seven robotaxi vehicles. In addition, we deepened our collaboration with SANE Group and added Liuzhou Moto as a new partner to have multiple vehicles to support. Our further operations. To sum up, 2025 is a critical year of mass production and the commercialization for Pony AR. We take pride in the progress we have made and are steadily delivering on the promise we have made to our shareholders at the time of our US IPO last year. Our recent Hong Kong listing not only marks a major milestone for our company, but also underscores the promising future of the industry. Moving forward, we will drive technological innovation and create lasting values. By scaling fast efficient, and comfortable autonomous mobility services toward our mission. Autonomous mobility everywhere. With that, now I'll hand it over to our CTO, doctor Tianten Lo, to share more about our technology strategies. Hinton, please go ahead. CTO Remarks (Tianqin Luo) Tianqin Luo: Thanks, James. Hello, everyone. This is Tian Cheng. Let me first share my thoughts on our home driving technology stack. From day one, we believe that full stack integration across software, hardware, and operations was the only way to build a truly scalable autonomous mobility. That conviction have been validated again and again. Especially for this critical year of scaling up. With the achievement we made, it is clear to over early technology best help us help us achieve the leading position and it will further accelerate our future growth. Our deep foresight into tech stack what is what is positioning us as a leader in the industry today. As we become one of the few company to operate large scale 40 driverless stroke protection services. So as early as 2020, we recognize the importance of a training go through base on reinforcement learning unit simulation. In that year, we transit transitioned over tech stack into a one model. Which is what we call a pony word today. Through years of R and D effort and the real real world validation, over a top driving world of the driving model have evolved into a closed loop training. We achieved unsupervised self improving iterations. In recent years, we are seeing the broader autonomous and robotic industry coverage converge on one model. Validating the approach we adopt today. This full time in AI tech stack has given us a meaningful head start and we're confident that we will stay ahead of for multiple years. Tianqin Luo: Then let me dive into the three criteria that put us the frontier forefront of of what model development. First, the high fidelity impacted simulation. This is far beyond the ability to just generate the scenarios and render sensor data. Driving is by nature interactive. The robotaxis action directly affect how to run the agent to behave. Such as other vehicles and pedestrians need to react to over driving behavior. It must understand and adapt to new situation and the complex physical interaction in real time. Mirroring true unload interactions. It enables robotax operation that are safe, smooth, and social aware. After 10,000,000,000 kilometer of test miles that only were generated each week, more than 99% kept vehicle agent detections, while less than 1% are still static environment such as center rendering. Okay. Second, the ability to reproduce scale and the realistic color cases. While this long tail scenario don't occur frequently, the way are they they are critical to safety. In our top More importantly, every scenario must be something that could real have really happen in the real world. Not those use case useless edge cases with no basic no basic in reality reality. So the third, the AI based learning evaluator. This is the reward based evaluation mechanism. Driving is a multiple object optimization problem What is considered as a good driving also changes in various driving scenarios. Within the cross loop training environment, the PonyWord and our virtual driver are continuously evaluate on key driving metrics. This assessment does not rely on real world data. Human label data, or rules. Instead, it use AI in part model to learn what good driving looks like directly from the outcomes. Turning real and assimilated experience into a powerful cycle of self improvement. A best in class word model must meet all three criteria to enable truly unsupervised and self improving closed loop training. This is critical to realizing large scale driverless auto driving. And leveraging over full stack technology as a core strengths, I will now turn to how to drive business progress during the third quarter. First, on cost and operational efficiency. We pioneer we pioneered 100% automotive grade autonomous driving kit. For for gen seven robotaxis. We've optimized the design reduce reducing bomb cost by 70% compared with the previous generation. The gen seven v have been officially operating for public in Guangzhou, Shenzhen, Beijing, fully validating our safety standard and operational efficiency. We build on our momentum and deliver further progress. Driving by scale the production and enhance R and D We've already realized an additional 20% reduction in the atomic driving kit from cost for the gen seven platform designed for 2026 production, compared with 2025 baseline. This slide foundation for sustained cost fit Our our robust AI algorithm and fleet management has proven effective at driving operational efficiency. To better identify user demand in hotspot areas, during rush of hours, we will hand our algorithm for all the dispatch. Matching, scheduling. Thereby ensuring sustained different sustained sustained sustained efficient robotactic utilization. Have also improved our virtual driver to recognize more and more complex scenarios. This allow us to improve over remote assistant to vehicle ratio substantially. On the track to reach one to one to 30. By year end. Our our superior servers service experience have become the key reason user choose only Airover taxi. After launch of Gen seven robotaxis, we will earn the worldwide widespread positive feedback and and generate great social media bot from users. As we deliver high quality experience, users are increase increasingly willing to pay a premium for the enhanced effort reliability, the safety of the of our autonomous journey. For ride comfort, over advanced interactive planning cap capability intelligence to optimize for the frequency, and the magnitude of acceleration, braking, and steering. This delivers smooth natural motion control. Tell to the electronic vehicles and the ride sharing markets. Offering consistent comfort experience for every Polyair prover taxi ride. This enhancement have reflect the imaginable improvement for gen seven such as the emergency brakes and the steering over the past few months. Tianqin Luo: Additionally, our low tech features are super in cabin experience. We also pioneered the innovative smart positioning feature with one tap, user can remotely adjust their vehicle position for more convenient pickup and drop off. Introduced the voice active features call it POPO voice assist. Allow users to do star trips, and the country air condition, etcetera. We will continue to upgrade to the cabin into an AI powered mobility terminal. Together, this upgrade create a more accessible and streamlined user experience. Tianqin Luo: So third, over text stack is also built for generalization. The alpha native tech architecture allow us to adapt quickly to new markets and platforms. In terms of cost region generalization, all virtual drive and the show is can quickly understand and adapt to diverse traffic conditions around the world. For example, leveraging over high fidelity training environment and evaluation mechanism powered by 40 jobless coverage in Pudong District in just a few weeks. In addition, when sending to Europe, the system intelligently identified and adapted key difference in in local road conditions. Such as unique traffic signals configuration, and the various driving driving patterns. Our technology boost generation power across platform as well. The latest generation robot truck will commence production and operation from next year. This demonstrate our capability to create synergy between Robotexi and Robotrex tech stack. Looking ahead, we will leverage our success Hong Kong listing to reinforce our technology core leadership. Increasing r and d investment, and attract top AI talent to advance our robotaxi, robotruck, and new market initiatives. We will continue pushing the frontier of the autonomous mobility refining what is possible in the transportation. Okay. This concludes my prepared remarks. I will now pass the call over to our CFO, doctor Liu Wang. For a closer look at our financial results. Liu, please go ahead. CFO Remarks (Liu Wang) Liu Wang: Thank you, Tien Tsin. Hello, everyone. This is Leo. I will focus on year over year comparisons for the third quarter. Unless otherwise noted. Q3 twenty twenty five was a landmark quarter. We delivered a robust revenue growth specifically with solid progress in robotaxi large scale commercialization. And now we expect to outperform our full year fleet target of 1,000 vehicles. Moreover, our newly deployed Gen seven robotaxis fleet have reached a pivotal citywide unit economic breakeven milestone. This layout a solid foundation for further scaling up. And the implementation of ASA Live business model. Well which will be further accelerated by our success Hong Kong IPO capital raise. In this quarter, revenue finished at 25,400,000.0 US dollars. Growing by 72% This strong performance was primarily driven by the continuous optimization of our robotaxis services. And the sustained demand in our licensing and application business. Firstly, robotaxi services revenue reached 6,700,000.0 US dollars. Representing a remarkable growth of 89.5%. Year over year. And the 338.7% quarter over quarter. Specifically, fare charging revenue continued to deliver a triple digit growth surging 233.3%. This was achieved even before the commercial rollout of our gen seven robotaxis. Supported by a stable commercial fleet of our Gens five and Gens six vehicles, the strong growth during Q2 and Q3, stemmed from growing user demand in tier one cities in China. Our continuous effort to optimize fleet operation and the pricing strategy, altogether leading to increased fleet utilization and efficiency. This is a testament to growing user recognition and the brand royalty to Pony Pilot service Going forward, as we follow this strong momentum towards a significant fleet expansion, of over 3,000 vehicles by 2026. Tianqin Luo: We expect Liu Wang: robotaxi revenue growth to accelerate even further driving more orders and a higher operational efficiency. In Q3, another key robotaxi update is the implementation of our ASA Lido asset light model for fleet expansion. As we have shown promising numbers, in vehicle unit economics, We received a strong interest from third parties who are willing to purchase gen seven vehicle. To run as robotaxi operators Such partners include, but are not limited to, leading ride hailing or taxi operators. For instance, Shenzhen Shihu Group and Sunlight Mobility. The asset light model has contributed revenues through technology licensing fee and the vehicle sales. While giving us further leverage and capital efficiency for further fleet expansion. Aside from strong top line growth domestically, we are also seeing fast growth of robotaxis revenues from overseas market. Moving forward, we expect robotaxi revenues from overseas market to continue to grow. Currently, our robotaxi footprint have already expanded into a country globally. Serving as a promising foundation in our exploration of the international opportunities. Secondly, moving to Robotruck. Robotruck service revenues were 10,200,000.0 US dollars, growing by 8.7% Moreover, as we launch our Gen four, fully auto grade robot truck, we expect to reduce the bound cost of its ADK autonomous driving hardware kit. By 70% and the reach a thousand unit scale of Robotruck fleet going forward. This new generation of Robotruck will powerfully accelerate the progress of Robotruck commercialization at scale. Thirdly, licensing and application revenues were 8,600,000.0 US dollars. Growing significantly by 354.6% We continue to see robust and growing demand of our autonomous domain controller. Primary from robot delivery clients. Turning to gross margin. We delivered a significant gross profit margin improvement from 9.2% in Q3 twenty twenty four to 18.4% in Q3 twenty twenty five. With gross profit of 4,700,000.0 US dollars in the third quarter. This remarkable improvement was firstly driven by our strategic initiatives to optimize the revenue mix and secondly, by a greater contribution from robotaxis services. Which carry a relatively higher margin. The UE, the unique economic breakeven achievement validates our due focus on go to market execution. And optimize the operational efficiency. Since the launch of gen seven commercial operations in Guangzhou, daily net revenue per vehicle has reached 299 RMB. The net revenue refers to the total RMB value generated from ride hailing service after deducting discounts and the refunds. Notably, daily average orders per vehicle have reached 23. Fueled by a robust widespread user demand and our operational optimization. Meanwhile, we have also optimized the hardware depreciation as well as operational cost. Including charging remote assistant, ground support, service, maintenance. Insurance, parking, and network costs. This will further improve our margin down the road. The total operating expenses were 74,300,000.0 US dollars up by 76.7% Tianqin Luo: Excluding share based compensation expenses, Liu Wang: non GAAP operating expenses, were 67,700,000.0 US dollars. Up 63.7%. Tianqin Luo: The increase primarily reflects Liu Wang: the one one off r and d investment in gen seven vehicles and the expansion of our r and d personnel. Critical to securing and extending our technological leadership. Specifically, approximately half of the increase in research and development expenses stemmed from onetime customized development fee of 12,700,000.0 US dollars for gen seven vehicles. Net loss for the third quarter was 61,600,000.0 US dollars, compared to 42,100,000.0 US dollars in the same period of last year. Non GAAP net loss was 55,000,000 US dollars, compared to 41,400,000.0 US dollars last year. Looking ahead, we expect to sustain disciplined investment to accelerate larger scale commercial deployment. Turning to the balance sheet. Our cash and cash equivalents short term investments, restricted cash, and long term debt instrument for wealth management were 587,700,000.0 US dollars as of 09/30/2025. Compared to the balance as of 06/30/2025 of 747,700,000.0 US dollars. Around half of this decrease comes from one off cash outflow, including capital injection to Jifeng our joint venture with Toyota, to support a gen seven mass production and deployment All of the capital commitment in Jifeng has been completed The remaining cash balance reduction primarily reflects our mass production and the large scale deployment status including firstly, ongoing operational cash outflow, and secondly, capital expenditure for the Procurement of gen seven vehicle in Q3. To support our goal of 1,000 vehicle fleet by year end. For the nine months ending 09/30/2025, we have a accumulated free cash outflow of 173,600,000.0 US dollars, With the completion of our recent Hong Kong IPO, we have over 800,000,000 US dollars cash newly added providing us with substantial fuel for the next phase of growth. The IPO proceeds will help us accelerate fleet expansion into key addressable markets further optimize our platform for scale, and deepen our R and D investments. To further solidify our technology mode. Looking ahead, our mass production momentum continues to strengthen. And we are on track to exceed our full year vehicle target of 1,000. Achieving this milestone ahead of schedule. This acceleration reinforce our confidence in scaling rapidly. And we now anticipate to grow our fleet to be more than 3,000 vehicles by 2026. In addition, we've already transitioned to a asset light model for a meaningful portion of our new vehicles. This will enhance our capital expenditure efficiency. And provide a greater leverage for scalable fleet expansion. With the proven operational model, and the financial runway from the recent Hong Kong IPO. We are uniquely positioned to accelerate our business plan turning momentum into sustained profitable growth, I will now turn the call over to the operator to begin our q and a session. Thank you. Question & Answer Session Operator: Thank you. We will now begin the question and answer session. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. For the benefit of all participants on today's call, please limit yourself to one question. If you have more questions, please reenter the question queue. If you ask questions in Chinese, please repeat them in English. And the first question comes from Ming Shun Li with Bank of America. Please go ahead. Ming Shun Li: Thank you. Thank you management to give the opportunity for me to ask a question. So I just have one question. So could the management team give us some more update on the flea size for this year and also outlook in 2026. For the new vehicles added, what is the full fleet deployment plan across different city? Thank you. James Tong: This is James. I'll take this one. So as you can see that since the launch of our gen seven robotaxi, we actually have seen a much faster than expected production and the the deployment. So so for this year, we certainly expect to outperform our previous target of 1,000 robotaxis by the year end. We certainly expect this strong momentum to continue into 2026. Now with conservative target of over 3,000 vehicles, This is mainly because we have already seen upward spiral with the launch of our gen seven vehicles. Essentially, the fleet density creates a much shorter wait time for the passengers. And then that creates a better user experience. And then the user experience leads to much higher utilization for our vehicles. And, then we can actually then charge a better pricing So so this spiral really created a strong momentum for us to expand much faster. In addition, we also started experimenting with the asset light model. By collaborating with fleet managers such as, Shihu, Sunlight, and and certainly we'll add more partners This asset light model allows us to deploy at a much larger fleet with, less CapEx. So this is our growth plan. Then in terms of the fleet deployment plan, we'll go deeper on our existing markets and at the same time, we'll go much wider to explore some new opportunities. The citywide UE breakeven for the gen seven in Guangzhou In my view, it's a pivotal milestone to validate our business model. This gives us a huge confidence and allow us to deepen our collaboration and our operation in the existing markets, which are the tier one cities in China. This is because as I already mentioned, expand expanded fleet size creates a upward spiral. But at the same time, we also expand into many more domestic cities and also the overseas markets. We see those for our future growth, Our go to market strategy on those markets is that we'll collaborate deeply with the local partners and the local government agencies to establish presence and prepare for our future growth. So stay tuned. I think we'll have, great news ahead of us. With that, back to the operator. Operator: Thank you. The next question comes from Bin Wang with Deutsche Bank. Please go ahead. Ming Shun Li: Hi, management. Thank you for taking my question. I I just have one question. Which is about the charging. I'd like to know fair charging revenue delivered another growth in 03/2025. So what is the outlook for fair charging revenues as we deploy more vehicles? Thank you. Liu Wang: Yeah. This is Leo. I'll take this question. Yes. In Q3, our fair charging revenue actually surged even faster. It was growing about two hundred and thirty three percent. Though at that time, our fleet were still with the gen five and gen six, gen six vehicles. So we believe such growth was driven by both the demand side as well as the operational side. On the demand side, we have been continuously to do our effort to improve the whole writing experience and also the user experience. So with this effort, we've seen, robust and organic user demand in tier one cities. This is also a signal of a strong consumer adoption of our robotaxis service. Giving you an example that the total registered user Was more than doubled, year over year in Q3. And on the operational side, we have also been optimizing the fleet operation to improve our vehicle utilization and the order fulfillment as Tianqin already mentioned in his remarks. So for example, we enhanced our fleet dispatching and the deployment This has consistently reduced our wait time. It's approximately 50% shorter compared to the same period. In 2024. And we also continue to expand our pickup and drop off points to create a much more smooth user experience. For example, in Shenzhen, now we have more than 10,000 such points. More than 300% increase since the end of June this year. With all this, you know, demand side and operational side improvement, I believe we could see sustained strong growth momentum through the continuous fleet expansion with more and more gen seven vehicle are into our service. First of all, we expect that our fleet has been growing exponentially from 270 next last year and to be more than 1,000 this year. And a target of more than 3,000 next year. This scaling up would also create a a better network effect. Which means shorter wait time and higher vehicle utilization and higher user adoption. We would also progressively expanding our service area. In cities such as Shanghai, Shenzhen, we've already been doing so today. We would increase the population coverage and expanding to more drivable mileages. Etcetera, etcetera. With all these being done, I think we can boost the average order value per chip. Okay. I'll get back to the operator. Operator: Thank you, sir. The next question comes from Kyle Wu with Citi Research. Please go ahead. Unknown Executive: Thanks for taking my questions. This is Kyle from Citi Research. And congratulations on achieving the milestone of Citi wide UEFA even. Could you elaborate more about the assumption behind the delivery per event? Including daily order, pricing, daily operating hours, and a ratio of remote assistance. Thank you. Liu Wang: Yes. I'll I'll take this question. Like you said, we we all believe the citywide u unique economic breakeven is a pivotal milestone for the company and also for the industry. First of all, we you know, achieved this pivotal milestone, in Guangzhou City, since our gen seven vehicle. Has been put into commercial service. And we always believe China is the largest market of global ride hitting market. And for the tier one cities, the total TAM accounts for a huge percent of ride hailing market in China. So achieving this milestone in this market is far more meaningful. From commercial perspective. Then if we talk about the unique economic, there's the revenue side. There's always the cost side. On the revenue side, first of all, on the daily net revenue per vehicle, As I mentioned, our daily net revenue per vehicle has hit 299 RMB. It's based on a two week daily average figures as of November 23. Following the launch of our gen seven vehicle in Guangzhou. And this net revenue also refers to the total RMB value generated from ride hailing service after deducting discounts. And the refunds. And in terms of daily orders, from this 299 RMB number, it was average 23 orders per day. It's fueled by robust widespread of user demand. Now let's look into the cost side. So the cost side of the unique economic basically, has two major component. First of all, it's the hardware depreciation. For gen seven vehicle, the annual vehicle depreciation is based on a six year useful life. The other major component on the cost side is the operational cost. Which include the charging remote assistant, and the ground supporting staff. Vehicle service and maintenance, insurance, parking, Internet network cost, So regarding the remote assistant, we are on track to achieve our well over 30 vehicles. And from this milestone that we achieved, we are very confident to capture the China huge TAM. Meanwhile, it also established a strategic foundation for further scale scaling up. Domestically and internationally. This not only give us strong confidence to further scale our fleet, But we also see more and more third party companies are enabled to fund their fleet and helping us to transition into a satellite model. So all these together we believe will drive our top line growth and also the call cost optimization. Okay. I'll go get back to the operator. Operator: Thank you. The next question comes from Purdy Ho with Huatai Securities. Please go ahead. Unknown Executive: Hello, James, doctor Law, and Liu. Thank you for taking my question, and congratulations on the results. Purdy Ho: We've observed a surge in diverge players attempting to attempt into the robotaxi operation. Particularly the easy makers. Right? So what's your take on these new entry entrants in the l in the level four autonomous driving space? And not so specifically, could you elaborate on the main technical and operational challenges such as tackling corner cases and fleet management for digital commerce. James Tong: Thank you. This is James. I'll take this one. So so first and the foremost, I think it's definitely as we see more and more companies announcing that they're gonna enter into robotaxi industry, I think itself, is actually a great thing because it indicates increasing recognition and the confidence in robo taxi imminent potential for the large scale of of commercialization. As the the awareness increase more resource, More companies come in. More resources will pour into this robotaxi industry. To actually accelerate its development. So overall, I view this as a good thing. But on the flip side, the robotaxi industry is actually not a one that any new player can easily enter. Because as you can see, the fact is that currently none of the new entrants are being OEM maker or being a ride hailing platforms? None of them have fully driverless vehicles deployed on the road to road. So it's clear evidence this is not easy industry to to be entered. I think there certainly three huge hurdles for the any new players. And those hurdles are business side, regulatory side, and also technical challenges. Let's probably look at the business challenges first. Because Volvo Taxi, as you see, it's not just about airfoil driving itself. It also has many more aspects such as user acquisition vehicle production, fleet dispatching, fleet maintenance, such as the cleaning, charging, and everything else. So as a leader, and first mover in this industry, we certainly enjoyed the early mover advantages. As we have a much bigger l four fleet on the road. We generated a better brand awareness We have optimized the cost on every aspects of the business as Leo already mentioned in his answer to the last question. And and the we because of early mover, we also have secured more partners. I think all those are important and it creates big hurdle for any new entrants. The second hurdle that I wanna mention is on the regulatory front. Because l four, a robotaxis needs very high safety requirement. All the policymakers worldwide have fundamentally will require a much, much higher safety requirements for the robotaxis compared with the traditional taxi That means in any city, a new player needs to prove its safety stepped by step. Before they can expand. Even into a fully driverless fleet. Typically, a new player will start with a testing with just a few dozen or maybe even less vehicles. And then once those vehicles prove to be safe, they add more vehicles and then expand operational areas. After they can accumulate the the safety records. And along the way, they also need to acquire all the required licenses and permits And this is in itself is actually a lengthy process. So overall, the whole process takes time. And this code starting process cannot be easily accelerated. So that's the second challenge. The third challenge challenge is certainly in my view, is on the technical side. And probably for this one, I'll tend to tend to elaborate. Tianqin Luo: Yeah. Sure. So I'm Kenton. So let me continue from a technology perspective. So as I as I said in my prepared remarks, we are now seeing the broader industry starting to using one model. Such as robotaxi players and automakers. Essentially, they are all about using reinforcement learning based on simulation training environments. First and foremost, I would say we started developing reinforcement learning for account driving five years ago. This give us a early mover advantage. They have one of the most experienced company in the world model. We believe that we'll continue to stay ahead as more peers follow the same path. So once the word more mature now, the human feedback and the real word, they no longer used for further iterations. Purdy Ho: So Tianqin Luo: at at the stage of training cost loop, the word model and the virtual driver co evolve into a dual spiral cycle. This means the word model and training the virtual driver And at the same time, the word model improves sales through feedback of the virtual driver. This sharply reduce reliance on the real world data. Question will touch on the technical challenge before the meeting of corner cases. Maybe example here that why the virtual driving some corner cases. So this is gonna give feedback to the word model. And the word model will improve its distribution of the corner cases. Then the next generation next version of our model will be able to create a generator testing and also improving the the the capability of the virtual battery handle the chronic cases. Okay. So looking ahead, our real advantage lies in ability to validate new technology safely and then deploy that scale. So based on our proven track record of scaling Robotech's operations, so we believe can quickly capture the next wave of innovation. Also, last but not least, our current Hong Kong IPO will further accelerate IND and the attrition cycles. Reinforcing our technical leadership at a widening over competitive mode. Yeah. With that, I'll back to the operator. Operator: The next question comes from Xia Li with Jefferies. Please go ahead. Purdy Ho: Thanks for taking my question. I have one as well. My question is about what do you see as the main factors behind the faster expansion of your operational areas. And beyond technology, what else do you think really matters? And from the technical perspective, are you using large language models? And if so, how are they helping push for autonomy fall forward? Thank you. Tianqin Luo: Thank you. This is Kim Chubb. Will continue to answer this question. I think your question consists of two parts. Let me answer your question on generalization first. Then we address the other one on large language model later. Generalization, would say tech technically, over text side, it's by nature built for generalization. So a good example is that over operational area expansion into new areas in Shanghai, Pudong and Shenzhen, Nan Shan District, the third quarter. In both cases, it only took us only a few weeks for our verifying the city to truly realizing fully drivers operation to the public. There was no need for additional model training. Quick the key reading that and, also, native architecture is a beautiful handling corner cases and to June cases. While these cases are actually very consistent across different regions, They are really nothing more than things like small obstacles, boxes on the road. Pedestrians that they are crossing. And suddenly, they change from other cars without looking at the vehicle behind. Etcetera. So it's just about the likelihood and the probabilities of each what happening. So hope that can help understand why the awful tech stack by nature built for generalization. So at this moment, I will say, the key to over new area extension, the number of v number of robotaxi vehicles. If we extend to too many areas without adding more cars, it will instead dilute the density. So that is the reason why the speed of operational error extension cannot significantly faster than that of three five. Yeah. So then then let me share my thought on the second part. That's a land large language model. First, I will say first and foremost, there are two non negotiable requirement for l four onboard value model. Uncompromising safety. And also low latency. There are the lot longer more than chatbot don't need and that are not designed to meet as well. So for safety, last we went not not long long model generally have issue like model health and nation. Which is which is unacceptable for l four in terms of safety. And for latency, large language models are optimized for throughput like tokens per second, In contrast, l four, the optimized for low latency and the ability to run fully driverless over textile chips. That are both low power consumption and the cost efficient. Moreover, large language model overly run human data. Fundamentally limits them to the boundary of the existing human knowledge. Add anything ever inevitably makes them pick up human errors. Bad habit from human driver. So we also extensively use l a lot of language model in the IND effort such as AI has human machine interaction, engineering productivity tools for coding and documentation, and analysis for the rider feedback for extended improvement. But, however, due to the multiple reasons mentioned above, large large language model is by nature not good for driving model onboard. So with that, so back to the operator. Thank you. Unknown Executive: Thank you. That's very helpful. Operator: The next question comes from Jin Yu Fang with UBS. Please go ahead. Unknown Executive: Hi. Thank you, management, for taking my questions. I have one question here. It is currently that only cooperate with multiple OEMs for robotaxi manufacturing including BAIC, GAC, and Toyota, Does management see potential for improving operating leverage through working with only one OEM team staff? Thank you. James Tong: This is Jets. I'll take this one. So the matter of the reality is that in the whole global taxi industry, local governments and the local residents actually have a strong preference preferences for the local branded taxi vehicles. So so that's a reality. Typically, when, robotaxi fleet is relatively small. The brand that doesn't really matter much. But if we need to deploy a significant fleet size, the requirements certainly is no longer true. And the local branded OEMs is much more more preferred. So it is necessary for us to cooperate with multiple local OEMs in different regions it actually can help us to expand into different markets much quickly And that's why we are now collaborate with three OEMs to produce our gen seven robotaxis. It is true that feeding our autonomous driving kit into a different vehicles actually posts a huge technical challenge But on the if you look at from the other side, the mere fact that we were able to standardize our technology and being able to treat our setup into different vehicles. That shows our technical generalization And down the road, it actually can create a huge competitive edge. So as a result, we can add new models much faster to accelerate our expansion into new regions. For example, in the Europe, we currently added the partnership with Stellantis. So with that, back to the operator. Operator: The next question comes from Tung Zhujia with Guosun. Please go ahead. Thanks for taking my question. Purdy Ho: I have one question. Why Pony can use remote assistant on robotaxi when the car meets difficulty? Instead of remote control human take up. Over? And what is the technology difference behind that? Tianqin Luo: This is Kim Chen. I will take this one. I think one of the previous question also touched on the remote assistant for robotaxi. So let me elaborate on that at least more detail. First and foremost, I'd say over remote assist never control the vehicle. Through the thin wheel or pedal. Instead, they provide remote support and suggestions by responding to service request. For all the time, the vehicle can independently drive from this independently make decisions without remote assistance. Assistance only initiates one of vehicle requested. Rather than through the remote driving. So one vehicle received the assistance response. The onboard driving system will still make time decision based on the actual situation. Because the vehicle never waits for remote command to react to act. So it will remain safe, operates operation without any dependence on network latency. So one typical example of remote assistance is the situation of a temporary traffic control. In such cases, the system may request remote assist which can provide high level suggestion to confirm the car's decision navigating through a scenario. But also, as I mentioned, we have to continue to improve the AI algorithm, and also leverage our general AI capability to recognize more and more complex contact context This allows us to improve remote assist to vehicle ratio in a third quarter quarter. To reach one to 30 by year end. Hope that can answer your question. Go back to the operator. Operator: The next question comes from Serena Li with China Securities. Please go ahead. Purdy Ho: Okay. Thank you for taking my question. This is Serena Li from China Security. As far as we know, some countries in The Middle East have issued fully driverless robotaxi license recently. What's our view on that? What town is overseas? To stretch it? James Tong: Sure. This is James again. Let me take this one. Our company's mission has always been autonomous mobility everywhere. So we certainly have the global ambition since our funding to actually utilize our technology to benefit the local societies worldwide. Currently, our global efforts are focused on the markets with hyper growth potential. Those are the markets with typically strong mobility demand well developed infrastructure, and a supportive regulatory environment. When we evaluate a potential market to enter on a high level three factors, we'll consider. One is the, adjustable market size, which is 10. Second is the openness and the execution of the local government. To support. And issue permit for the fully driverless commercial operation. Third is how strong is the local partner for their on the ground resources. And operational capacities. So as you can see, our globe current global expansion status is that we have already entered eight countries for our robotaxi. And we also for example, in Q3, we added Qatar as a new market by collaborating with Movasaleh. In Q3, we have also saw a rapid revenue growth especially for the robotaxi for our overseas from our overseas markets. And we certainly expect this momentum to continue. So going forward, we will enter other global markets if we see, there's a good growth opportunities. So this is our overseas strategy. With this, back to the operator. Operator: As there are no further questions, I'd like to turn the call back over to the company for closing remarks. Tianqin Luo: Thank you, operator. This is George again. If anyone has any more questions, feel free to contact the IR team. We will conclude our call today. Thank you, everyone. Operator: This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your line.
Operator: Welcome, ladies and gentlemen, to Embecta Corp.'s fiscal Fourth Quarter 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. Please note that this conference call is being recorded and a replay will be available on the company's website following the call. I would now like to hand the conference call over to your host today, Mr. Pravesh Khandelwal, Vice President of Investor Relations. Mr. Khandelwal, please go ahead. Pravesh Khandelwal: Thank you, operator. Good morning, everyone. And welcome to Embecta Corp.'s Fiscal Fourth Quarter 2025 Earnings Conference Call. The press release and slides to accompany today's call and webcast replay details are available on the Investor Relations section of the company website at www.embecta.com. With me today are Devdatt Kurdikar, Embecta's President and Chief Executive Officer, and Jacob P. Elguicze, our Chief Financial Officer. Before we begin, I would like to remind you that some of the matters discussed in the conference call will contain forward-looking statements regarding future events as outlined in our slides. Such statements are, in fact, forward-looking in nature, and are subject to risk and uncertainties, and actual events or results may differ materially. The factors that could cause actual results or events to differ materially include but are not limited to, factors referenced in our press release today, as well as our filings with the SEC which can be accessed on our website. In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered a supplement to and not as a substitute for financial measures prepared in accordance with GAAP. Reconciliation of these non-GAAP measures to the comparable GAAP measures is included in our press release and conference call presentation. Our agenda for today's call is as follows. We will begin with an overview of Embecta's fiscal year 2025 performance and discuss progress across our strategic priorities. Jacob will then review the financial results for the fourth quarter and full year 2025 and share our preliminary thoughts for fiscal year 2026. Following these updates, we will open the call for questions. With that said, I would now like to turn the call over to our CEO, Devdatt Kurdikar. Devdatt Kurdikar: Good morning, and thank you for taking the time to join us. During fiscal year 2025, we achieved several key milestones. We made the decision to end our batch pump program and we executed a restructuring plan aimed at enhancing our profitability and free cash flow. We completed the implementation of our own ERP system and operationalized a new distribution network and shared service capabilities in Latin America and India, marking the completion of a major complex multiyear standard program. With this, 100% of our revenue now flows through our systems, and all TSAs and LSAs that we had at spin have been exited. We substantially completed our brand transition efforts in North America, with more than 95% of our US and Canadian revenue now converted to the brand. This was carefully managed to ensure continuity for customers and patients. With this foundation in place, we have now commenced the next phase of the initiative globally. Transition activities have already begun in certain international markets, and we expect to be significantly complete in most regions by the end of calendar year 2026. Together, the completion of these separation and stand-up activities have freed up capacity which we are now devoting to initiatives that we anticipate will help transition the company towards long-term sustainable growth. Supporting this goal, we advanced our GLP-1 strategy meaningfully during fiscal 2025. We are now collaborating with more than 30 pharmaceutical partners to co-package our pen needles with generic GLP-1 therapies. Several of these partners have already signed agreements and placed purchase orders. Our products are included in multiple GLP-1 managed regulatory submissions expected to lead to commercial launches. Our generic GLP-1 partners are anticipating launches in Canada, Brazil, and India during calendar year 2026. While we do not control the timing and content of the company's regulatory submissions, nor the timing of their launches upon receiving regulatory approval, we are encouraged by their momentum and remain ready to support our partners by providing them with our pen needles. In parallel, we are continuing to expand the availability of pen needles in consumer-friendly small packs for the Canadian and select European markets. These small packs are targeted specifically towards out-of-pocket customers like GLP-1 users. Taken together, we continue to believe that the use of our pen needles with GLP-1 represents at least a $100 million annual revenue opportunity by 2033. We anticipate that this will be a growing contributor to our results over the next several years. We also initiated new product development programs for market-appropriate syringes and pen needles aimed at strengthening and expanding our portfolio with the goal to maintain our leadership position in our core product categories. These programs are important because we believe they will allow us to expand our reach into market segments that we do not significantly participate in. We continue to prioritize financial discipline and debt reduction. Throughout the year, we generated approximately $182 million in free cash flow, and we paid down approximately $184 million of debt, exceeding our original fiscal year 2025 target of $110 million. With leverage now at 2.9 times net debt to adjusted EBITDA, we continue to create financial flexibility to invest in potential organic and inorganic opportunities that can reshape Embecta's long-term growth profile. In summary, fiscal year 2025 was a year of solid execution on multiple fronts, while outlining and initiating a new strategic direction for the company. From the standpoint of our financial results, we exceeded our previously provided fiscal year 2025 adjusted gross margin, adjusted operating margin, and adjusted EBITDA margin ranges, while our adjusted diluted earnings per share was at the top end of our previously provided guidance range. As we move into fiscal year 2026, we remain focused on the priorities and the long-term financial targets outlined at our 2025 analyst and investor day. Now let's review our revenue performance for the fourth quarter and full year. During 2025, Embecta generated $264 million in revenue, reflecting a 7.7% decline year-over-year on an as-reported basis, or a 10.4% decline on an adjusted constant currency basis. Within the US, revenue for the quarter totaled $142 million, reflecting a year-over-year decline of 15.2% on an adjusted constant currency basis. The year-over-year decline was primarily driven by an unfavorable comparison to the prior year fiscal fourth quarter, which benefited from additional distributor orders that occurred because of the then-looming US port strike totaling approximately $10 million, as well as the unwinding of the favorable order associated with the July 4 holiday, that positively impacted our 2025 results, totaling approximately $7 million. Additionally, year-over-year price in the US was unfavorable by approximately $7 million, primarily due to milestone payments made to a large US pharmacy customer. Turning to our international business, revenue for the fourth quarter totaled $122 million, representing an increase of 2.8% on a reported basis but a decline of 4% on an adjusted constant currency basis. This decline was anticipated and primarily due to lower volumes and year-over-year pricing headwinds within China. This was driven by heightened competitive intensity in China, fueled by the growing preference of local Chinese brands amidst an evolving US-China geopolitical and trade environment. This was partially offset by performance in other emerging markets. While from a product family perspective, during the quarter, adjusted constant currency pen needle revenue declined approximately 13.9%, syringes declined by approximately 4.5%, safety products grew approximately 3.7%, and contract manufacturing revenue grew approximately 8.5%. The year-over-year decline in pen needle revenue was driven by the same factors that impacted our US and international results. Turning to our syringe products, the decrease was primarily due to ongoing end-market volume declines within the US. This trend is not new and has persisted over the past several years and is consistent with the decrease in prescriptions for insulin vials as compared with insulin pens. This decline was partially offset by improved pricing. Finally, our safety products grew 3.7% primarily due to improved pricing. For the full year, Embecta generated adjusted revenues of approximately $1.08 billion, which represented a decline of 3.9% on an adjusted constant currency basis. US revenues totaled $579.1 million, which is a decrease of 4.6% on an adjusted constant currency basis. The year-over-year decline in the US was largely due to the aforementioned advanced distributor ordering that occurred in Q4 of fiscal 2024 associated with the potential port strike, as well as the continued end-market declines in syringe volumes. Meanwhile, international revenues totaled $501.3 million, which equated to a year-over-year adjusted constant currency decline of approximately 3.1%. The decline in international revenue was primarily due to lower revenue contribution from China. Turning to our product family revenue performance, globally, our pen needle revenue declined approximately 7.1%, totaling $784.1 million. Fiscal year 2025 pen needle revenue reflects the confluence of several transitory factors, including advanced distributor ordering in the prior year, lower China revenue, and pricing headwinds in certain markets. Turning to our syringe products, revenue grew year-over-year by 1.7%, primarily driven by improved pricing, while our safety products grew 6.3% due to a combination of improved pricing and volume increases. Lastly, contract manufacturing revenue grew approximately 53.9% as compared to the prior year. With that, let me turn the call over to Jacob P. Elguicze for him to review other financial highlights as well as to provide our preliminary financial guidance for fiscal year 2026. Jacob? Jacob P. Elguicze: Thank you, Devdatt, and good morning, everyone. Given the discussion that has already occurred regarding revenue, I will start my review of Embecta's fourth quarter financial performance at the gross profit line. GAAP gross profit and margin for 2025 totaled $158.5 million and 60%, respectively. This compared to $173.8 million and 60.7% in the prior year period. While on an adjusted basis, our Q4 2025 adjusted gross profit and margin totaled $159.5 million and 60.6%. This compared to $178.3 million and 61.4% in the prior year period. The year-over-year decline in adjusted gross profit and margin was primarily driven by the lower year-over-year volume and mix and price that Devdatt mentioned earlier, as well as the negative impact of foreign currency translation. These headwinds were partially offset by manufacturing cost improvement programs, the favorable impact of net changes in profit and inventory adjustments, and lower freight costs. Turning to GAAP operating income and margin, during the fourth quarter, they were $56.5 million and 21.4%. This compared to $26.2 million and 9.2% in the prior year period. While on an adjusted basis, our Q4 2025 adjusted operating income and margin totaled $66.7 million and 25.3%. This compared to $61.2 million and 21.1% in the prior year period. The year-over-year increase in adjusted operating income is primarily due to lower R&D expenses associated with the discontinuation of our insulin patch pump program, as well as lower year-over-year SG&A expenses due to the restructuring initiative we announced earlier this year coupled with no TSA expenses within the current year. This was partially offset by lower revenue and gross profit as compared to the prior year period. Turning to the bottom line, GAAP net income and earnings per diluted share were $26.4 million and $0.45 during 2025, as compared to $14.6 million and $0.25 in the prior year period. While on an adjusted basis, during 2025, net income and earnings per share were $29.4 million and $0.50 as compared to $25.9 million and $0.45 in the prior year period. The increase in year-over-year adjusted net income and diluted earnings per share is primarily due to the adjusted operating profit drivers I just discussed, as well as a reduction in interest expense. This was offset by an increase in our adjusted tax rate from approximately 9.5% in 2024 to approximately 25% in 2025. Lastly, from a P&L perspective, for 2025, our adjusted EBITDA and margin totaled approximately $89.9 million and 34.1%, as compared to $73 million and 25.2% in the prior year period. Turning to our full year results, GAAP gross profit and margin for fiscal 2025 totaled $676.8 million and 62.6%, respectively. This compared to $735.2 million and 65.5% in the prior year. While on an adjusted basis, our 2025 gross profit and margin totaled $687.3 million and 63.7%. This compared to $740.7 million and 65.7% in the prior year. The year-over-year decrease in adjusted gross profit and margin was primarily driven by lower year-over-year volume and mix, and an unfavorable year-over-year impact from profit and inventory. This was partially offset by manufacturing cost improvement programs. Turning to GAAP operating income and margin, during 2025, they were $242.1 million and 22.4%. This compared to $166.8 million and 14.9% in the prior year. While on an adjusted basis, our 2025 adjusted operating income and margin totaled $337.7 million and 31.3%. This compared to $296.9 million and 26.3% in the prior year period. Similar to the comments relating to the fourth quarter, the year-over-year increase in adjusted operating income and margin is due to similar factors that impacted the fourth quarter. Those being the lower R&D expenses associated with the discontinuation of our insulin patch pump program, as well as lower year-over-year SG&A expenses due to the restructuring initiative we announced earlier this year coupled with a reduction in TSA expenses. This was partially offset by lower revenue and gross profit as compared to the prior year. Turning to the bottom line, GAAP net income and earnings per diluted share were $95.4 million and $1.62 during fiscal 2025, which compared to $78.3 million and $1.34 in the prior year. While on an adjusted basis, net income and earnings per share were $173.9 million and $2.95 during fiscal 2025. This compared to $143.1 million and $2.45 in the prior year. Like my comments relating to the fourth quarter, the increase in year-over-year adjusted net income and diluted earnings per share is primarily due to the adjusted operating profit drivers I discussed, as well as lower year-over-year interest expense resulting from a reduction in outstanding borrowings under our term loan B facility as we continue to pay down debt. Somewhat offset by an increase in our adjusted tax rate from approximately 20% in 2024 to approximately 25% in 2025. Lastly, from a P&L perspective, during 2025, our adjusted EBITDA and margin totaled approximately $415.3 million and 38.5%. This compared to $353.4 million and 31.4% in the prior year. Turning to the balance sheet and cash flow, during fiscal year 2025, we generated approximately $182 million in free cash flow. Additionally, during the year, we repaid approximately $184 million of outstanding debt and ended 2025 with a net leverage level of approximately 2.9 times as defined under our credit facility agreement compared to our covenant requirement of below 4.75 times. And finally, we recently executed an agreement with a third party to sell certain intellectual property rights and long-lived assets associated with the discontinued patch pump program for $10 million. This transaction occurred subsequent to year-end and therefore had no impact on our fiscal fourth quarter results. That completes my prepared remarks on our fourth quarter full year 2025 results. Next, I'd like to discuss our preliminary 2026 financial guidance and certain underlying assumptions. Before I go into all the details surrounding our fiscal year 2026 guidance, let me remind you that in May 2025, at our Analyst and Investor Day, we laid out our long-range plan through fiscal year 2028. Those expectations included that our revenue growth CAGR would remain flattish on a constant currency basis from fiscal year 2026 through 2028, with modest declines of approximately 1% to 2% in core injection and contract manufacturing revenue over the LRP period, offset by contributions from new revenue streams, including GLP-1 opportunities and distributed product partnerships that were expected to build as we move through fiscal years 2026 through 2028. Additionally, the financial targets that we provided at our Analyst and Investor Day anticipated adjusted operating margin to be between 28-30% by fiscal 2028, as R&D expenses were expected to increase from 2025 levels as we support key value creation initiatives through 2028, while SG&A expenses were expected to remain flattish as compared to 2025 levels. Despite a dynamic geopolitical and trade backdrop, I'm pleased to say that we believe our initial fiscal 2026 financial guidance is well aligned with the expectations established in our long-range plan. Beginning with revenue, on an adjusted constant currency basis, we currently anticipate that our revenues will be flat to down 2% as compared to 2025 levels. At the high end of our constant currency revenue range, we have factored in modest volume declines within our core injection business, primarily related to syringe declines within the US, that reduced contract manufacturing revenues contributed to approximately 50 basis points of the decline, that pricing is relatively flat year-over-year, and that the contribution from new revenue streams contribute positively by approximately 100 basis points. While at the low end of our range, we are assuming that volumes within our core injection business contribute to approximately 150 basis points of the decline, that reduced contract manufacturing revenues contribute to approximately 50 basis points of the decline, that pricing is relatively flat year-over-year, and that the contribution from new revenue streams is negligible. Turning to our thoughts on FX, our initial guidance calls for a foreign currency tailwind of approximately 1.2% during 2026. This assumption is based on foreign exchange rates that were in existence in the early November time frame. Somewhat offsetting FX is an estimated 0.1 year-over-year headwind associated with the Italian payback measure, primarily driven by the favorable adjustment recognized in fiscal year 2025. On a combined basis, our as-reported revenue guidance calls for a range of between negative 0.9% to positive 1.1%, resulting in an initial revenue guide of between $1.071 billion and $1.093 billion. Turning to adjusted operating margin, our initial guidance range calls for a range of between 29-30%, or lower by approximately 180 basis points at the midpoint as compared to 2025 levels. The expected decline at the midpoint is due to two factors contributing equally. First, adjusted gross margin is expected to decline due to increased cannula costs. While in terms of tariffs, based on current information, we expect incremental tariffs to have a negligible impact as compared to the prior year. Second, we anticipate R&D expense to approximate 2% of revenue, as we continue to invest in the development of market-appropriate pen needles and syringes, and advance our efforts to qualify and onboard alternate cannula suppliers. SG&A as a percentage of revenue is expected to remain relatively consistent with fiscal 2025 levels. All totaled, our initial guidance range for adjusted operating margin aligns with the margin framework outlined in our Analyst and Investor Day and reflects our disciplined approach to balancing reinvestment for growth with sustained profitability as we advance through the next phase of our transformation. Moving to earnings, during 2026, our initial guidance calls for an adjusted diluted earnings per share range of between $2.80 and $3, and it's based on a weighted average diluted share amount of approximately 60 million shares. Our initial adjusted earnings per share range includes an assumption that during 2026, we will repay approximately $150 million in debt and that our annual net interest expense will be approximately $93 million. While from a tax perspective, our initial adjusted earnings per share range assumes that our adjusted tax rate will be approximately 23% as compared to approximately 25% in fiscal year 2025 due to tax planning initiatives we put in place, US tax reform, and lower interest expense. Before I turn the call over to the operator, I'd like to highlight some considerations regarding the cadence of quarterly revenue during 2026. Moving forward, we may not provide any further commentary concerning the quarterly cadence of revenue on an ongoing basis. During fiscal year 2025, we generated approximately 48% of our adjusted revenue dollars during the first half of the year, with revenue split roughly evenly between the first and second fiscal quarters. During fiscal year 2026, we currently expect something similar to occur. Finally, during fiscal 2026, we expect to generate between $180 million and $200 million in free cash flow, which includes using approximately $20 million of cash for capital expenditures as well as approximately $30 million of cash on one-time spend primarily focused on advancing the global brand transition program, which remains on track to be substantially complete by the end of calendar year 2026. Importantly, the free cash flow that we expect to generate during fiscal year 2026 keeps us firmly on pace with the commitment we outlined at our Analyst and Investor Day to generate approximately $600 million of cumulative free cash flow from fiscal 2026 through fiscal 2028, and demonstrates the strength of our cash generation model and reinforces our confidence in achieving our long-term deleveraging and investment objectives. That completes my prepared remarks. At this time, I would like to turn the call over to the operator for questions. Operator? Operator: Thank you. Star one one on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Marie Yoko Thibault with BTIG. Your line is now open. Marie Yoko Thibault: Good morning. Thanks for taking the questions. I wanted to start here and see if I could learn a little bit more about the GLP-1 partnership that you have. Can you just give us a little more detail on how many partners you have signed POs with? And anything on timing, how they might be ordering ahead of any approvals that they get on their side, just so we can sort of get a little more detail on how this might impact fiscal year 2026, of course, understanding that it's not being assumed in your revenue guidance. Devdatt Kurdikar: Yeah. Good morning, Marie. Thanks for the question. So we are in discussions with 30 plus potential GLP-1 entrants. And as you remember, this is all about co-packaging of pen needles. They are moving through various stages of discussions. You can imagine, you know, we go through quality agreements. We talk about MSAs. The orders that they provide, and a handful of them have already provided orders, and we've actually shipped product during 2025. Much of the volume, I would say, is for their own development purposes. As they work out, you know, what data they need beyond the data we supply for their regulatory submissions. Several of them have actually submitted to the regulatory authorities. Now they control the timing and the content of the submissions, and these submissions, we believe, include many of them will include specs that our product satisfies. Now, obviously, timing of commercial quantities is contingent on when they get approval, which one of them get approval, when they get approval. As you might have heard, publicly, generic GLP-1s could be available in calendar year 2026 in China, India, Brazil, and Canada. So there is obviously some uncertainty associated with timing, but overall, we are very, very pleased with the progress that we made in fiscal 2025. I mean, you might remember a year ago, we were just starting discussions, the team has made tremendous progress. And we continue to remain confident in the opportunity for us by 2033. in the assumptions that we had laid out or the estimates that we had laid out during the Analyst Day of this being, you know, over a $100 million opportunity. Jacob P. Elguicze: And Marie, this is Jake. I'll just jump in regarding guidance. I think the low end of our guidance range assumes really a negligible impact in terms of new revenue streams, mostly associated with GLP-1s. While from a high end of our revenue guidance range, we assume that new revenue streams, again, mostly coming from GLP-1 additional revenue, would contribute positively by about 1%. So we feel, we feel very good about where the, where this is all going. Devdatt mentioned that over the longer term that we feel that this can be at least a $100 million, you know, annual product revenue for Embecta through 2033. And we feel like we're well on our way towards achieving that. Marie Yoko Thibault: Okay. Thank you for that clarification, Jake, on the guidance as well. I guess I'll ask my follow-up here on China. You referred to it at the beginning, you know, some of the geopolitical tensions. What are you seeing on the ground in China in terms of consumer willingness to buy non-Chinese products? Of course, the product is made in China, but not a Chinese brand, I suppose. So any further updates on how that dynamic is playing out? And thanks for taking the questions. Devdatt Kurdikar: Yeah, Marie. On that, first, let me just say China in Q4 2025 performed very close or almost exactly in line with our expectations. So, you know, our thoughts when we formulated or revised our FY 2025 guidance incorporated a significant year-over-year decline, you know, partially because of the pressures that you mentioned, partially because of some inventory rebalancing. And Q4 2025 played out exactly as we thought it would. We've certainly taken steps to stabilize the situation, including reorganizing our sales team, we've actually introduced a more price-competitive pen needle which also has a lower manufacturing cost. Our guidance for 2026 does incorporate some expectations around headwind in 2026 compared to 2025. But our current expectation is that it's gonna be much less as compared to what we experienced in 2025. You know, as we all read in the press, I mean, the situation continues to evolve. But certainly, we are focused on controlling what we can control to stabilize the situation there as quickly as possible. Maybe just one final comment. Over the long term, you know, we still continue to believe that this is gonna be an important market for us. The market itself is growing mid-single digits. As you know, we have strong commercial and manufacturing infrastructure in China. You've heard us refer to the development of a market-appropriate pen needle. In fact, that pen needle is being developed by our team in China and I'm quite hopeful that it will serve a segment in China that we don't serve today. As well as you asked about GLP-1s earlier. You know, there are generic GLP-1 companies in China that have global aspirations that obviously we wanna serve as well. So over the long term, we still think it's gonna be an important market for us. And we'll find a way to weather through the evolving landscape over there. Operator: Thank you. Our next question comes from the line of Michael K. Polark with Wolfe Research. Your line is now open. Michael K. Polark: Hi. Good morning. Thank you for taking the questions. Two smaller ones for me. I'm interested in the cannula comments. You talked about increased costs there, and an effort to source alternate, alternative suppliers. So maybe can you just unpack that for us a little bit? Why are the costs up? And what does the opportunity set look like to find other sources to mitigate that creep? Thank you. Devdatt Kurdikar: Yeah. Good morning, Mike. Maybe I'll kick us off just as a reminder. So the entire supply of cannulas that we get is from our previous parent BD. And we have a cannula agreement with them to supply those cannulas that goes until 2032. So it's sole source from BD right now. And you can imagine, that we do want to have an alternate supplier for cannula. Our team has been working on this for the last couple of years. We've identified a couple of alternate cannula suppliers, and the team has made significant progress, including running some trials with alternate cannulas and doing some development work. So you know, I feel confident that certainly, you know, we have our current supply of cannula to 2032. But the team is making remarkable progress, and I feel reasonably confident that we are gonna have at least one alternate supplier here qualified certainly well before our current cannula agreement runs out. With that, obviously, that allows us, you know, an alternate supply with a different cost profile. Because since we became independent, the increase in cannula cost to us has been a significant contributor to the pressure we faced on gross margin. Jake, anything you'd like to add? Jacob P. Elguicze: Yeah. Devdatt, so just to maybe add a little bit more, you know, Devdatt had mentioned sort of what the margin profile of the company sort of looked like at the gross margin line kind of pre-spin as to sort of where we were during say 2025 and exiting 2025. And pre-spin, gross margins were sort of or right at spin, right around, let's call it, 67%. This year for 2025, our adjusted gross finished just under 64%. And really, Mike, the entirety of the decline over those years really came down to just increased cannula costs. It really is important for us to find an alternate provider, both from a risk mitigation standpoint and you never wanna be beholden to one sole source. And then also to drive some price decreases in the future as well, which we would certainly hope to do. In terms of our fiscal 2026 guidance in relation to 2025, we talked about our adjusted operating margins being down about 180 basis points at the midpoint compared to 2025 levels. About half of that is in the gross margin line entirely due to increased cannula costs, and the other half of that is just increases in terms of R&D expense as we, you know, need to make some investments in order to come to market with an alternate cannula provider as well as some of those market-appropriate low-cost products for pen needles and syringes to service some of the emerging markets. Michael K. Polark: Helpful color. For the follow-up, I wanted to ask on one of the comments about the fourth quarter performance. I heard, price unfavorable year on year in the US, $7 million. Mention of milestone payments to a large US pharmacy customer. I just wanna make sure I understand what that is, what you're saying there. The word milestone specifically tripped me up. So if you can add any color on that dynamic, I'd appreciate it. Thank you. Devdatt Kurdikar: Yeah. Mike, I'm happy to. Obviously, I won't talk about this specific contract, but you know, our contracts with the US change, you know, there is a rebate level. Right? There are sometimes marketing spend items that we contribute to marketing of our products. And finally, on achievement of certain volume levels typically, there is an additional payment, and we often refer to them as milestone payments. At the end of the day, it all comes down to price. But depending upon the timing of the payments, it can lead to, you know, year-over-year unfavorability or favorability during the course of a quarter. Operator: Thank you. Our next question comes from the line of Anthony Charles Petrone with Mizuho Americas. Your line is now open. Anthony Charles Petrone: Thanks, and good morning, everyone. Happy early Thanksgiving here to everyone in the team's family. Maybe start on GLP-1 and the generic contracting phase. I'm wondering, Devdatt, and or Jake, if you could talk a little bit about how those contracts are gonna be structured here. So typically, when we have, you know, drug-device combination solutions, you're in the clinical phase. But if you get to market, you know, essentially get written into the drug master file and the instructions for use, and that can be a multiyear contract. So how does contracting work with the generic GLP-1 providers in the clinical development phase, and what will those look like once we get with success to a commercial phase? How long will they be? Will there be minimum quantities baked in? How do the economics work over, let's say, a medium-term contract? Then I'll have a couple of follow-ups. Thanks. Devdatt Kurdikar: Yeah. Anthony, so you know, I don't wanna get too far ahead of myself with respect to commercial quantities and commercial contracts until, you know, some of these generic manufacturers get approved. But let me at least provide additional color. Right? So as we go through the contracting phase, you can imagine the early discussions and the initial discussions. We get NDAs in place. We get qualified as a vendor in our system that includes providing some data on our product from a quality standpoint, from a regulatory standpoint. We have quality agreements in place. Then we start talking about contracting, get a contract complete. But the commercial contract, I think we'll talk about once some of these drugs are commercial. The quantities that they are ordering now are really to do their own development work. And you can imagine, the way this is all going to play out is we will be supplying bulk pen needles to these manufacturers. They are going to co-package our pen needles with their pen injector. And then they will be the ones to market that combined product to patients. They also, as I think you implied, are going to be responsible for the regulatory submission for the whole package. That includes the drug and the device. Certainly, we'll help with providing data but they are responsible for that submission and our pen needle will get specked in. Now, obviously, once you are part of that combination, that imparts a level of stickiness to the product. But beyond that, since they are going to be doing the co-packaging, you know, the co-packaging lines will be configured, if you will, to be accepting of our pen needles. And that provides some additional stickiness, if you will, to our product as part of that combined package. But perhaps most importantly, you know, I wanna point out something that might seem obvious. We have a long history in demonstrating reliability of supply. And if you are a generic manufacturer that's introducing a generic GLP-1 drug, I would think that you would want your pen needle supplier to be somebody you can depend upon and has that generic has that long demonstrated reliability of supply, not to mention our pen needles are already approved in markets where you would expect generic GLP-1s to launch. With respect to profitability, what I would also say is that these are, as pointed out, bulk pen needles. We don't expect to spend any significant CapEx in meeting this demand, and so we would expect there to be, you know, some incremental margin drop through as compared to our corporate averages of gross margin. You know, obviously, I won't comment on pricing. Maybe one final comment. Because we've established these conversations now with generic drug companies, we are also expanding the conversation to work with them on potential supply of other devices that they may use. And I think on analyst day, I said, you know, the most sort of nearest adjacent device to us would be a pen injector. So I'm hopeful that supplying devices to generic drug companies for their generic GLP-1 drugs is just the start as we transition from, you know, pure injection delivery for insulin company to a broader-based medical supplies company. Hopefully, that was helpful, Anthony. Anthony Charles Petrone: No. Very helpful. And provide some color as we think about the, you know, next few years ahead. And then the follow-up here will just be on capital deployment. You mentioned a little bit of CapEx here, but the leverage ratios are coming down. You know, the company in the past has talked about potentially forging additional partnerships perhaps outside of GLP-1 or being a little bit more focused a little bit on tuck-in M&A. So just a little bit to take the temperature on capital deployment outside of GLP-1 and the CapEx needs immediately. Do you see any tuck-in M&A opportunities over the next couple of years? Thanks. Devdatt Kurdikar: Yeah. Thanks, Anthony. First, let me just say I'm very pleased with how our profitability metrics ended up. With respect to our guidance, as you saw, we sort of exceeded the top end of our gross margin, adjusted EBITDA margin, adjusted operating margin, and that really allowed us to pay down significantly more debt in 2025 and brought our net leverage down, as you pointed out, to 2.9. Our capital allocation plan, you know, remains unchanged from what I said on investor day. You know, we think $600 million in free cash flow over the two years. Most of that will go to debt pay down. We, you know, pay a dividend at this point. We are not considering changing that. And our highest priority still remains paying down debt. But as our leverage comes down, certainly, it's already below three and we drive it down further in 2026. We are very open to organic and inorganic investments. And so M&A by obviously, its very nature, is very opportunistic. We will continue to, you know, to be alert and aware if such an opportunity arises. And we feel that it is gonna be value accretive to our company and help transition the company towards long-term sustainable growth. We certainly will be ready to act on it. Anthony Charles Petrone: Thank you again. Operator: Thank you. Our next question comes from the line of Gracia Leydon Mahoney with Bank of America Securities. Your line is now open. Gracia Leydon Mahoney: Hey. This is Gracia on for Travis. Thanks for taking the questions. I just wanted to ask a follow-up on in your prepared remarks, you mentioned selling certain intellectual properties of $10 million associated with the patch pump subsequent to year-end. So just wondering if you could add any more details around this and what's baked into your assumptions moving forward that is associated with this? Devdatt Kurdikar: Yeah. Gracia, thanks for the question. Yeah. We did sell certain intellectual property and associated assets to a buyer for $10 million. We are pleased to be able to monetize these assets from the patch pump program that we discontinued about a year ago. I'll let Jake comment on. This is a Q1 event really for 2026 for us. But I'll let Jake comment on how you should expect to see that run through the financials. Jacob P. Elguicze: Yeah. So, obviously, Gracia, it'll obviously be an increase to cash from a guidance standpoint. This isn't going to impact our adjusted results that we provided guidance metrics for today. There'll be a gain most likely on the sale of these assets. And as a result of that, we're just going to normalize that for our adjusted operating margins or earnings per share. Gracia Leydon Mahoney: Great. Thank you. And then maybe just one follow-up on the pharmacy closures that you saw earlier this year, and then you had the stocking dynamic in for July 4 and ahead of the brand transition. So a lot of one-time benefits. Can you just speak to any more details on how you saw that play out in '25? And maybe if there's any sort of visibility on that into 2026 on how the pharmacy volumes are moving forward. Thanks. Devdatt Kurdikar: Yeah. So, you know, as you pointed out, earlier in the year, we had commented on, you know, plans to closure, store closures at a major US pharmacy chain. We don't sell directly to that pharmacy chain. We sell to a third-party distributor that also serves other customers. But I think as I said at that point, you know, our product is medically necessary. So what happens is if a chain if a store closes, patients will shift to other chains or the sources to procure product. And as expected, we saw strength at some other chain outlets. And we incorporated our thoughts around, you know, what the impact of that closures will be into our 2026 guidance. You know, in the guidance that Jake went through, he talked about, you know, a 100 basis point range in the volume assumptions. That includes our thoughts on what might happen with the US pharmacy volume as well. You know, maybe one just final point on how 2025 played out. You know, we had started the year with the original guidance. And actually, as the year played out, we did see what I'll say China year-over-year headwinds that were not incorporated in our original guidance. But actually, the year played out including the impact of store closures with us being within the range of our original guidance had it not been for China. So I think the store closures are playing out as we thought they would, patients will move to other outlets and will see strength, and we incorporated our thoughts in the 2026 guidance. Thanks, Gracia. Gracia Leydon Mahoney: Thank you so much. Operator: Thank you. And I'm currently showing no further questions at this time. I'd now like to hand the call back over to Devdatt Kurdikar for closing remarks. Devdatt Kurdikar: As we close the call, I just want to express my sincere gratitude to all my colleagues at the company around the world. Fiscal 2025 represented a meaningful milestone as we completed the first phase of our strategic roadmap, standing up our core systems and infrastructure needed for the next stage of growth. And despite a complex trade and geopolitical backdrop, we continue to perform well and strengthen our operational foundation. We enter fiscal 2026 confident in the direction of the company. Our focus remains clear: maintaining leadership in our core categories, advancing our innovation programs, and delivering strong profitability and cash flow in order to execute on the commitments we outlined at our 2025 analyst and investor day. Thank you for calling in for your interest in Embecta, and happy Thanksgiving all. Operator: This concludes today's conference. Thank you for your participation. You may now disconnect.
Clint Tomlinson: Good morning, everyone, and welcome to the Anavex Life Sciences Fiscal 2025 Fourth Quarter Conference Call. My name is Clint Tomlinson, and I'll be your host for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. And during this session, you would like to ask a question, please use the q and a box or raise your hand. Please note that this conference is being recorded, and the call will be available for replay on website at www.anavex.com. With us today is doctor Christopher Missling, president and chief executive officer and Sandra Bohnish, financial officer. Before we begin, please note that during this conference call, the company will make some projections and forward looking statements. These statements are only predictions based on current information and expectations and involve a number of risks and uncertainties. We encourage you to review the company's filings with the SEC that include, without limitation, the company's forms 10 k and 10 q, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward looking statements. These factors may include, without limitation, risks inherent in the development and or commercialization of potential products, uncertainty in the results of clinical trials or regulatory approvals, need an ability to obtain future capital, and maintenance of intellectual property rights. This conference call discusses investigational uses of agents in development and is not intended to convey conclusions about efficacy or safety. And there is no guarantee that any investigational uses of such products will successfully complete clinical development or gain health authority approval. And with that, I would like to turn the call over to doctor Misslin. Christopher Missling: Thank you, Clint. And good morning, everyone. Thank you for being with us today to review our Q4 financial results and quarterly business update. We are fully committed to bringing Oral Black Amazin and oral ANAVEX three seventy one to patients. We are dedicated to delivering on the value of our pipeline and maximizing its potential for patients investors, and our employees. Over the coming months, we will continue to focus on progressing our clinical trials and regulatory actions. At the same time, we're aiming to expanding our collaborative initiatives and strategic partnership activities. As previously announced, through our update on the status of the regulatory filing of blacaramazine in Europe, we expect the CHMP to adopt a negative opinion on the MAA at its December meeting. We intend to request a reexamination of the CHMP opinion upon its formal adoption based on feedback and continued guidance from the CHMP, EMA and the Alzheimer disease community. DMA procedures adopted by the CHMP allow an applicant to request reexamination of its decision. Which would be undertaken by a different set of reviewers that conduct a new examination. Independent from the first opinion. Our expert advisers investigators, as well as patients and their caregivers encourage us our commitment to continue working in partnership with global regulatory bodies to advance science and potentially new treatment options for patients and their families. As part of the MAA review process, we have successfully undergone a full good clinical practice GCP inspection of the trial data by EMA. The manufacturing package has passed the EMA review as well. A good clinical practice GCP inspection is an official review by a regulatory authority over clinical trials documents facilities, records, and other resources to ensure compliance with g p GCP guidelines. We're looking forward to working closely with EMA and other stakeholders advance our investigational therapy for early Alzheimer disease. Importantly, we also announced we had initial contacts with the authorities in The US regarding our Alzheimer's disease program. And we intend to provide further updates on our interaction with the FDA as they become available. Going forward, we will provide both regulatory and clinical trial updates on dacamazine in other indications, such as Parkinson disease, Rett syndrome, and fragile X. This will include the disclosure of planned future clinical trial designs as we continue to advance our therapeutic pipeline. Scientific & Clinical Data Updates Christopher Missling: During the most recent quarter, we announced several new scientific and medical publications includes a peer reviewed publication in the journal Neuroscience Letters, titled Prevention of Memory Impairment: in Hippocampal Injury with blacamazine in an Alzheimer's disease model. This study shows that pretreatment with blacarbazine prevented amyloid beta induced memory impairment. And brain oxidative injury suggesting that blackamcin is an attractive candidate for Alzheimer disease pharmacological prevention. A peer reviewed publication the journal Eye Science asserting the precise autophagy mechanism of sigma one receptor through blacamazine activation titled conserved LI R specific interaction of sigma one receptor in GABA RAB. A publication oral glycogen phase two b slash three trial confirms identified precision medicine patient population significant broad clinical and quality of life improvements for early Alzheimer disease patients. To be available online as a preprint and in submission to a peer reviewed medical journal. Anavex announced the latest published scientific results for blacamazine. On all standard scales for measuring Alzheimer's disease and cognitive decline after forty eight weeks, the defined precision medicine population ABCEAR three, consisting of early Alzheimer's disease patients with confirmed and progressed pathology taking thirty milligram once daily oral blacamazine demonstrated barely detectable decline This was comparable to minimally perceptible decline in prodromal which is pre dementia aging with adults. On October 29, we announced additional long term clinical data for blacamycin, This new data demonstrated continued long term benefit from oral blacamazine compared to decline observed in the Alzheimer disease neuroimaging initiative control group also called ADNI, a control group established by a clinical research project launched by NIH in 2004. In the intent to treat population, significantly less cognitive decline was observed for the black carnosine participants compared to the acne control group at forty eight weeks with a significant and clinically meaningful difference in mean change from baseline at a 13 total score of minus 2.68. Points. Over the course of the open label extension study, at time point ninety six weeks, these two groups further diverged sharply with statistical significant differences in mean change in ADAS cogs. 13 total score at ninety six weeks of minus 6.41 points. The difference between groups continues to increase at one hundred and forty four weeks. To ADA's COC 13 total score difference of minus 12.78 points. The results provide evidence of the significant beneficial therapeutic effect of blacamazine which positively separates from black from which positively separates from the ADNI control group with duration of treatment. This significant beneficial therapeutic effect of blacamazine compared to decline observed in the ADNI control group, trans translates into seventeen point eight months of time saved with oral blacamazine. Allowing for longer independence of the patients by approximately over one point five years. Looking ahead, Annavec will be presenting additional data and scientific findings at upcoming conferences and in publications. These include the direct relationship between cognitive function and reduced brain region atrophy with blacamazine. Oral blacamazine for early symptomatic Alzheimer's robust effect size through precision medicine an analysis of the ANAVEX two seventy three AD024 randomized trial. Also, newly identified precision medicine gene collagen 24A1, with over seventy percent, seven zero, prevalence, establishes effective treatment of early Alzheimer's disease with glacamazine. And also, continued long term benefit from oral blacamazine compared to delayed start analysis and decline compared to natural history studies. ANAVEX 3-71 (Schizophrenia & Neuropsychiatry) Christopher Missling: With regard to ANAVEX three seventy one, in October, ANAVEX announced positive top line results from its placebo controlled Phase two clinical study, evaluating ANAVEX three seventy one for the treatment of schizophrenia in adults on stable antipsychotic medication. The study successfully achieved its primary endpoint demonstrating that ANAVEX three seventy one was safe and well tolerated. The safety profile was consistent with previous studies of ANAVEX three seventy one in healthy volunteers. With no serious or severe treatment emergent adverse events reported in either Part A or part b of the study. In addition, to meeting the primary safety endpoint, secondary and exploratory analysis revealed encouraging trends in several outcome measures. Our other oral medicine candidate ANAVEX three seventy one, represents therefore, a transformative opportunity in neuropsychiatric drug development. Leveraging its unique dual sigma-one agonist unique sigma-one m one PAM mechanism to address multiple high value indications through a unified neuroinflammatory biomarker platform Further detailed analysis of randomized, strictly double blind, and placebo controlled clinical trial under DEX371 SZ001 revealed very encouraging data in suffering from schizophrenia. Following successful Phase two results from the SZ 001 study while confirming the accident safety profile of ANAVEX three seventy one, the study demonstrated reduction in GFab NYLK40 neuroinflammatory markers. G Fab is a structural protein of astrocytes in the brain, represents aberrant activation of astrocytes the major brain glycol cell lineage. Astrocytes participate in brain neural function in multiple ways. Amongst them, critical modulation of synaptic relay between neurons in neural circuits. Its dysfunction a key pathogenesis mechanism in schizophrenia. This positions ANAVEX three seventy one to advance into pivotal trials with the once daily modified release oral tablet enabling once daily dosing across depression, and psychosis indications where current therapies have failed or shown limited efficacy. Addition to schizophrenia, one high unmet need opportunity would be depression in Alzheimer's disease. With currently no approved therapies. Up to forty percent of people with Alzheimer experience significant especially in early and middle stages of the disease. Depression in Alzheimer's is associated with worse quality of life. Accelerated cognitive decline, and earlier onset of dementia symptoms. The neuroinflammatory biomarker strategy positions Anavex 371 to potentially achieve disease modification claims beyond symptomatic treatment, representing a paradigm shift in neuropsychiatric drug development. And now I would like to direct the call to Sandra Boenisch, principal financial officer of ANAVEX, for a financial summary of the recently reported quarter. Sandra Boenisch: Thank an you, Christopher, and good morning to everyone here. I'm pleased to share with you today our fourth quarter financial results for our 2025 fiscal year. Our cash position as September 30 was 102,600,000.0, and we had no debt. During the quarter, we utilized cash and cash equivalents of 8,600,000.0 in our operating activities. After taking into account changes in non cash working capital accounts. As of today, with a current cash balance of over a 120,000,000 we anticipate that at the current cash utilization rate, our cash runway is more than three years. Our research and development expenses for the quarter 7,300,000.0 as compared to 11,600,000.0 in the comparable quarter of last year. General and administrative expenses were 3,500,000.0 as compared to 2,700,000.0 for the comparable quarter of last year. Compared to the same quarter of fiscal twenty twenty four, we saw a decrease in operating expenses mostly driven by the completion of a large manufacturing campaign of larcamesine and a decrease in clinical trial activities. As a result of the completion of our open label extension studies and our ANAVEX three seventy one phase two study in schizophrenia. And lastly, we reported a net loss of $9,800,000 for the quarter which is $0.11 per share. Thank you. And now I will turn the call back to Christopher. Christopher Missling: Thank you, Sandra. In summary, we are focused on continuing to advance our precision medicine compounds we are excited to be potentially making a difference for individuals suffering from these diseases by presenting a scalable treatment alternative alongside the ease of all administration. I would now like to turn the call back to Clint for Q and A. Clint Tomlinson: Thank you, Kasr. We'll now begin the Q and A session. If you have a question, please raise your hand or enter it into the q and a box. It looks like our first question will from Michael Obadiah from HC Wainwright. Hello. Good morning. So are we asking the questions on behalf of Ram Selvaraju? From H. Wainwright? Have a couple of questions for the management. And the first question is, what is the likely commercial impact of the failure of semaglutide on the outlook for glycogenesine in Alzheimer's disease? Second one is when is the next formal discussion of black hemisinin scheduled to take place with the FDA? And the third question is, what initiatives does INOVIX plan near term pursue glycemic sign approval in regions beyond the European Union and The United States? Thank you. Christopher Missling: I appreciate the questions. So to answer the first question about the impact of the semaglutide glutide results. We understand there's an unmet medical need here. And this is certainly further highlighted by the recent setback by the two EVOQUE studies from Novo Nordisk. And also by other companies, including other large pharma companies recently, with also with anti tau injectables. So there's a lack of upcoming pipeline certainly. We also understand that the Evoque semaglutide GLP one finding highlight the complexity of Alzheimer disease biology. And the challenges of expecting metabolic pathway alone to meaningfully alter your dinner processes. But Alzheimer's more complex, involves impaired proteostasis, autophagy dysfunction, synaptic failure in multiple converging mechanism. So therapeutic effects seen in related conditions do not always translate into kind of benefit here. However, we have with oral once daily blacamazine with this upstream mechanism of action, which restores autophagy, which precedes these pathologies adjust summarized and has demonstrated in early Alzheimer disease patients clinically meaningful efficacy of slowing cognitive decline significant amounts. Some cases over fifty percent. With an acceptable safety profile with no ARIA, and as demonstrated in the phase two b less free study. So the answer to the question is this makes it more clear that this is a complex disease and there's a lack of compounds near term available for patient to address this unmet need. Second question is about timing. So we provide as we stated, updates what we'll follow-up in the initial discussion with The US regulators and we'll provide updates as we receive them. But we're very excited about the initiation of these discussions. Regarding the third questions, we are continuing to now explore other regulatory geographies. As well as moving forward where we can see fit to address open questions. So I trust this addresses the question. Michael Obodai: Yes. Very much for the clarity and transparency. Christopher Missling: Thank you. Clint Tomlinson: The next question is gonna come from Tom Bishop at BI Research. Tom, you need to unmute Christopher Missling: per the press release, the, CHMP seems to have given you some guidance about the additional information they they need to see, for example, biomarker. But can you elaborate, what this includes? Christopher Missling: So we we want to proceed with the reexamination. Because we owe it to the patient, and we get the feedback also from investigators that the unmet need is very high, And we it boils down to CHMP the benefit await the risks. Of the drug to be on the market. And that discussion includes all available data. And it might be you know, to make the glass half full, that the should or may out biomarker, which are not subject to influence, might be helping in getting to that point. So that is the background of biomarker best including biomarker assessments. Tom Bishop: Well, there was no particular biomarkers that you you hope to bring out? Christopher Missling: We have communicated, and it's, been published that we have a brace strong biomarker of the pathology. Which is the analogy of oncology where tumor grows and you look at the size of the tumor, which is measurable objectively, can be measured objectively, and it cannot be influenced by a patient or by anybody else. The same as in Alzheimer's disease is the brain shrinks. So the brain gets smaller, then the the brain mass shrinks, and we can measure that as well. And it's a very objective marker of neurodegeneration, and we demonstrated that this marker of neurodegeneration is significant, the less or even halted in some patients, with active oral blacamazine. While in the placebo arm, this shrink, the brain continues. Which is the clear definition of the advancement of the Alzheimer pathology. And we like to include, of course, that as well in the discussion. Tom Bishop: What about the ABC Clear data? I mean, that was very compelling with forty eight to eighty six percent slowing depending on the gene biomarker, or combination Was this guess this was not considered by the CHPT as it came out, MP because it came out kinda late. But, can this be included for consideration on reexamination? Christopher Missling: It's a good question. So we like to emphasize our focus is on each individual patient affected by Alzheimer. And we see that very clear beneficial signal of cognitive also clinically meaningful effect in both cognitive and functional also in all the other endpoints consistent improvement and significant improvement of the clinical outcomes that is the CGI that is the quality of life and PRQ, MMSE, all the measures are the SCOC 13, see there from the boxes, ADCS ADL, In all this a b clear, two and three, populations, we see clearly clinically meaningful and significant improvement. So we would like to also point that out and that is really good a good dataset to have and to put this forward. And also, last but not least, making the point about the focus on each individual patient we see a reversal of the negative trajectory of quality of life of the patients in seventy percent of the patients seven zero, in the trial. That means the quality of life is better after one year than at the start of the trial. That's very impactful because that's what is really impacts the individual patient. Tom Bishop: Okay. If the approval ultimately came from the EMA, and and let's assume perhaps it was conditional. Is is there a rule of thumb or how long you would have to to do a conditional trial? Christopher Missling: It's really not it's it's really hard to speculate about this. But we would like to make sure we wanna point out we are motivated and driven by the fact that there's a huge significant unmet need for a drug which with these features today, and we pointed out the recent pipeline failures, And also, I wanna point out that between twenty and twenty five, this year and 2030, there will be more than 300,000,000,000 of large pharma revenue at risk from loss of exclusivity with over 40% of top pharma sales exposed creating an estimated $90,000,000,000 growth gap even after internal pipeline contributions. So that means there's also a huge unmet need not only for this indication, but also for overall pipeline to be filled by large pharma. Tom Bishop: Well, that's interesting that you brought that up because I wanted to ask about how you're coming with you know, exploring your options if you get approval. For example, blarcamesine to market. large pharma, organizations, and so forth to take Christopher Missling: Yes. So we pointed out in just in this call that one of the key things we are focusing on now is expanding the corporate development partnership activities And we mentioned that we are presenting at the most important conference every year, which takes place in San Francisco in early January. And we are a presenting company on Wednesday. On at that conference itself. And that allows for more meaningful discussions, which is the hotspot for business development activities. At at this conference, and we will make sure we are present in that regard. Tom Bishop: Okay. Well, I think it'd be a real tragedy for Alzheimer's patients to to to not see this drug approved because especially the ABC CLEAR data to me is so convincing. That and and the risks are so low, and it's oral. That it I I just can't fathom that it wouldn't get approved, but that's just me. I wish I had a vote. Christopher Missling: We would agree. Thank you for your vote as well. Clint Tomlinson: Tom, are you there? Tom Bishop: Yeah. Okay. As long as I'm still on, is there a mechanism of action for call 241? Christopher Missling: Yes. There is. And this will be now published in a peer review paper But in summary, I can say that collagen twenty four zero one is the ingredient key ingredient of the extracellular matrix called ACM. When you look at pictures of brain neurons or astrocytes, we see this very nice you know, connections or network like a web. Spider web description or pictures. And in the background, it's always like pitch black. And you're wondering this is how the brain looks like. And, of course, it doesn't it does not. And this background is actually the axosodular matrix. And that's where these neurons and astrocytes are residing or sitting on. Your brain. And if you have a mutation of this extracellular matrix, then your response to blacamazine is impaired. The autophagy flux the autophagy restoration, which is the recycling mechanism of the neurons, which precedes a beta and tau. So it's further upstream closer to the origination of the pathology of Alzheimer, if you like, that is impaired. And for that reason, we found that patients with a wild type, with not mutated collagen genes, they respond extremely well. And we see effects of in ADAS-Cog13, minus 4.7. In the patients with that effect. With that wild type gene. And in in the CDS or the boxes, the scores go up, up to 1.4, minus 1.4. And these are really very unprecedented effects of benefit. And we pointed out that that means since patients are actually almost not declining or declining less than prodromal patients. Which are less impaired. So that's quite impactful. And this is really intriguing science. And it will be published in a major peer review paper very soon. So extremely intriguing. And also consistent with the mechanism of blackamazin. Tom Bishop: Great. Okay. Well well, that's it for me. I'm just excited to see this ABC data get examined by the e CHMP as well. Christopher Missling: Appreciate it. Thank you. Clint Tomlinson: Thank you for the questions, Tom. The next question going to come from Jesse Silvera. Spirit of the Coast Analytics. Jesse Silveira: Hey. Good morning. Can you hear me alright? Clint Tomlinson: Yes. You're fine. Ahead, Jesse. Jesse Silveira: Good morning, Clint and doctor Missling. This is Jesse Silvera from Spirit of Coast Analytics. Thank you for taking my call. Some of these questions you've kind of addressed a little bit earlier, but hopefully you can maybe provide some additional color on on some of them. Yeah. Just to reiterate kind of one of your previous points. My first question is sort of an assumption, though I think you got at it earlier. But considering the CHMP review is ongoing and a final decision hasn't even been rendered yet, is it safe to say that you can't discuss the reasons negative CHMP trending or give details on the strategy going into the reevaluation Christopher Missling: That that's, yeah, correct. That's correct. Jesse Silveira: Okay. Got that. And perhaps adjacent to that conversation, you think you can give more detail on a statement that was found in the fourteen November press release? It stated, quote, the company intends to request a reexamination of the CHMP opinion upon its formal adoption, including providing relevant biomarker data based on feedback and continued guidance from the CHMP, EMA, and Alzheimer's disease I think it was Tom that was getting at this earlier, but can you can you comment any further on the the biomarker data? I think I saw in your press release this morning that you plan to publish maybe a paper about brain atrophy and its direct correlation to cognition. Is that accurate? And is that some of the data that you may may not be presenting to to the EMA? Christopher Missling: That's accurate. So the advantage of the biomarker is that the biomarker endpoint is objective and cannot be influenced by a patient the caregiver, or the physician, or anybody else as a matter of fact, because it's objective. And I pointed out that in analogy to oncology where you get drugs approved purely by the effect of the brain measure sorry, of the tumor measurement. And while, for example, the clinical effect was not yet significant, And that is something which we like to point out that the analogy is in Alzheimer, the clear pathological shrinking of the brain, which is one of the first features Alois Alzheimer himself actually identified his patients with Ultima, the first patient he assessed. Subsequent later on when he looked into the brain, he found this additional, you know, aberrant features of proteins than identified as a beta plaque or tau. But the first thing he identified was really that the brain shrinks and the holes, the gaps widen in the brain. And that's really the pathological logical consequence of a declining brain, less less functional brain. And it's like a lemon which is drying up. You cannot squeeze anything out of it. And that is really a strong objective biomarker and biomarker end point for demonstrating an objective effect of a drug and that was demonstrated with blacamazine. So we just make sure that gets visibility and and part of this is also a correlation analysis. That we are able to find that not only that there's a shrinking less shrinking of the brain, shrinking of the brain going along with blackamazin treatment, but also that correlates with each patient with a improvement in the respective regions. Of the brain's activities of the adascoct 13 subdomains, for example, For example, learning and and reading and writing as in one area of the brain, and if that is improved, in the clinical trial for the patient, that same region of the brain responsible for that if that also is less impaired in the active glycogen treatment arm compared to placebo. And if you can find this this further confirms the true effect of the drug. And that will be convincing in our opinion. Jesse Silveira: I I think that's really interesting. I'm definitely looking forward to that. And I think kind of related is in light of the semaglitude failure is that they reported that you know, that the drug had improved bio markers, amyloid, maybe tau. I don't recall about tau. But you know, the improved amyloid but had no clinical effect no improvement on CDR sum of boxes. And I think that I'm not sure exactly when there needs to be if there will be a time where regulators will no longer see amyloid equals, you know, better cognition or whatever. But moving along kind of on September, the company PR'd really impressive AppClear three comparisons to Prodromal. Populations and had a detailed follow on analysis of AbClear two and AbClear three subpopulations in a GWAS preprint a little bit later. AbClare three in particular appears to showcase an effective functional cure in early Alzheimer's patients and you covered the mechanisms of these earlier But can you give further color on APCLEAR one versus APCLEAR two and APCLEAR three? Specifically whether they were prespecified or exploratory and how regulators may or may not view these subpopulations in light of being exploratory or being prespecified. Is this something you can talk about? Christopher Missling: Yeah. So the definition of a b clear one which basically is the wild type sigma one gene. Which was identified already in the beneficial effect of that gene, in the previous preceding phase two a study. Which was published 2020, we identified that patients with the sigma one wild type which represents seventy percent, seven zero, of the population, had a better response to blarcamesine than those with the respective mutation. It's a point mutation and that's how biology is. Thirty percent of overall population, that's not patients, but overall population has a one point mutation, r s one eight hundred eight sixty six, and this one mutation changes the confirmation of the gene makes it a little bit less viable or effective in its ability to restore homeostasis. Increase autophagy, which is the mechanism of the activation of blackamisines through sigma one activation as its ultimate effect. And so the patients with the wild type, the fully functional non mutated gene respond better. So this was identified in the phase two a. So we prespecified the analysis of the primary endpoint as well as the secondary and exploratory endpoints With these in mind, how would patients do in the phase two b slash three study? With the wild type sigma one. And that was prespecified, and we now define this as a b clear one. And we did indeed demonstrate or it was demonstrated that indeed that was confirmed Blacamazine increased effect of patients with that of seventy percent, roundabout is the number of patients, seven zero, which improved better than the patients with the mutation. And that is improving. So now ABCLEAR2 was the result of a pre planned in the trial. We did a whole genomicosome analysis. That means we looked at all patients in the study and analyzed their genes and genes expression and response to the drug based on the genetic profile as well. That is the DNA of all patients. And in this analysis, which was preplanned, we found to our surprise, unexpectedly, one gene showing up is a extremely strong driver of efficacy And that gene turned out to be the collagen 24 a one gene. And that gene, I explained it just before, is involved in the buildup of the extracellular matrix. That's really really intriguing novel science and underappreciated or overlooked up to now by the in the field because everybody always looks at the neurons or the astrocytes or the areas of active involvement in the brain. But the extracellular matrix is where all these neurons and astrocytes are residing or sitting on. It's like a a pavement, like a street. And if that street is not smooth, like a highway, or like a a pavement, then then this then this these neurons cannot function well. And we were able to find find them because the patients with the mutation of this colagene in gene in this extracellular matrix, not respond so well, to blackamazine, representing that they're not as viable as the respective wild type carriers. And the good news, though, is the collagen wild type represents seventy one patient percent of the overall population. And that was also found in our trials. We had run about seventy percent with patients with this cytology and wild type gene. So very intriguing new data, and that was, as a consequence, was preplanned in the study. Of course, not prespecified because we found it in the analysis of the phase two b slash three study. Jesse Silveira: Okay. And it's my understanding that Leqembi and Kisunla were both approved after a CHMP reexam, and that subpopulation data enrich their filing by conferring a more desirable like, safety efficacy axis. Is that true, and is this any way relevant to Anavex's current position with some of this data, the the ABC CLEAR two and ABC CLEAR three data. Christopher Missling: It's it's it's correct. Both lecanumab and donanemab and these are run by large pharma companies. They had been a low prior approved in The US, reached the same point as we did just as we communicated a few weeks ago. And they underwent the same reexamination and were able to get approval. I don't want to I would say, make that that this is a guarantee for us because every review is complex and we are not able to anticipate or know the outcome of this re reexamination process, but the body pulls down to in the assessment of lecanumab and donanemab. Was the assessment and the judgment of benefit needs to outweigh the risk. Sure. And our our drug has safe has safety. It's has no ARIA. We talked about the efficacy, which we just discussed. But we cannot anticipate, of course, an outcome of the regulatory review. Jesse Silveira: Okay. Understood. And moving forward, will you be immediately refiling for the EMA reevaluation? To my knowledge, it took about three and a half to four months for the CHMP to give Leukemia and Kasimha their next opinions respectively. So maybe we could see something around April. Is that about what you're projecting? Christopher Missling: That that's correct. We will immediately ask for the reexamination as soon as possible. And, again, while there's never certainty to obtain approval from regulators, we remain highly excited about the science and the data. Jesse Silveira: Okay. And, you know, being a small with a unique mechanism of action, it's probably difficult for you to garner support from the community. I recall that the European Alzheimer's disease consortium, Alzheimer's Europe, and even the US Alzheimer's Association kinda put together persuasive arguments for the CHMP to consider during the Lyckembian re evaluations. Does Anivex have any support like this? Are you aware of any organizations, key opinion leaders, or even patients from the trial attempting to persuade the CHMP to reconsider. Do you have that support from the community? Christopher Missling: It's really not for us to make that move, and the community is aware of our of our drug, and we let them basically do what they think is appropriate. And what we only can do is point out the data and this is a process. And we are committed to this process. But also, very importantly, with this process, we gain also confidence with the regulators We are doing this in a partnership. We are doing this in a open discussion. We are are also getting the the ability to get feedback, which we need to move this forward in what way it takes to help patients addressing this unmet medical need. Jesse Silveira: Okay. Well, I see that we're, you know, nearing time. So to conclude for me, least, it's pretty obvious to anyone paying attention that, you know, Blarcamesine should likely be approved for early Alzheimer's patients and, you know, the the efficacy has been absolutely unprecedented in these megalithic effect sizes were achieved in a really small population, which should theoretically make it more difficult to do So I think it's a clear win for patients, caregivers, and payers, and I I think part of the problem the first time around may have been that it was sort of you know, piecemeal analysis and you're, you know, you're introducing analysis as you're going. But now that you have all analysis at your disposal, and a clear narrative, it's my hope that the company will use know, the reexamination to tell Barcambizine's story and earn the approval it deserves. So thank you for taking my call, and you have a good rest of day. Thank you. Christopher Missling: Oh, we appreciate the kind words, and our expert advisers advises us also to proceed and so do the patients and investigators They also advise us to proceed. And we may remain committed to do our best. Thank you. Clint Tomlinson: Yeah. Thank you, Jesse. And doctor, I don't see any further questions at this time. Christopher Missling: Well, thank you. So we are thankful for your continued interest and trust in ANAVEX. Wishing you a happy and blessed Thanksgiving. But in closing, we like to continue to point out our focus on execution as we advance our therapeutic pipeline to potentially improve patients' lives living with these devastating conditions. Oral once daily blacaramazine has the potential to address high unmet medical need in early Alzheimer patients. With its clinically meaningful efficacy profile, of slowing cognitive decline by more than thirty percent and sometimes even higher for certain populations. Its acceptable safety profile as demonstrated in the phase 2bthree program. Thank you very much. And, again, happy and blessed Thanksgiving. Clint Tomlinson: Thank you, ladies and gentlemen. This will conclude today's conference call. We appreciate you participating, and you may now disconnect.
Operator: Good day, everybody, and welcome to the Movado Group Third Quarter Fiscal twenty twenty six Earnings Call. As a reminder, today's call is being recorded and may not be reproduced in full or in part without permission from the company. At this time, I would like to turn the conference over to Alison Melkin of ICR. Please go ahead. Alison Melkin: Thank you. Good morning, everyone. With me on the call today are Efraim Grinberg, Chairman and Chief Executive Officer and Sally DeMarcellus, Executive Vice President and Chief Financial Officer. Before we get started, I would like to remind you of the company's Safe Harbor language. Which I'm sure you're all familiar with. The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in such statements due to a number of risks and uncertainties all of which are described in the company's filings with the SEC which includes today's press release. If any non GAAP financial measure is used on this call, a presentation of the most directly comparable GAAP financial measure to this non GAAP financial measure will be provided as supplemental financial information in our press release. Now, I would like to turn the call over to Efraim Grinberg Chairman and Chief Executive Officer of Movado Group. Efraim Grinberg: Thank you, Allison. Good morning, and welcome to Movado Group's third quarter conference call. Joining me today is our Executive Vice President and CFO, Sally DeMarcellus. After I review the highlights of our quarterly results, and the progress we're making against our strategic initiatives, Sally will discuss our financial results for the quarter and year to date in greater detail. We'll then be glad to take your questions. We're pleased with our results for the third quarter. And more importantly with the progress we're making in building our brands and business in a sustainable way. In a globally challenging retail environment, we delivered revenue growth of 3.1% to $186,100,000 Excluding The Middle East, where we have rebuilt our team and are refining our strategy, growth was 5.9%. We plan to return to growth in that region next year. For the quarter, gross margin improved by 80 basis points to 54.3% compared to 53.5% last year. Despite a $4,500,000 and two thirty basis point impact from incremental U. S. Tariffs. After quarter end, The US and Switzerland announced a framework agreement that we expect will lower our overall US tariff rate on Swiss watches to 15%. Roughly one third of the rate we've paid since August. This positive development will allow us to plan effectively for next year and reduce the level of price based mitigation. Benefiting both American consumers and the company. Adjusted operating income grew more than 40% to $12,600,000 For the first nine months, we generated positive operating cash flow of $1,300,000 versus a use of cash of $40,600,000 last year. We ended the quarter with a strong balance sheet dollars 183,900,000.0 in cash and no debt. And our board has approved a quarterly dividend of 35¢ per share. This quarter reflects continued progress on our strategic priorities. Strengthening our brands driving innovation, delivering improving financial results. Our results are a direct reflection of our team's effort, dedication, and commitment. Despite ongoing global economic and political uncertainty, we're increasingly optimistic about the improving dynamics in the fashion and accessible luxury watch categories. Driven by innovation in new shapes, and sizes and growing interest from women and younger consumers. We're also seeing a strong momentum in fashion jewelry. Supported by the growing adoption of jewelry for men. Regionally, we're pleased that The United States returned to 6.9% growth, led by our fashion brand business and our direct to consumer business. 11.9% growth in Movado Company stores, and 12.4% growth on movado.com. Internationally, our business in Europe and Latin America continue to perform strongly partially offset by softer results in The Middle East. From a branding standpoint, we're very pleased with the progress we're making on the Movado brand. Our product innovation this year has resonated strongly. The museum collection performed well, particularly our new BANGL collection. And we're introducing a new style that would allow lab grown diamonds for the holiday season. This collection will be featured prominently in holiday marketing with Jessica Alba and Julianne Moore. For men, we launched the Automatic Museum Imperial, a new hero collection inspired by an iconic design from the late nineteen seventies. Holiday marketing will feature the collection in videos with star running back Christian McCaffrey. In bold, our limited edition collaboration with brand ambassador Ludacris celebrating the twenty fifth anniversary of his debut album, has been a standout. The MVP collection is already sold out. We're also seeing strong growth in Movado Heritage. Inspired by our rich archives. The new 1917 collection based on a square vintage design from that year has launched successfully. Supported by a digital campaign featuring basketball superstar Tyrese Halliburton who is an avid vintage watch collector. Sell through is strong across both men's and women's styles. Our holiday campaign is designed to deepen engagement between our products, ambassadors, and consumers while driving performance at the point of sale through enhanced displays, training, and retail partner support to ensure an elevated in store experience. The Movado brand helped drive double digit growth in both sales and contribution margin in our company stores. Overall, sales in Movado company stores grew 9.4% on a comparable store basis. With Movado brand sales up 17.7%. Over the past year, we've refreshed all Movato display displays and visuals in our stores. Improved assortments, leading to a strong strong results from these initiatives. Among our licensed brands, we saw strong performance in both jewelry and watches, delivering a 6.4% growth overall and a 2.9% on a constant currency basis. Leading the way to Gen Z consumers has been coached. Continues to drive double digit growth led by the SAMI collection. Inspired by Coach's iconic turn lock. We've expanded his hero family with SAMI stretch bracelets and a mini ring watch. Which is trending strongly. Other successes include the Caddie, Cass, and Reese families. All featuring shaped cases. Hugo Boss continues to perform well. Led by hero families such as Sky Traveler, the Grand Prix, and the Principal Tank Watch. We're also excited about the potential in Hugo Boss jewelry, particularly for men, led by the watch inspired candor bracelet. For Tommy Hilfiger, the new T. H. Oxford family, with a dial inspired by the classic Oxford shirt is gaining traction. With new case shapes rolling out this fall. On the women's side, we are increasing our penetration with our best selling Mia collection already sold out in many markets. Lacoste continues to set trends in jewelry, with the best selling Metropole collection and strong results in the rugged LC33 anti digi lie. Which is truly aligned with the Lacoste brand. The new black and gold version introduced this fall is expected to sell out over the holidays. In Calvin Klein, we're building leadership in women's watches, complemented by a strong jewelry offering. The Mini Pulse has quickly become a best seller and the new micro contemporary is performing very well. For Olivia Burton, we're seeing healthy growth in our two key markets. The US and The United Kingdom. Led by the Mini Grove Collection our Mini to the Max campaign, which will continue through the spring. We're very proud of our team's execution this year. Especially following a challenging fiscal twenty twenty five. We're making strong progress against our strategic initiatives and capturing opportunities across global markets. We're also encouraged by the renewed interest among younger consumers embracing analog watches for their design, innovation, quality, and value. With our strong portfolio of brands, we're well positioned to capture this momentum. At the same time, we've made meaningful strides in improving gross and controlling expenses as we return to sales growth. Looking ahead, our focus remains on driving improved profitability across every aspect of the business. We're looking forward to a strong holiday season and to building on this momentum as we plan for the next year. I'll now turn the call over to Sally. Sally DeMarcellus: Thank you, Efraim, and good morning, everyone. For today's call, I will review our financial results for the third quarter and year to date period of fiscal twenty twenty six. My comments today will focus on adjusted results. Please refer to the description of the special items included in our results for the third quarter and first nine months of fiscal twenty twenty six and fiscal twenty twenty five in our press release issued earlier today. Which also includes a reconciliation table of GAAP and non GAAP measures. Turning to a review of the quarter. Overall, we were pleased with our performance for the 2026. Sales were $186,100,000 as compared to $180,500,000 last year. An increase of 3.1%. In constant dollars, the increase in net sales was 1.2%. Net sales increased across licensed brands and company stores, partially offset by a decrease in net sales in owned brands. By geography, US net sales increased nine I'm sorry, U. S. Net sales increased 6.9% as compared to the third quarter of last year. International net sales increased 0.6% with strong performances in certain markets such as Europe, and Latin America, offset by a weaker performance in The Middle East. Which is where we are making progress rebuilding this important market. On a constant currency basis, international net sales decreased 2.5%. Gross profit as a percent of sales was 54.3% compared to 53.5% in the third quarter of last year. The increase in gross margin rate as compared to the same period last year was primarily driven by favorable channel and product mix and the increased leverage driven by certain reduced costs and higher sales. This was partially offset by increased tariffs. Operating expenses were $88,500,000 as compared to $87,900,000 for the third quarter of last year. The $600,000 increase was driven by an increase in performance based compensation partially offset by a planned reduction in marketing expenses. The combination of higher revenue and gross profit more than offset a relatively small increase in operating expenses to deliver a 43.5% increase in operating income. To $12,600,000 This is a $3,800,000 improvement from the $8,800,000 spent in the 2025. We recorded approximately $1,200,000 of other nonoperating income in the 2026 as compared $1,400,000 in the same period of last year. Other nonoperating income is comprised of interest earned on our global cash position. We recorded income tax expense of $3,500,000 in the third quarter fiscal twenty twenty six as compared to $1,500,000 in the third quarter fiscal twenty twenty five. Net income in the third quarter was $10,200,000 or $0.45 per diluted share as compared to $8,500,000 or $0.37 per diluted share in the year ago period. Now turning to our year to date results. Sales for the nine month period ended 10/31/2025 were $479,700,000 as compared to $471,900,000 last year. Total net sales increased 1.7% as compared to the nine month period of fiscal two thousand twenty five. In constant dollars, the increase in net sales for the year to date period was point 6%. U. S. Net sales increased by 1.5% and international net sales increased 1.8%. Gross profit was $260,000,000 or 54.2% of sales. As compared to $254,800,000 or 54% of sales last year. The increase in the gross margin rate for the first nine months was primarily due to favorable channel and product mix partially offset by increased tariff costs, and the unfavorable foreign currency exchange. Operating expenses were $239,500,000 as compared to $241,300,000 for the same period of last year. The decrease was driven by a reduction in marketing expenses partially offset by an increase in performance based compensation. For the nine months ended 10/31/2025, operating income was $20,500,000 compared to $13,500,000 in fiscal twenty twenty five. We reported approximately $4,000,000 of other nonoperating income in the nine month period of fiscal two thousand twenty is primarily comprised of interest earned on our global cash position as compared to $5,200,000 in the same period of last year. Net income was $17,400,000 or $0.77 per diluted share as compared to $13,900,000 or $0.62 per diluted share in the year ago period. Now turning to our balance sheet. Cash at the end of the third quarter was $183,900,000 as compared to $181,500,000 in the same period of last year. Accounts receivable was $118,300,000 up $4,500,000 from the same period of last year, primarily due to foreign currency. Inventory at the end of the quarter was up $20,800,000 or 11.8% above the same period of last year. $5,400,000 of the increase was due to foreign currency. And $6,400,000 of IEPA reciprocal tariffs is included in the inventory on hand at the end of the third quarter. We are comfortable with the composition and balance of our inventory at quarter end. In the first nine months of fiscal twenty twenty six, capital expenditures were $3,500,000 and we repurchased approximately 100,000 shares under our share repurchase program. Of 10/31/2025, we had $48,400,000 remaining under our authorized share repurchase program. Subject to prevailing market conditions and the business environment, we plan to utilize our share repurchase program to offset dilution. As Efra mentioned, there has been a recent trade agreement impacting future Swiss tariff rates, we will adjust our mitigation strategy accordingly. Given the current economic uncertainty and the unpredictable impact of tariff developments, the company is not providing fiscal twenty twenty six outlook. I would now like to open the call up for questions. Thank you. The floor is now open for questions. Operator: Once again, that's star one if you'd like to register a question at this time. Our first question today is coming from Hamed Khorsand of BWS Financial. Please go ahead. Sally DeMarcellus: Hi. Good morning. So first, I just wanted to ask you, the success you're seeing with many of your watches and brands, is that coming from your, you know, influencers, your, you know, the spokespeople that you have, or is that because of the design and it's just trending well with with Gen z? Efraim Grinberg: Well, I think it's a combination of both, Amit. Thank you. A good question. And so what you're seeing is is an increased coverage of of these products on social media and obviously, the bulk of our campaigns are also on digital media, and and and so that resonates they're resonating, with with younger, consumers across the spectrum. I think it's also the combination of innovation of new shapes and sizes. And the embrace of younger consumers to the the watch category. And and that's occurring pretty much on a global basis. So it's it's nice to see. Hamed Khorsand: Okay. And then as far as the commentary you made about many of your brands being selling well or being sold out, Do you want the sold out conditions? I mean, would that that impair your sales? Efraim Grinberg: So, I think it's really on some select product families across, I think I mentioned Tommy Hilfiger in some markets and some of our other brands. And and and and I think that that that what you know, this is not a in some cases, we also in the case of the ludicrous watch and Movado, it was a limited edition. So it was planned to be sold out. We still have one model available. Which we expect to sell out in the next few weeks. So I think it's always good to have a balance of supply and demand, and we'll be able to replenish most of the styles into the first early first quarter or the end of the fourth quarter of this year. So I think it's a good balance to have. And part of it is as the category comes back and the innovation has has increased and consumers are drawn back into the category. Obviously, the levels of demand change. And that's also very good to see. Hamed Khorsand: And the success you're seeing in sales, does that change your commentary coming into the calendar year about you know, what your spending levels would be for the the fiscal year? Efraim Grinberg: I think it's really a balance. And our focus has been on improving profitability. And you saw that through the first nine months of this year and particularly in quarter. So it's really we will continue to invest in in in our brand building efforts. But at the same time, we have made it a goal and we're very serious about it. Of of driving improved profitability at the company. Hamed Khorsand: Okay. Thank you. Operator: Once again, that's star one if you'd like to register a question at this time. We're showing no additional questions in queue at this time. I'd like to turn the floor back over to Mr. Grinberg for closing comments. Efraim Grinberg: Well, thank very much all for participating today. I'd like to wish everybody a great Thanksgiving holiday. And, of course, it's the really formal beginning of the holiday shopping period. We'll all be in stores looking to see how how businesses out there, and I'm sure many of you will be as well as, beginning your holiday shopping. So, again, enjoy the holiday, and and thank you very much for being here today. Operator: Ladies and gentlemen, this concludes today's event. You may disconnect your lines or lock off the webcast at this time, and enjoy the of your day.
Operator: Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome you to the DICK'S Sporting Goods, Inc. Third Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Simply press star followed by the number one on your telephone keypad. If you'd like to withdraw that question, again, press star one. Thank you. I would now like to turn the conference over to Nate Gilch, Investor Relations. Nate, please go ahead. Nate Gilch: Good morning, everyone. And thanks for joining us to discuss our third quarter 2025 results. On today's call will be Ed Stack, our Executive Chairman, Lauren Hobart, our President and Chief Executive Officer, and Navdeep Gupta, our Chief Financial Officer. A playback of today's call will be archived in our Investor Relations website located at investors.dicks.com for approximately twelve months. As a reminder, we will be making forward-looking statements that are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factor discussions in our filings with the SEC, including our last annual report on Form 10-K and our quarterly report on Form 10-Q for the first fiscal quarter, as well as cautionary statements made during this call. We assume no obligation to update any of these forward-looking statements or information. Please refer to our Investor Relations website to find the reconciliation of our non-GAAP financial measures referenced in today's call. And finally, a couple of admin items. First, a quick note on our comparable sales reporting. Foot Locker will be included in our comp base beginning in Q4 of next year, which will mark the start of their fourteenth full month of operations post-acquisition. As such, all reported comp sales for this quarter and for the upcoming year pertain to the DICK'S business only. Second, I want to provide clarity on certain terminology we'll use throughout today's call and going forward. First, when we refer to the DICK'S business, we mean our existing DICK'S Sporting Goods operations, including the DICK'S Sporting Goods, Golf Galaxy, Going Going Gone, and Public Lands banners, as well as GameChanger. Earnings per diluted share results for the DICK'S business exclude the dilutive effect of the 9,600,000 shares issued as part of the Foot Locker acquisition. Second, Foot Locker business refers to our newly acquired operations including the Foot Locker, Kids Foot Locker, Champ Sports, WSS, and Atmos banners. And finally, for future scheduling purposes, we are tentatively planning to publish our fourth quarter 2025 earnings results on March 10, 2026. With that, I now turn the call over to Ed. Ed Stack: Thanks, Nate. Good morning, everyone. Thanks for joining us today. This is an important call. It's our first earnings call as a combined company with Foot Locker. We have a lot to share. There's a lot of detail and a lot of numbers. We want to make it clear we're doing all that our shareholders would expect us to do to make the Foot Locker business accretive in 2026. And I have to tell you, as the largest shareholder, I couldn't be more excited about the progress we're making and the opportunities ahead. As announced earlier this morning, we delivered another great quarter with comps of 5.7% for the DICK'S business, and we continue to operate from a position of strength. Our momentum in the DICK'S business remains strong, as we execute against the key priorities that have fueled our success: a differentiated on-trend product assortment and an industry-leading omnichannel athlete experience. This is the flywheel of our success as a company. It's driving consistent growth and performance. Now I will discuss the tremendous opportunity we see with Foot Locker. Completing this acquisition on September 8 marks a bold and transformative moment for DICK'S. Together, we're building a global platform that is at the intersection of sport and culture, one that we believe will redefine sports retailing. This powerful combination will allow us to serve a broader consumer base, deepen our partnerships with the world's leading sports brands, and significantly expand our total addressable market. When we announced this acquisition, we knew that business was going to need work. Let me be candid. Foot Locker strayed from retail 101 and did not execute the fundamentals. Post-COVID, Foot Locker did not react quickly enough as its largest brand pivoted toward a direct-to-consumer model, leaving Foot Locker with the wrong inventory—too much of what didn't sell and not enough of what did sell. Consequently, as we enter this transitional phase, the Foot Locker business, as expected, comped negatively with pro forma comp sales for the full third quarter declining 4.7%, including a 10.2% decline internationally. Now after looking even deeper under the hood as the owners of Foot Locker, our conviction that we can turn this business around has only grown. We will bring our operational excellence, our supplier relationships, and our merchandise expertise to return Foot Locker to its rightful place as a top player in the specialty athletic channel. Today, we're even more excited about the long-term value we believe this acquisition will deliver to our shareholders. We're committed to investing in Foot Locker's business to return it to profitable growth. We've assembled a world-class management team to lead the Foot Locker business, and I'm personally excited to guide this next chapter. As previously announced, Anne Freeman, a longtime former Nike executive, is now serving as Foot Locker North America president. Anne brings deep industry expertise and leadership experience, and she is supported by a high-caliber team of senior leaders—a combination of key executives from Foot Locker, all of whom are well respected by the stripers, blue shirts, and our brand partners, experienced leaders from DICK'S, and talent from other world-class companies. This team was handpicked to return Foot Locker to its rightful place in our industry, and we're already moving quickly in North America to build momentum. In addition, we're thrilled to have just announced that Matthew Barnes, former CEO of Aldi, will be joining our team next month as president of the Foot Locker International business. Matthew has nearly three decades of experience in global retail and a track record of transforming brands. We look forward to working to stabilize and ultimately accelerate that business with targeted turnaround strategies to meet the evolving needs of consumers globally. There's a lot happening to position the business for the short term and build for the long term. Our first priority is clear. We need to clean out the garage of underperforming assets. This means clearing out unproductive inventory, closing underperforming stores, and rightsizing assets that don't align with our go-forward vision for the Foot Locker business. This is the groundwork for the transformation. We began this work shortly after the closing on September 8. We have identified an initial number of underperforming assets around the globe, including inventory that needs to be marked down and liquidated, along with the preliminary number of stores that need to be impaired or closed. We initiated certain pricing actions in late Q3 and we'll be more aggressive in Q4 to clean up unproductive inventory. Our intent is to get the vast majority of the inventory charges behind us by the end of the year so we can start 2026 fresh and position Foot Locker for an inflection point during the back-to-school season in 2026. As a result, we expect Q4 margin rate for the Foot Locker business to be down between 1,000 to 1,500 basis points with pro forma Q4 comp sales being down mid- to high single digits. We believe this aggressive purging of underperforming assets is what needs to be done to return Foot Locker to its rightful position as a key leader in this industry. Navdeep will share more details in his remarks about the charges we anticipate as part of this important cleanup effort. Importantly, we've met with all of our key vendor partners and they are fully aligned with our vision and are eager to support a thriving, growing Foot Locker. They indicated they are committed to investing alongside us to reignite the Foot Locker business. We're moving with urgency and have already kicked off an 11-store pilot to begin testing changes in product and the in-store presentation. It's early, but we're encouraged by what we're seeing and learning. Looking ahead, we expect back-to-school next year to be an inflection point as our new strategies, assortments, and processes align to drive meaningful progress in the Foot Locker business. All supported by the work we're doing now by cleaning out the garage to position Foot Locker for future success. With these actions, we continue to expect Foot Locker to be accretive to our EPS in fiscal 2026, excluding one-time costs. What amplifies our confidence is the talented people we found inside the Foot Locker business. Over the past two months, we spent time in Foot Locker stores, offices, and distribution centers. Our teammates' passion is real, especially among the stripers and blue shirts along with the rest of the team members. They love sneakers, they're hungry for leadership, and they want to get back to playing offense. That energy is validating our excitement and building focus for what's ahead. In closing, at DICK'S, we've built a business that leads our industry in performance, innovation, and customer loyalty. DICK'S has generated consistent growth and strong margins, with a relentless focus on delivering shareholder value. While we're just getting started on Foot Locker's transformation, our deep expertise and our track record of growth and success fuel our conviction that we can turn this business around and we are confident that Foot Locker will reemerge as a stronger, more resilient, and more dynamic business. We will do this with the same grit, vision, and execution that got DICK'S to where it is today. Before turning it to Lauren, I want to take a moment to thank our more than 100,000 teammates across all of our banners for their passion and commitment during this exciting chapter for our company and wish everyone a happy Thanksgiving. With that, I'll turn it over to Lauren to share more on the continued momentum across the DICK'S business. Lauren Hobart: Thank you, Ed, and good morning, everyone. We're very pleased with our strong third quarter results for the DICK'S business, which continue to demonstrate the strength of our operating model and our team's disciplined execution. We are entirely focused on delivering on our strategies and sustaining our strong momentum. As always, our performance is powered by our compelling omni-athlete experience, differentiated product assortment, best-in-class teammate experience, and our ability to create deep engagement with the DICK'S brand. Today, we are raising our full-year outlook for the DICK'S business. This updated guidance reflects our strong Q3 results and the ongoing confidence we have in our business, grounded in our team's execution of the four strategic pillars I just mentioned. We now expect comp sales growth of 3.5% to 4% for the year and EPS to be in the range of $14.25 to $14.55 for the DICK'S business. Now moving to our third quarter results for the DICK'S business. Our Q3 comps increased 5.7% with growth in average ticket and transactions. These strong comps were on top of a 4.3% increase last year and a 1.9% increase in 2023, as we continue to gain market share. Our gross margin expanded 27 basis points in line with our expectations, and we delivered non-GAAP EPS of $2.78 for the DICK'S business, up from $2.75 in the prior year's quarter. As we continue to execute through our strategic pillars, we're seeing strong momentum across the three growth areas for the DICK'S business that we are focused on for 2025. First, we're incredibly proud of the progress we're making in repositioning our real estate and store portfolio. In Q3, we opened 13 new House of Sport locations, the most we've ever opened in a single quarter, bringing our year-to-date total to 16 openings. This achievement reflects the outstanding work of our team, whose focus and execution made this ambitious rollout a reality. We now have 35 House of Sport locations nationwide, a major milestone in the growth of this transformative concept. We also opened six new Fieldhouse locations in Q3 and opened another just last week, completing our 15 planned openings for the year and bringing us to a total of 42 Fieldhouse locations across the US. These innovative formats are delivering powerful results, deepening engagement with our athletes, brand partners, and landlords, and laying the foundation for long-term profitable growth for the DICK'S business. The second of our three major focus areas is driving growth across key categories. Our unparalleled access to top-tier products from both national and emerging brand partners continues to fuel athlete demand and excitement, driving strong growth across the DICK'S business. At the same time, our vertical brands are resonating incredibly well with our athletes, further contributing to this momentum. For Q3, this growth came from having more athletes purchase from us with more frequent purchases and more spending each trip. We feel great about the product pipeline from our brand partners, and our inventory is well-positioned to meet athlete demand this holiday season. I also want to highlight our ongoing expansion into trading cards and collectibles. In partnership with Fanatics, we've launched the Collector's Clubhouse in 20 House of Sport locations, with plans to include it in every new location going forward. These spaces feature trading cards, autograph memorabilia, and more, and the athlete response has exceeded our expectations. It's a unique and fast-growing category that's a great fit to everything we do, and we're very excited about the opportunity ahead. And our third major focus area, our multibillion-dollar highly profitable e-commerce business continues to stand out as a growth driver, once again growing faster than the DICK'S business overall. I'd like to highlight three examples of ways we're building strength in e-commerce. First, we're really leaning into our app experience, including app-exclusive reservations that are establishing us as a leader in launch culture across many key categories. Second, we're continuing to invest in capabilities to deliver more personalized experiences, content, product recommendations, and search results. An example of this is how we're targeting NFL fans with personalized creative messaging and product recommendations for their favorite team. Third, for the holiday season, we're making it easier than ever to find the perfect gift with a new capability for athletes to build and share their wish list with family and friends. Lastly, as part of our broader digital strategy, we're harnessing the power of our athlete data and continue to be enthusiastic about the long-term growth opportunities we see with GameChanger and the DICK'S Media Network. Our GameChanger platform keeps expanding with new features, partnerships, and content that enriches the whole youth sports experience and reinforces our leadership in the multibillion-dollar youth sports tech ecosystem. A great example is our new game insights feature, which gives coaches fast, actionable takeaways after every game, further elevating the value we provide to athletes, coaches, and families. We're also seeing great momentum with our DICK'S Media Network, which is deepening engagement with consumers and key brand partners while expanding across new ad platforms. In addition to our collection of owned and our full spectrum of off-site channels, we're ramping up our in-store capabilities like our interactive digital experiences and programmable spaces that are driving impactful brand activations in our House of Sport locations. In closing, we're very pleased with our strong third quarter results and remain highly confident in our long-term strategies to drive sustained sales and profit growth for the DICK'S business. We believe the power of our omnichannel athlete experience and our compelling differentiated product offering will resonate with our athletes this holiday season, supported by our fantastic holiday brand campaign, which launched a few weeks ago. I'd like to thank all of our teammates for their hard work and commitment and for their focus on delivering great experiences for our athletes throughout the season. And, also, a warm welcome to all stripers, blue shirts, and team members from the Foot Locker business. We're excited to have you as part of the DICK'S family and to achieve great things together. I share Ed's excitement about how we will bring our operational excellence, our supplier relationships, and our merchandise expertise to return Foot Locker to its rightful place as a top player in the specialty athletic channel. With that, I'll turn it over to Navdeep to share more detail on our financial results and 2025 outlook. Navdeep, over to you. Navdeep Gupta: Thank you, Lauren, and good morning, everyone. Before I begin my review of our third quarter results, I would like to take a moment to provide important context for Foot Locker's performance included in our consolidated financial results. As noted in this morning's release, our acquisition of Foot Locker closed on September 8. As a result, our third quarter consolidated financials do not include the peak back-to-school selling season in August for the Foot Locker business. They reflect just eight weeks of post-acquisition results in September and October, historically an unprofitable time period for the Foot Locker business. Let's now move to a brief review of our third quarter results for the consolidated company, including continued strong performance for the DICK'S business. Consolidated net sales increased 36.3% to $4.17 billion, driven by an approximate $931 million sales contribution from a partial quarter of owning the Foot Locker business and a 5.7% comp increase for the DICK'S business as we continue to gain market share. On a two-year and a three-year stack basis, comps for the DICK'S business increased 10% and 11.9%, respectively. These strong comps were driven by a 4.4% increase in average ticket and a 1.3% increase in transactions. We also saw broad-based strength across our three primary categories of footwear, apparel, and hardlines. As Nate said, Foot Locker will be included in the comp base beginning in Q4 of next year, which is when they will commence their fourteenth full month of operation following the closing of the acquisition. For reference, pro forma comp sales for the Foot Locker business in Q3 in its entirety decreased 4.7%, with the comparable sales in North America decreasing by 2.6% and the comparable sales in Foot Locker International decreasing by 10.2%, primarily driven by softness in Europe. Consolidated gross profit for the quarter was $1.38 billion or 33.13% of net sales, down 264 basis points from last year. For the DICK'S business, gross margin increased by 27 basis points and was in line with our expectations. Notably, the year-over-year decline in consolidated gross was driven entirely by the mix impact from the lower gross margin Foot Locker business. On a non-GAAP basis, consolidated SG&A expenses increased 40.8% or $320.9 million to $1.11 billion and deleveraged 84 basis points compared to last year's non-GAAP results. $259.9 million of this consolidated increase was driven by the Foot Locker business. For the DICK'S business, expense dollars increased by 7.7% and deleveraged 45 basis points, which was in line with our expectation and driven by strategic investments digitally, in-store, and in marketing to better position the DICK'S business over the long term. Consolidated preopening expenses were $30.6 million, an increase of $13.8 million compared to the prior year. As Lauren mentioned, this supported the opening of 13 new House of Sport locations in Q3, our highest numbers opened in a single quarter to date, plus another six Fieldhouse locations we opened in the quarter. Consolidated non-GAAP operating income was $242.2 million or 5.81% of net sales, compared to $289.5 million or 9.47% of net sales last year. For the DICK'S business, non-GAAP operating income was $288.6 million or 8.92% of net sales. This year's consolidated results included a $46.3 million operating loss in the quarter from the Foot Locker business, which was primarily driven by the gross margin decline. We initiated certain pricing actions in late Q3. Importantly, since the acquisition of Foot Locker closed on September 8, these results exclude a profitable back-to-school season for the Foot Locker business in August and through Labor Day. For reference, pro forma non-GAAP operating income for the Foot Locker business in Q3 in its entirety was approximately $6.8 million. On a non-GAAP basis, other income comprised primarily of interest income was $12.7 million, down $7.8 million from the prior year. This decline was from lower cash on hand and a lower interest rate environment. Consolidated non-GAAP EBT was $239.9 million or 5.76% of net sales, including the Foot Locker business. This compares to an EBT of $297.1 million or 9.7% of net sales in Q3 of last year. Moving down the P&L, consolidated non-GAAP income tax expense was $59.4 million or a rate of 24.7%. While the income for the DICK'S business was taxed at a low 20% rate, the combined company was subject to a higher tax rate primarily driven by the Foot Locker's EMEA business, where a full valuation allowance remains in place. In total, we delivered a consolidated non-GAAP earnings per diluted share of $2.07 for the quarter. These results included non-GAAP earnings per diluted share of $2.78 for the DICK'S business based on a share count of 81.2 million, which excludes the dilutive effect of the shares issued in connection with the acquisition of Foot Locker. This is up from the earnings per diluted share of $2.75 last year. The DICK'S business results were partially offset by the effects of the partial quarter contribution from the Foot Locker business, which include a 52¢ negative impact from Foot Locker operations, including the gross margin decline as well as the higher tax rate, a 19¢ negative impact from the increased share count, which was up 5.9 million prorated for the eight weeks of the Foot Locker ownership. On a GAAP basis, our earnings per diluted shares were 86¢. This includes the noncash gains from our nonoperating Foot Locker stock, as well as $141.9 million of pretax Foot Locker acquisition-related costs. For additional details on this, you can refer to the non-GAAP reconciliation table of our press release that we issued this morning. Now turning to our balance sheet. We ended Q3 with approximately $821 million of cash and cash equivalents and no borrowings on our $2 billion unsecured credit facility. Our quarter-end inventory levels increased 51% compared to Q3 of last year. Excluding the Foot Locker business, inventory levels for the DICK'S business increased 2% compared to Q3 of last year. We believe the inventory in the DICK'S business is well-positioned to continue fueling our sales momentum. For reference, on a pro forma basis, inventory levels for the Foot Locker business increased approximately 5% as compared to the same period last year. And as I've mentioned, the work is underway to clear out the unproductive inventory at the Foot Locker business. Turning to our third quarter capital allocation, net capital expenditures were $218 million, which included $201 million for the DICK'S business and $17 million for the Foot Locker business. We also paid $109 million in quarterly dividends. Before I move to our outlook, I want to address a few key expectations surrounding the Foot Locker acquisition. First, as Ed discussed, our immediate priority is to clean out the garage of unproductive assets as we look to optimize the inventory assortment and store portfolio for the Foot Locker business. We expect these actions, along with other merger and integration costs, to result in a future pretax charge of between $500 million and $750 million. Importantly, these future pretax charges are excluded from today's outlook. Second, we remain confident in achieving the previously announced $100 million to $125 million in cost synergies over the medium term, primarily from procurement and direct sourcing efficiencies. Third, as Ed said, we continue to expect the acquisition to be accretive to EPS in fiscal 2026, excluding one-time costs. Now moving to our outlook for 2025. Today, we are providing an updated outlook that is specific to the DICK'S business and does not include the Foot Locker business, which we will address separately. We are taking this approach to ensure comparability of our performance across the quarters and to provide ongoing visibility into the DICK'S business. This outlook also excludes the investment gains as well as the merger and integration costs related to the Foot Locker acquisition. As Lauren said, we are raising our expectation for comp sales and EPS for the DICK'S business. Our updated guidance reflects our strong Q3 performance and includes the expected impact from all tariffs currently in effect. This outlook balances our confidence in the outcomes we are driving through our strategic initiatives and our operational strength against the ongoing dynamic macroeconomic environment. We now expect full-year comp sales growth for the DICK'S business in the range of 3.5% to 4% compared to our prior growth expectation of 2% to 3.5%. Total sales for the DICK'S business are expected to be in the range of $13.95 billion to $14 billion compared to our prior expectation of $13.75 billion to $13.95 billion. Driven by the quality of our assortment, we continue to expect to drive gross margin expansion for the full year. We anticipate this expansion will be offset by SG&A deleverage as we are making strategic investments digitally, in-store, and in marketing to better position ourselves over the long term. We still expect operating margins to be approximately 11.1% at the midpoint. At the high end of the expectations, we continue to expect to drive approximately 10 basis points of operating margin expansion. We now expect EPS for the DICK'S business in the range of $14.25 to $14.55 compared to a prior expectation of $13.90 to $14.50. Our earnings guidance for the DICK'S business is based on approximately 81 million average diluted shares outstanding and excludes the dilutive impact of the 9.6 million shares issued in connection with the acquisition. This outlook for the DICK'S business also assumes an effective tax rate of approximately 24% compared to our prior expectation of approximately 25%. We continue to expect net capital expenditures of approximately $1 billion for the full year for the DICK'S business. Turning now to the Foot Locker business. We want to provide some perspective on our expectations for the fourth quarter. As Ed discussed, our priority is to position Foot Locker for a fresh start in 2026 and reset the business for long-term success. This includes taking strategic actions to address unproductive assets, including the optimization of inventory and the closure of underperforming stores. As a result of our actions to optimize Foot Locker's inventory, we expect Q4 gross margins for the Foot Locker business will be down between 1,000 to 1,500 basis points as compared to Foot Locker's reported results in the same period last year, with the pro forma comp sales being down mid- to high single digits. Excluding the one-time costs associated with our actions to address unproductive assets, we expect Q4 operating income for the Foot Locker business to be slightly negative. Looking ahead, we expect next year's back-to-school season to be an inflection point to drive meaningful progress in the Foot Locker business. As a reminder, we continue to expect the Foot Locker acquisition to be accretive to our EPS in fiscal 2026, excluding the one-time cost. Before we wrap up, I want to provide a couple of consolidated company assumptions to provide clarity for your models. For the fourth quarter, we expect approximately 91 million average diluted shares outstanding, which includes the dilutive impact of the 9.6 million shares issued in connection with the Foot Locker acquisition. We also anticipate a consolidated company effective tax rate of approximately 29% for Q4, impacted by the expected Foot Locker losses in EMEA where no corresponding tax benefit is anticipated. As Ed and Lauren said at the top of the call, we are proud that we continue to operate from a position of strength with robust momentum in the DICK'S business and a significant effort underway to return the Foot Locker business to growth. We are doing all that our shareholders would expect to make the Foot Locker business accretive in 2026. We could not be more excited about our future together. This concludes our prepared remarks. Thank you for your interest in DICK'S Sporting Goods, Inc. Operator, you may now open the line for questions. Operator: Thank you. We will now begin the question and answer session. Withdraw that question, again, star one. And as a reminder, please limit yourself to one question and one follow-up. Any additional questions, please re-queue. And your first question comes from the line of Robbie Ohmes with Bank of America. Please go ahead. Robbie Ohmes: Good morning. Hi, Ed and Lauren. My first question is I know we're going to be talking a lot about Foot Locker today, but on the 5.7% comp, etcetera, and you raised guidance. But just how are you driving that? And how are you guys thinking about your confidence going into the holiday here? Lauren Hobart: Thanks, Robbie. We are so proud of the team for a 5.7% comp. And importantly, we are comping strong comps, so a two-year stack of 10%. And as you know, it's been several quarters, seven quarters in a row, where we've had an over 4% comp. That really speaks to the fact that our long-term strategies are working. And I would point to the differentiated product assortment that we've been able to bring in, everything from newness from our strategic partners to emerging brands, our vertical brands, consumers, athletes are really resonating with the products that we are providing. And at the same time, our entire team is fully focused on delivering an engaging athlete experience. So that's in our stores. That's our digital environment. We are really focused on excelling and getting people the product that will give them the confidence, the excitement to do their absolute best. So our strategies are working. If you look at Q3, one of the great things we saw was that we had growth across all of our key categories. When you think of back to school, you think of back to sport, you think of footwear and apparel and team sports. We knocked it out of the park with those categories. But also golf and as well as our licensed business and our trading card business really doing well. So as I flip to the holiday, all of those themes are the reasons why we are so excited and confident as we look to Q4 and that we just raised our guidance. We've got an incredible product assortment for athletes. The consumer is fully focused on sport, and we are right sitting at the middle of the intersection of sport and culture. Robbie Ohmes: That's really helpful. And then just my follow-up, just on Foot Locker, what kind of assumptions did you make about Foot Locker's cleanup of inventory in the fourth quarter having on DICK'S Sporting Goods? And also, how many stores are you guys planning to close, and what would the timing be there? Ed Stack: Thanks, Robbie. As we take a look at closings, we're still addressing that. We've got some stores that we think we're going to close. Also looking to address just the upside that we think we have in these stores and many really need to be closed and how many can we make more profitable. So we'll give you some more guidance on that at the end of our fourth quarter call. Navdeep Gupta: Robbie, let me quickly add on to the cleanup of the inventory in the fourth quarter. So what Ed said in his prepared remarks as well as what I said, that we expect the gross margins in the Foot Locker business in the fourth quarter to be down between 1,000 to 1,500 basis points. As you can imagine, that is primarily driven by us quickly addressing the unproductive inventory that is in the system right now and have the room available to bring the excitement assortment that positions the business really well for 2026. Robbie Ohmes: Thank you. Operator: Your next question comes from the line of Simeon Gutman with Morgan Stanley. Please go ahead. Simeon Gutman: Hey, good morning team. My first question on Foot Locker, so it looks like the business may have been a bit softer than the Street was expecting in Q3, and you're anticipating a slightly negative operating income in Q4. Yet you're expecting the acquisition to be accretive to EPS in '26. Can you walk through the building blocks to achieve it? And then what gives you confidence? Ed Stack: Sure. Thanks, Simeon. I can't tell you really couldn't be more excited about Foot Locker and the opportunity of Foot Locker. But there's some work that needs to be done to get it ready for '26 and for it to be accretive to our business. So one of the things that we're doing, and we gave the Foot Locker team kind of a visual that we need to clean out the garage. So we're cleaning out the garage. We're cleaning out old unproductive inventory, we're going to be impairing underperforming assets. And from a confidence standpoint, those are all part of the building blocks that we need to put together to be ready for 2026. I have tremendous confidence in this management team that we've assembled in North America as we talked about. It's being led by Anne Freeman, a longtime Nike executive that we've got a tremendous amount of respect for. The brands have a tremendous amount of respect for her. We just announced today that Matthew Barnes is going to run our international business. And he's a Brit, and we think that it truly needs to be run by a European. We're making some real changes on how we are approaching the international business, which we think is going to be very positive. And one of the things we love about Foot Locker and one of the reasons we bought it when we went out and did our due diligence before is the men and women in the stores, the stripers and the blue shirts. These young men and women, they love sneakers. They love Foot Locker. They love to be around this product. And they're really our secret weapon as we go forward. And the other thing that gives us a tremendous amount of confidence is we've talked with every brand, and every brand has a renewed interest in being supportive to Foot Locker, and they've all talked that they want a stable and growing Foot Locker. And to be honest with you, it's great for our business. It's also great for the brand's business. And we've got complete alignment with the brands. And we are confident that in 2026, we do put all these building blocks together. We're confident that Foot Locker will be accretive to our earnings in 2026. Simeon Gutman: So my follow-up, I guess, I'll make it two parts. First, just to that point on '26 accretion, that's Foot Locker standalone, including Synergy. That's not, let's say, DICK'S Sporting Goods electing to buy stock back. That's Foot Locker math adding to DICK'S earnings base. That's part one of the follow-up. And then part two, you know, you don't tell us what your footwear gross margin is inside of core DICK'S, but if you look at Foot Locker, they've been on a steady decline for the last several years, and a lot of it does track with one of your major suppliers' proliferation of product. Is it feasible once you're done with your cleanup that you can get gross margins at parity with DICK'S Sporting Goods, or is there something about the mix and the selection that you can't get it quite to that level? Meaning, how much quick repair could there be once you clean up the assortment? Ed Stack: Well, we're not going to guide right now, and we'll give you some more guidance at the end of Q4. But we're not going to give you we're not going to tell you where it's going to be compared to DICK'S Sporting Goods. But we do know that it can be meaningfully different than it is right now. There's a huge opportunity. One of the reasons it struggled is they haven't had access to some of the key product, haven't had allocation of some of the product. There's a number of stores that are out of stock in product that they don't have. I was just in a store in New York yesterday, as a matter of fact, and talking to the gentleman who runs the store. He said, we're a great running store. We just got Nike's running construct in last week. When you take a look at some things like that, there's just a huge opportunity. That product is being sold at full price. So, yeah, we're really confident that there'll be a meaningful increase in their gross margin. And we'll give you some more color on that at the end of the fourth quarter. Simeon Gutman: And then I don't know, Ed. Sorry. It was that follow-up to the accretion comment if you can comment any more on that, whether that included buyback or that's just core Foot Locker? Ed Stack: That's core Foot Locker. That's not to say we might not, you know, as we've said, we've been opportunistic based on what happens with the stock. We may buy back some stock, but we think from a core Foot Locker standpoint, it can be accretive to our earnings in 2026. Simeon Gutman: Okay. Happy holidays. Thanks. Good luck. Ed Stack: Thanks. You too. Operator: Your next question comes from the line of Kate McShane with Goldman Sachs. Please go ahead. Kate McShane: Hi, good morning. Thanks for taking our question. We were curious about how you're going to manage the markdowns at Foot Locker. I guess the concern is that if you do discount aggressively in the fourth quarter, do you think you'll be in a position where you can go back to full price selling and the customer be ready for that as new product comes into the store? Our second question on the discounting is, do you feel like the market is going to be heavy with discounts now in Q4? And how much do you expect that to impact the market and DICK'S own footwear sales? Ed Stack: Sure. Thanks, Kate. I don't really think that that's going to be an issue with these markdowns and then going back to full price because the product that we're marking down is older product that hasn't sold, product that's been sitting around for a while. So when we get the new fresh product, we're confident we'll sell that at full price. And the consumer out there is looking for new fresh product that is innovative in the marketplace. That's what Foot Locker, for the most part, doesn't have right now. And we'll be bringing that product in as we get into '26. From a discounting standpoint, right now and who knows, things could change. But right now, we don't think that the discounting is going to be meaningfully different than it was last year. We do feel that we've got, as Lauren said in her remarks, we've got different and innovative product, more premium product that you'll see, product that's not as fully distributed in the marketplace. We don't see that promotional activity impacting our business a whole lot. Kate McShane: Thank you. Operator: Next question comes from the line of Adrienne Yih with Barclays. Please go ahead. Adrienne Yih: Great. Thank you very much. It's great to see the continued momentum at the DICK'S brand. I guess Lauren and Ed, obviously, I'm going to ask a question about Foot Locker. Is this a case of kind of just historically underperforming operations? And with some closures and inventory management, that you can control the controllables to kind of turn the business, or are there more infrastructure investments in some longer-tailed structural things about the business? Secondarily, are there banners within Foot Locker that no longer perhaps make sense? If you could talk about that. Then finally, my follow-up is on inventory. 1,000 to 1,500 basis points is quite a bit. Is there a write-off reserve within that? And is it just the depth of the promo, or are you using third-party channels? Just trying to understand the magnitude of that and the quickness of trying to get through that in the next couple of months. Thank you very much. Ed Stack: Wow. That's a lot. That's a lot, Adrienne. Let me start. Adrienne Yih: That was a one. Thank you. Ed Stack: That's okay. So the idea of this is historically underperforming operations. I think that's a big part of this. So Foot Locker really didn't know. They kind of got away from retail 101 of trying to have the right product in the right store and having those. I think turning this around, we don't think there's going to be some capital, and we're going to invest in the stores. But we've just done an 11-store test, and it was pretty capital light. And what we really did is we took the inventory, most of the inventory out of the store, and we relaid out the wall. And one of the things that, you know, the DICK'S team is really good at, and we're bringing that expertise to Foot Locker, is from a merchandising standpoint and how those visual merchandising really can help drive store. We took the inventory out of the store and we redid the walls. And no real infrastructure back in there. But if you had walked into a Foot Locker store and still walk into a lot of Foot Locker stores other than these 11, look at the wall, it's kind of merely a run-on sentence of shoes. And what we've done is we've taken and tried to segment it and show the consumer what's important in the stores. And we've got this 11-store test, and now it's only 11 stores. But the results have been we're pretty enthusiastic about the results. So we think that we can definitely turn this around. As far as the inventory being down 1,000 to 1,500 basis points, we are going to take markdowns to get this out of the store of older underperforming SKUs. And we do expect the end of the year, there will be a program that we will sell some of this off to a jobber and just clean out what's left from the inventory and be able to get a fresh start in 2026. Yep. So that's why we're moving as quickly as we can to get a fresh start in 2026. Yep. Lauren Hobart: I want to just add to what Ed is saying from my perspective. If you look at the core challenges that we're facing with the business, it really is, as you said, it's underperforming operations, it's inventory management, core retail 101. And one of the things that's been so amazing to see is the team is coming together, and Ed is spending a ton of time with them. Is that the core expertise in DICK'S, be it merchandising and the balance of art and science or the visual presentation, you can hear in his remarks just talking about that. The fact that our, you know, we are a marketing-driven company and that we believe in brand, and so those plans are being worked on for next year. And the brand relationships, there's just a heavy operational focus. All of those things are being transferred by, you know, osmosis, coaching, mentorship, all of that. And that's what gives us the confidence that we are moving in the right direction. Adrienne Yih: Okay. And just to be very crystal clear, the markdowns of the inventory are on lifestyle and will have kind of no competitive impact with the performance, you know, premium performance at DICK'S. So there's no crossover there. Ed Stack: The product that we're marking down is not key product at DICK'S Sporting Goods. It's older product that, quite frankly, and with the visual we used with the Foot Locker team, and it is kind of caught on globally as we just got to clean out the garage. We got to clean out all the inventory that's kind of in the corner that's not selling. That we need to have out of our system. Adrienne Yih: Fantastic. A 100% sense. Good luck. Ed Stack: Thank you. Operator: Your next question comes from the line of Michael Lasser with UBS. Please go ahead. Michael Lasser: Good morning. Thank you so much for taking my question. The first one is relatively straightforward. The expectation that Foot Locker will be accretive next year is based on the $14.25 to $14.55 for this year. Is that correct? And how dependent is the accretion expectation on inflecting the sales that you would anticipate by back to school for next year? Navdeep Gupta: Michael, thanks for that question. Yeah. Let me clarify on and exactly like you said, yes. The basis is on the $14.25 to $14.55 as the basis for 2025 results. And the dependency, I think, so starts with what Ed said about the building blocks. It starts out with cleaning out the garage, positioning the inventory, and having that excitement assortment and the newness that is resonating so well at DICK'S Sporting Goods with the gross margin expansion and the merch margin expansion that you are seeing. Gonna be the first and foremost priority as we look to the building blocks for how can this business be accretive. And keep in mind, you know, we talked about as part of the cleaning out of the garage that there are other unproductive assets. We are looking into the store portfolio where there are some unprofitable stores. But the opportunity we are looking at is not only deciding if the store should be closed, but actually the opportunity is the reverse to say if those stores had access to the right product, and the right innovation and the newness, can those stores be turned around and made profitable? We are looking into that. We are absolutely looking into some of the unproductive assets. That won't be part of the core business going forward. To your point, it starts with sales and margin. And in addition to that, we'll look into cleaning up under the garage to position the business for profitable growth into 2026, especially from the back-to-school season of next year. Michael Lasser: Got you. And my follow-up question is, one of the key debates on the combined enterprise story right now is how do you ring-fence the core DICK'S business in order to ensure that the integration of Foot Locker does not become a distraction to slow the momentum of the core business. It does look like in the fourth quarter, you are anticipating a significant slowdown guiding to a flat to slightly positive comp for the core business. So, a, what is fostering that expectation? And, b, given you have owned this business for a matter of months now, give us a sense of how you anticipate that they won't be it won't become a distraction such as the core business can accelerate into next year and drive some growth on top of the accretion that you're anticipating for Foot Locker? Sorry. There was a lot of words in that question. Lauren Hobart: I got it. Thank you, Michael. One of the absolute prerequisites for us to do this acquisition is exactly what you're saying. We needed to ring-fence the DICK'S team, and DICK'S needs to stay completely focused on driving our growth and our strategic priorities. And that is exactly what we are doing. I mean, eight, ten weeks in now, I'm even more confident that that is how we're doing it. Set up the team at Foot Locker. Ed is very much spending time over there. The DICK'S team is fully focused on the DICK'S priorities. And we're going to continue to just keep the teams sharing learnings, but not, not remotely working, you know, not distracting each other from what their core priorities are. When we look at Q4, you mentioned the deceleration. I want to be really clear about this. We just came off of a 5.7% comp, and we're up against a 6.4% comp last year. So the fact that you see our comp slightly moderating in Q4, we actually just raised the comp and the high end of our previous guidance now is the low end of our guidance. So we are really bullish on the holiday. We are just balancing that with an appropriate level of caution as we always do. We don't ever guide to the best possible outcome, but we are pumped and ready to go on the DICK'S side for Q4. Michael Lasser: Thank you very much, and good luck. Lauren Hobart: Thank you. Operator: Your next question comes from the line of Mike Baker with D.A. Davidson. Please go ahead. Mike Baker: Great. Couple to start on. First, a little bit more detail on that 11-store test. Maybe any initial results or pop in sales in and, I mean, is it just simple as relaying a back wall, or there's got to be more to what you're doing? So if you could address that, please. Ed Stack: Sure. So we're not going to lay out kind of the results. As I said, they're early, but we're really very, very encouraged on them. And it's not just as simple as laying out the wall as kind of taking some of the older product out of those stores. Put in some newer, fresher product that we were able to get our hands on. And one of the things we've also done is we're bringing the apparel business back to Foot Locker. They had really kind of walked away from the apparel business. And if you walk into these stores, you can see the apparel in there, and the apparel is selling really quite well too. So we think that there's an increase from a footwear standpoint, from an apparel standpoint going forward. And, you know, we'll more than likely give you a little bit more color on this test at the end of the fourth quarter as we give guidance going into 2026. But there's a lot of just basic retail 101 that if Foot Locker gets back to that or when Foot Locker gets back to it, will have a meaningful impact on their business. Mike Baker: Great. Fair enough. One more follow-up. If I could, you're talking about a fresh start and getting everything cleared by the end of the fourth quarter, but back to school is the inflection point, not to, you know, put too much pressure on you or try to accelerate it, but why not spring as an example as the inflection point? Why should the first half not be as strong? Ed Stack: I think that's a really good question. And the main reason for that is our merchandising philosophy and how we're buying the product. We didn't buy that. It was bought by the previous management team, and we think that there's some going to talk to the brands about trying to plug some holes. But the third quarter or the back-to-school time frame is the first time we will have had complete control over the assortment going forward. Mike Baker: Perfect sense. Thank you for that answer. Ed Stack: Sure. Operator: Your next question comes from the line of Christopher Horvers with JPMorgan. Please go ahead. Julie Wasserman: Hi. This is Julie Wasserman on for Chris. Just following up with DICK'S ability to affect inventory orders for Foot Locker. So just confirming that you're saying that you won't be able to fully affect it until the start of the third quarter, but are you able to have any sort of impact even if it's lighter in the first half? And just specifically on the percent of spring ordered, since the acquisition, how much of that have you been able to order? Thus far, and how do you see that flowing into the fall? Ed Stack: We can have some impact on Q1 and Q2 probably. Hopefully, a little bit more on Q2 than Q1. We're working through that and working with the brands, and they are being as helpful as they can to try to get product to us that we need. But it's really going to be in that third quarter that you'll see the big difference that our team will have fully bought that product and merchandise that product. Julie Wasserman: That makes sense. And our follow-up question was just on gross margin with the third quarter. Just more broadly, if you could speak to what's going on there. In terms of promotional environment for is all for Cortex, promotional environment. Tariff costs, and the other inputs we discussed last quarter, like the GameChanger business. Navdeep Gupta: Yeah. So we reported today at 27 basis points in our gross margin. Keep in mind that that 27 basis points of gross margin expansion is on top of a 70 basis points of expansion that we saw. In terms of the promotionality within the quarter, the promotionality, as you can imagine, the overall marketplace continues to remain dynamic. We participated in select promotions, which we always do during the important back-to-school season. Tariff impact was within that quarter, our results as well within the merchandising margin. But keep in mind, we still delivered a merchandising margin expansion of five basis points on top of almost about a 60 basis points of impact, a positive impact last year. And there was a slight unfavorable impact from the mix, like Lauren talked about. The license business performed really well, which is a fantastic growth opportunity, but has a slightly lower margin. So that we had a little bit of an unfavorable impact from the mix as well. And just to kind of round out that answer, I would say that if you look at it, we have guided that we expect our gross margin to expand on a full-year basis. We expect gross margin to expand in our on the back half as well as within the fourth quarter. So overall, we feel great about the capability, the work that the GameChanger team is doing, and the DICK'S Media Network. Those ingredients continue to remain in place that drive our confidence in the gross margin expansion for this year and into the future. Julie Wasserman: Thank you. Operator: Your next question comes from the line of Paul Lejuez with Citi. Please go ahead. Paul Lejuez: Hey, guys. Can you talk about the $500 to $750 million in charges that might be coming? How much of that is cash versus just write-off? And how many stores are actually being reviewed when you think about that range of $500 to $750 and any split that you can share in US, international, or a banner? Navdeep Gupta: Yeah, Paul. We'll share much more of the detailed assumptions. You can imagine, we are ten weeks into this acquisition. And like I said before, we are balancing the evaluation that we are doing with the opportunity that we see in terms of driving growth and profitability expansion on a store basis. So on stores, we'll share much more of the detailed plans during our Q4 call. In terms of the makeup of this $500 to $750, I would say there are three main buckets. The first and foremost, as Ed talked about, is the unproductive inventory, which makes up quite a decent chunk of that that we will be addressing. The vast majority of that will be addressed here in Q4. That does include some of the poor store portfolio evaluation. And then we are looking deeper into the assets that we have in place, some of the technology assets, some of the legacy contracts, that we will evaluate as part of the fourth quarter and clean that also up to position the business and the profitability of the business for 2026. In terms of the cash versus noncash, I would say it would be a combination of both things. You know, inventory definitely would be cash, but if there are some existing assets on the balance sheet that we'll be cleaning up, those will obviously be noncash. So we'll share more detailed assumptions behind all of this during our fourth quarter call. Paul Lejuez: Thanks. And then just on the synergy number, the $100 to $125 million, how much of that are you assuming you can capture in FY26 to get to those accretion numbers? And I'm curious if you're thinking you might be actually playing for a bigger number than that $100 to $125 longer term. Navdeep Gupta: Yeah. Well, the $100 to $125 million, I would say we have a lot of work that has already been done. What we are working through, as you can imagine, is just conversations with the brands, conversations with the non-merchandising vendors, and those conversations are happening right now. So to allow a better line of sight, call it, twelve weeks from now, part of the fourth quarter. And in terms of looking for additional opportunity, you know us, we'll continue to focus on driving the top line and the bottom line results for the collective business now. Absolutely, that's a focus within the organization. Paul Lejuez: Thank you so much. Operator: Your next question comes from the line of Christina Fernandez with Telsey Advisory Group. Please go ahead. Christina Fernandez: Good morning. I wanted to ask a question on the vision for the merchandising and Foot Locker. That business historically was heavy on basketball, sneaker culture, and kids. So as you look at where there can be improvement, do you see that mix materially changing on the apparel side? Are you looking to lean more into private label, or do you also see national brands playing a big role in their apparel expansion? Ed Stack: Yeah. Foot Locker has always been steeped in basketball culture, and basketball will still be a very important part of that. The basketball construct that we see in the product coming forward from a basketball standpoint, we are really enthusiastic about across a couple of brands. And the apparel business, we do see the apparel business—the national brands is where they had kind of stepped away from. And leaned into their private brands, which we think the private brands certainly have a place there. But we feel that the national brands will have a meaningful increase in the apparel business in Foot Locker, which will help drive the AURs, and we think it'll be very profitable. Christina Fernandez: And then my second question is on Foot Locker also having been on a pretty significant remodel and refresh program. Have you continued with those Foot Locker reimagine stores, or have you paused that program? And looking to make changes in that real estate strategy that they had been on. Ed Stack: I think the Foot Locker reimagined stores have been an interesting test. As we've kind of gone through there, there's parts of the reimagined store that are very good and other parts that need to be rethought. And we're in the process of rethinking those right now. So as an example, what they characterize as the Kick It Club and the drop zone when you first walk into a Foot Locker store in the middle of the store, we're going to take that out, reimagine that, give better sight lines to the balance of the store. And repurpose some of that place, which that area of the store, which was not very productive at all. It was more of a social place and turned that into the apparel presentation more space and really focusing on an apparel standpoint, which we think will drive the sales even better than they are. Operator: We have time for one more question, and that question comes from the line of Steve Forbes with Guggenheim. Please go ahead. Steve Forbes: Morning, Ed, Lauren, Navdeep. Ed, I was curious maybe to just explore, like, any demographic differences we should be aware of as we think about the performance spread between the two businesses? Yeah. I think one of the thoughts out there is maybe more exposure to lower income, but I'd be curious maybe just hearing you summarize how we should think about the demographic exposure and how that sort of impacts your merchandising plans on a go-forward basis here? Ed Stack: Well, we'll merchandise Foot Locker for Foot Locker, which is going to be a bit more basketball-inspired, a bit more trend-inspired, definitely more urban than the DICK'S business. The DICK'S business will be more sport-led along with the lifestyle product. We think DICK'S is really kind of at the center of sport and culture. And it's a more suburban concept. With that being said, all categories of consumer, if you will, are looking for product that is new, innovative, and different than what's out there in the marketplace right now. And Foot Locker didn't have that new and innovative product. As we get into 2026, we'll start to have more of that product. And by the third quarter, I think we'll be fully invested in that newer, innovative product that the consumer across all income levels is looking for. Steve Forbes: And then just a quick follow-up for Navdeep. Maybe just so we're all on the same page here. There's a slightly negative adjusted EBIT for Foot Locker on a pro forma basis, is that that compares to the $118 million last year? I just I guess, confirm that. And then is there any way to sort of think through how you sort of view, you know, like a normalized 4Q or how you would speak to just where that LTM adjusted EBITDA profile is for the business relative to the $395 million that's in the presentation? Navdeep Gupta: Yeah. So the comparison, you're right. It's comparing to a normalized on a non-GAAP basis, the results that the Foot Locker posted in the fourth quarter of last year. And keep in mind the connection point between the 1,000 or the 1,500 basis points of the margin decline versus the slightly negative operating income expectation for Foot Locker is the part of the cleanup of the garage inventory, and that's the piece that we have threaded between the two numbers and the estimates that we gave out for the Foot Locker business. Steve Forbes: Thank you. Operator: And that concludes the question and answer session. I will now turn the conference back over to Lauren Hobart, President and Chief Executive Officer, for closing comments. Lauren Hobart: Okay. Well, thank you all for your interest in the DICK'S story. We will see you next quarter. Have a wonderful Thanksgiving, and a huge thank you to our entire teams of over 100,000 people around the globe. Thank you. Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.
Operator: Morning, and welcome to The J. M. Smucker Company's Fiscal 2026 Second Quarter Earnings Question and Answer Session. This conference call is being recorded and all participants are in a listen-only mode. Please limit yourselves to two questions and re-queue if you have additional. I will now turn the call over to Crystal Beiting, Vice President, Investor Relations and Financial Planning and Analysis. Thank you. You may begin. Crystal Beiting: Good morning, and thank you for joining our fiscal 2026 second quarter earnings question and answer session. I hope everyone had a chance to review our results as detailed in this morning's press release and management's prepared remarks, which are available on our corporate website at jmsmucker.com. We will also post an audio replay of this call at the conclusion of this morning's Q&A session. During today's call, we may make forward-looking statements that reflect our current expectations about future plans and performance. These statements rely on assumptions and estimates, and actual results may differ materially due to risks and uncertainties. Additionally, we use non-GAAP results to evaluate performance internally. I encourage you to read the full disclosure concerning forward-looking statements and details on our non-GAAP measures in this morning's press release. Participating on this call are Mark Smucker, Chief Executive Officer and Chair of the Board, and Tucker Marshall, Chief Financial Officer. We will now open the call for questions. Operator, please queue up the first question. Thank you. Operator: The question and answer session will begin at this time. For operator assistance, please press 0. As a reminder, please limit yourselves to two questions during the Q&A session. Should you have additional questions, please re-queue. Our first question today is coming from Andrew Lazar from Barclays. Your line is now live. Andrew Lazar: Great. Thanks so much for the question. And good morning, everybody. Maybe I wanted to start off with a question on sweet baked goods, if I could. Organic sales in that segment came in sort of better than I think most Street expectations. Trying to get a sense from you as, you know, how much of this do you see as sort of sustainable improvement versus maybe just, you know, easier year-ago compares or any transitory benefits? Mark Smucker: Morning, Andrew. It's Mark. Morning. Thanks for the question. First, we are very pleased with the progress that we're making on Sweet Baked Snacks and the Hostess brand. As you noted, we are seeing sequential improvement. Notably, we're seeing improved performance in c-store. Our volume shares are improving. Our focus on a more focused portfolio has been helping. You will recall that we had a three-pronged plan where we're strengthening our portfolio by actually eliminating 25% of the SKUs, and we've seen really strong flowback into our core brands, notably the number one brands of donuts and cupcakes, which each of those are the number one in their respective segments. And so that has been great. We recently relaunched SuzyQs after they've been out of the market for many years, and that has been off to a pretty good start. And then just, you know, elevating our execution around sales, we're streamlining our operations. The Indianapolis closure should be complete by the fourth quarter. And then continuing to invest in the brand. So long and short of it is, you know, the plan we put in place, decisive actions are working, and we just need to continue to do what we're doing over subsequent quarters, and we do expect to see acceleration over the next couple of quarters as well. Andrew Lazar: Got it. Great. Thanks for that. And then maybe, Tucker, how much of the $0.50 tariff impact this year is specifically coffee-related, such that if tariff policy remains sort of unchanged from here going forward, how much of a benefit we could or should expect this to be to fiscal 2027? Thanks so much. Tucker Marshall: Andrew, good morning. The predominance of the $0.50, if not all, is related to green coffee tariffs. And so, therefore, stepping into FY 2027, it should be viewed as a tailwind while in FY 2026, it continues to be a headwind. Operator: Thank you. Our next question today is coming from Tom Palmer from JPMorgan. Your line is now live. Tom Palmer: Good morning. Thanks for the question. I wanted to follow-up on coffee as well. You noted not taking the third round of pricing as an incremental earnings overhang in the prepared remarks for this year. You've provided some really helpful bridges in terms of other items such as the tariff impact. I was wondering if you could maybe quantify how much that might have impacted your outlook to decision not to take pricing? And then just given the tariff guidance was kind of unchanged, should we think about tariffs flow through your P&L throughout fiscal 2026? And or is there a point where we start to see relief this year? Tucker Marshall: Good morning. As you think about this fiscal year, as we came out of our first quarter earnings call, we called out a net $0.50 impact as a result of tariffs. And that net $0.50 impact was receiving the benefit of recovering dollar-for-dollar cost inflation due to tariffs through an early winter pricing action and then ultimately making an assumption around a price elasticity of demand factor. That was all embedded in the $0.50 as we came out of the first quarter earnings call. We have essentially added that back as a result of being in a tariff-off environment moving forward. However, we have made the decision not to take pricing through US retail coffee in early winter, so we will be absorbing about $75 million of tariff-related costs incurred to date that we will realize, as I've noted, in our third quarter, which coincidentally is $0.50, which is why we're calling it out. Therefore, an impact to this fiscal year but a tailwind to next fiscal year. Tom Palmer: Understood. Thank you. On the SG&A side, there was the guidance reduction now flat year over year. Couple of pieces. One, is there a segment where that's going to be most evident? And then any update on marketing plans? Maybe I missed it. I think they were previously expected to be up around $40 million year over year. Any change there? Thank you. Tucker Marshall: So, Tom, let's begin with marketing. We remain committed to investing in the long-term health of our brands. And so marketing absolute dollars will be up year over year. And we're projecting that to be about 5.5% of net sales, which is pretty consistent throughout the year. We have sharpened the pencil as it relates to SG&A spend, not only throughout the entire network but also as we think about discretionary spend. And we've also sharpened the pencil in certain areas as it relates to marketing. We're still committed behind our growth brands, and you will see an increase year over year. Operator: Thank you. Next question is coming from Robert Moskow from TD Cowen. Your line is now live. Robert Moskow: Hi. Wanted to know, Tucker, about the profit results in Sweet Baked Snacks. Was that also in line with your expectations? Because, you know, sequentially, it's a step down. And it generally, you know, when you have these SKU rationalizations, it improves the profitability of the business because you get rid of some waste. Is there a reason why that's not happening in 2Q? Tucker Marshall: Rob, good morning. So the second quarter top line for Sweet Baked Snacks did exceed our expectations. The bottom line did not meet our expectations. We had anticipated sort of in line with Q1 to maybe slightly better in our second quarter. And as you've noted, we were just over $20 million. We do expect both the third and fourth quarters to get better so that we get back toward our outlook for the full fiscal year with respect to segment profit. And I would say that the second quarter shortfall to expectations really had much to do with the transition of our bakery network or environment and just more cost that we absorb through our supply chain, whether that be absorption, overhead, just the timing of transition. So we do expect benefit as we step into the third and fourth quarters. I would also remind you in our fourth quarter, we should benefit about $10 million from the closure of the Indianapolis facility, which is estimated to be a $30 million annual run rate impact, of which $10 million affects or benefits our fourth quarter this fiscal year. Robert Moskow: Okay. And maybe a follow-up on Petrete. In the commentary, you described the category dog treats as getting better. Your business is still down. What should we expect in the back half? I know there's some very easy, I think, some easy comparisons to some disruption last year. But are there marketing plans also to improve market share in what I guess is an improving category overall? Mark Smucker: Rob, it's Mark. And you actually are correct. You stated it. We are expecting a really strong lap, particularly as we get into this third quarter. So you will see Milk Bone getting back to growth, which is great news. And it's not only the lap, but I would just highlight it's all the work that we've been doing, and it is marketing. You know, we have continued to push on our campaign, which is called More Dog. And so you've probably seen that in various media channels. It has been helping, you know, just the, again, what we always remind you guys is just the spectrum from value-based all the way to premiumization. So as the consumers are looking for different things from their dog treats, the Milk Bone brand is definitely there delivering. And then just the innovation on peanut buttery bites has been very successful. And as we referenced in the prepared remarks, we are going to be launching another innovation after the beginning of the calendar year, which is also standing on another collaboration between the Jif brand and the Milk Bone brand. So that, including seasonal items, which we referenced as well, you know, there's a lot of really strong innovation in that category. It depends a lot on news for growth. So feeling really good about Milk Bone and the trajectory of the brand. And then just overall, our pet business and the growth that's gonna be driven by Meow Mix, we expect to continue as well. Tucker Marshall: Rob, in support of your question, we are anticipating low single-digit growth for our pet portfolio in the third and fourth quarters behind the momentum of Milk Bone and Meow Mix. Operator: Next question is coming from Yasmeen Deswande from Bank of America. Your line is now live. Yasmeen Deswande: Hey guys, thanks so much for the question. Just on the reduced net sales expectation for frozen handheld and spreads, I know that spreads, particularly peanut butter, was challenged in the second quarter. And the expectation is for that to continue for the balance of the year. So I'm asking around the reduced net sales expectation, is that simply flowing through the weaker 2Q? Or is that also, you know, spreads being enough of an offset that Uncrustables accelerating to double-digit growth won't be enough to offset the unforeseen weakness? Tucker Marshall: Yes. Good morning. As it relates to frozen handheld and spreads, we're really calling down that business a little over $80 million on a full-year basis. You're kinda seeing half of that come through the second quarter, and the balance will come through the back half of the year. Much of that is driven by the spreads portfolio, and we really haven't taken up the outlook on the Uncrustables brand. I can tell you that it still demonstrates growth and it is demonstrating a path or trajectory to being a billion-dollar brand by the end of this fiscal year. Yasmeen Deswande: Okay. And then Mark Smucker: Yeah. If I may, just add a little bit of color on a couple of these items. So on Uncrustables, Tucker just highlighted still gonna be a billion-dollar brand. The reason, you know, overall, saw 7% for the total company away from home has been extremely strong. We did see growth in retail as well. Maybe not as much as we would have expected because we were lapping a very strong Q2 last year, really strong merchandising and promo. But we do expect Uncrustables to get back to double-digit growth in the back half of the year, obviously supporting that billion-dollar ambition. And innovation is playing a key role. Right? So, you know, a couple of years ago when we had been capacity, we weren't able to innovate. Now we're launching seasonal flavors. The new one that just came out is this peanut butter and chocolate. It's called PB Choco Craze. And then we've got two new higher protein items that are meant to target sort of a morning daypart or breakfast daypart, and the uptake on those from our retail customers has been great as well. And then just on spreads, because we were expecting the question, I might just highlight peanut butter. Again, there is a very big lap against last Q2, we had multiple tropical storms in the Caribbean, and that drove a lot of stock up. And so we are seeing, you know, the Jif, the peanut butter business being down in the quarter, but regardless, it's generally holding share. So overall, still feel good about spreads, you know, making sure that we're getting our x right. But that is obviously supportive of the Uncrustables business. Yasmeen Deswande: Okay. Great. And if I could just squeeze another one in. I think the previous expectation was for in sweet baked snacks for SKU rationalization to be isolated to the second quarter. And with now that extending into the third quarter, is the expectation still for top-line stabilization in the second half? And I guess asked another way, given the expectation for sequential improvement, could 3Q be flattish in 4Q grow? Or is there still a possibility for, you know, March to be down? Tucker Marshall: I would say that one, the SKU rationalization is back to sort of single digits of growth. Crystal Beiting: Oh, your microphone is off. Tucker Marshall: Sorry. Yes. I'm sorry. We had a technical difficulty here. But to your question, I just want to acknowledge that the Q3 will be the completion of the SKU rationalization associated with the closure of the Indianapolis bakery. And then with respect to your question on growth, we should be flat to slightly down in the third quarter on a comparable basis. And then demonstrating a level of growth on a low single-digit basis in our fourth quarter for Sweet Baked Snacks. Thank you. Operator: Our next question is coming from Megan Klatt from Morgan Stanley. Your line is now live. Megan Klatt: Hi, good morning, Mark, Tucker, thank you. Maybe another question, Tucker, on coffee. Can you talk a little bit about how you're thinking about the pacing of coffee margins in 3Q and 4Q? The 3Q EPS outlook in the prepared remarks is a little bit softer than where the Street is. I assume most of that is just that you still have tariffed coffee flowing through the P&L that's sitting on the balance sheet today without the pricing. So is that the right way to think about it? And then do you still expect to get to mid-twenty percent margins in coffee in 4Q? Or will there be a lingering kind of tariff impact there as well? Thank you. Tucker Marshall: Megan, good morning. So we demonstrated an 18.2% second-quarter segment profit margin in coffee. Would anticipate a slight improvement to that in our third quarter, but it will not surpass 20%. And then as you step into our fourth quarter, we should move beyond 20%. I don't think that we'll get all the way to 25% just as we continue to digest a lot of cost and cost inflation. But just acknowledging, not taking pricing in early winter in our US retail coffee portfolio and absorbing the incurred coffee tariffs to date. So that will be approximately $75 million in our third quarter. Some of that may go into our fourth quarter, but the predominance is in the third, to your question. Megan Klatt: Okay. That's helpful. Thank you. And then maybe just putting together all of your comments on pet and sweet baked snacks and frozen handhelds. As you think about moving through the third quarter and the fourth quarter, you laid out for all segments an expectation for an acceleration in growth. So as you think about the 4Q exit rate, I guess, how are you feeling about outside of coffee, kind of the rest of the U.S. Retail portfolio contributing to or getting back to algo OSG as we finish the year? Thanks. Tucker Marshall: Megan, I would say that when you think of the midpoint of our guidance range today at the top line, it's 4% on a reported basis. Then you affect or isolate on a comparable basis divestitures and foreign exchange, and it's aligning to about 5.5% comparable growth year over year. And then underpinning that, we've got about $38 million worth of co-manufacturing sales that we're lapping. So all else equal, we're at 6%. On a comparable basis adjusted for the manufacturing sales for our outlook for this year. And, yes, much of that is driven by our coffee portfolio. But when you think about the balance of our portfolio, we're seeing tremendous momentum in the away-from-home aspect. We're seeing resilience and strength in our pet portfolio. We're seeing stabilization in sweet baked snacks. We obviously have great growth and momentum on Uncrustables. And we're addressing things within our spreads portfolio. And so I don't want to promise sort of what the exit rate is. What we're acknowledging is that we do have great organic sales growth. On a comparable basis. Our strategy is working, our execution is focused. We'll continue to drive the growth brands, and we'll continue to support the balance of the portfolio. Operator: Next question today is coming from Peter Grom from UBS. Your line is now live. Peter Grom: Great. Thank you. Good morning, everyone. Good morning. I wanted to just ask a follow-up on the tariff commentary in 2027. And I know you noted to both Andrew and Tom that this will be a tailwind to earnings. But I guess specifically, are you expecting those benefits to largely drop to the bottom line? Or would you look to maybe reinvest some of that upside? Tucker Marshall: As it relates to tariff-based inflation and in a tariff-off environment, and not taking pricing for tariffs and, in turn, not experiencing tariffs in our next fiscal year. That should benefit our bottom line, which is why we're effectively saying it should be a tailwind to our coffee portfolio next fiscal year. So, hopefully, it helps provide a little bit of context about how we're thinking about tariffs stepping into next year. Peter Grom: Okay. No. That's helpful. And then maybe just on coffee, can you maybe walk us through what you're now expecting in terms of elasticity? And I guess just as we think about modeling top-line growth through the balance of the year, can you maybe just understand how you see price versus volume at this stage? Especially considering that you're not going to take that additional price increase for the winter? Thanks. Tucker Marshall: Sure. So our current outlook for the coffee portfolio is 16% year-over-year growth. And what's embedded in that is 22% pricing offset by 6% down volume mix. That's an improvement to when we stepped into this fiscal year where we thought growth would be 11% against 22% pricing offset by negative 11% of volume mix. So what you can see is our elasticity assumptions have improved from point five stepping into this fiscal year to around point three where we stand. And, again, that's on average over the year. So hopefully that provides additional context as to the strength, the resilience of our coffee portfolio. Operator: Thank you. Our next question is coming from Matt Smith from Stifel. Your line is now live. Matt Smith: Hi, good morning. I wanted to dig in a bit on the Uncrustables sequential acceleration in the second half. Can you talk about some of the underpinnings to that acceleration, whether there's also unique comparisons there? And how we should be considering pricing in frozen handheld and spreads in the second half? Is there potentially increased promotional support behind Uncrustables to support that sequential acceleration? Thank you. Tucker Marshall: Yes. So we demonstrated 7% growth in our second quarter, which is really good momentum as we continue to advance to the billion-dollar ambition. As we think about our third and fourth quarters, we would anticipate low double-digit growth on the way to that journey of being a billion-dollar brand by the end of this year. We will continue to ensure that we're supporting with marketing, we continue to support our recent innovation launch around protein. We continue to round out distribution and also making sure that we have the right placement and promotion. I would also acknowledge that about 80% of sales run through our US retail portfolio and the balance of 20% flow through our away-from-home portfolio. And we are seeing great momentum in away-from-home on Uncrustables. And one example is the acceleration of growth in the convenience channel, not only due to our innovation behind the sandwich but also due to the capabilities that we acquired through the Hostess acquisition. Matt Smith: Thank you. And Mark, as a follow-up to some of the coffee commentary, elasticities are better than expected on average, but the performance by brand in the measured channel data that we see has varied. Specifically for the Dunkin' brand, elasticities have been softer than Folgers or Bustelo. Was that expected as you went into a more price-intensive environment? Has the performance of Dunkin' been different from what you anticipated coming into the year? Thank you. Mark Smucker: Yeah, Matt. A couple of things. So first of all, you're right that we have seen obviously very strong performance on Bustelo and Folgers. And so the resilience of the category overall gives us optimism, right, in terms of just how we've consumers still consuming coffee, our brands are resonating with consumers, you know, the investments we're making behind these brands is working, notably Bustelo, just had a phenomenal quarter. And then Dunkin' did in the quarter, so we did see a bit of improvement in Dunkin'. But as we've highlighted in previous quarters, we've seen some competitive pricing pressure that we have not overcome, but we are continuing to actually make surgical balancing, some surgical pricing investments as well as supporting innovation in terms of seasonals and so forth. So I think the long-term story on Dunkin' is that it's a great brand. We love the brand, and we still think it has plenty of runway. But over time, as we would expect pricing to moderate competitively, that will support the brand overall. Operator: Thank you. Next question is coming from Max Comfort from BNP Paribas. Your line is now live. Max Comfort: Thanks for the question. With regard to Uncrustables and the volume decline that we saw this quarter in the frozen handheld and spread segment, it sounds like you have plenty of confidence in the business. Distribution is gaining. Innovation is working. And you still see long-term opportunities. So I'm curious, is the volume decline we saw in the quarter really just due to any lapping items that you saw with the strong 2Q a year ago? And then also, could you comment on anything you're seeing from some of the new entrants in this space who have gotten distribution pretty quickly? Thank you. Mark Smucker: Yeah, Max. It's Mark. It is largely the lap. So, you know, again, that strong merchandising and promo in the last Q2 last year is what we're lapping. And as you highlighted, both the innovations Tucker, in his previous answer, talked a bit about the support that, you know, will be not out of the ordinary, but solid merchandising support. Coming into the back half is gonna continue to support the acceleration of that brand. And in broad strokes, you know, we have seen some competition come into the category. I would say that's largely been supportive over the longer term, seeing, you know, a couple of other brands, whether that might be private label. And some of the variety that you're seeing in the category in terms of and then pricing. Should continue to support the brand. But I think overall, you just think about the household penetration we've gained and the continued marketing that's and the innovation will continue to drive growth. Max Comfort: Great. Thanks. And then just to wrap it up with regards to the tariff impact, I just want to confirm, the $75 million in tariff expense that you're referring to, is that the total amount you expect to see in FY 2026, and it is essentially entirely due to coffee tariffs. Tucker Marshall: Correct. Operator: Thank you. Our next question is coming from Alexia Howard from Bernstein. Your line is now live. Alexia Howard: Good morning, everyone. Can I start with innovation and the pace of innovation? Are you able to quantify whether that's been accelerating? It sounds as though the pace has been picking up. I'm not sure whether you can give us numbers on the percentage of sales from new products. And is that pace of innovation now where you want it to be across the portfolio, or are there pockets where you would like to increase that still? Mark Smucker: Alexia, thanks. It's Mark. Yes is the short answer. Our pace of innovation has accelerated. I would say I'm very proud both of, well, actually, across the board, if you look at innovation on Hostess, innovation on pet, notably pet snacks, and more recently, the innovation on Uncrustables has all accelerated. The speed to which our teams have been able to get to market is as fast as we've ever done that. And so I think we're very proud of the work we've done. I mean, the Uncrustables innovations have been notable. And then I think we expect a little bit of a faster turnaround of both pet snacks and human snacks we've continued to deliver again. So thank you for the call out. Alexia Howard: And then a question for Tucker on leverage. You've been hovering a little above four times net debt to EBITDA for the last couple of quarters, and you're talking about getting it down to three times by 2027. How quickly does that start coming down? Should we expect it to start coming down more substantially in the near term? Tucker Marshall: Alexia, so we are committed to $975 million of free cash flow generation this fiscal year, which will support a half-billion dollars of debt pay down this fiscal year, and we anticipate the ability to pay down an additional $500 million in FY '27. As you think about the leverage profile this year, we'll probably hover around four times through the balance of fiscal year 2026. Then as we step into '27, we should begin to see the step down toward that three times amount in fiscal year 2027. Operator: Thank you. Next question is coming from Scott Marks from Jefferies. Your line is now live. Scott Marks: Hey, good morning. Thanks so much for taking our questions. First thing I wanted to ask about, we've heard some of your competitors speak to the need to reduce prices to offer value for the consumer. And we obviously haven't heard your team talk about that much. So just wondering if you can share any thoughts around that and whether you see any opportunities within the portfolio where you think that might be required. Mark Smucker: Scott, thanks. This is Mark. I would say first and foremost, our portfolio is very broad. And so as we look at each category, the fact that we play across the value spectrum allows us to deliver varying degrees of value to the consumer. So you think about Meow Mix is a mainstream brand that provides affordability for cat parents. Our Milk Bone brand, similarly, from base biscuits to more premium offerings like the peanut buttery bites, also has a range and obviously provides affordability to the consumer. It goes without saying in coffee as well, despite the fact that we've seen significant inflation, we're glad, of course, that the tariffs are off, and that affords us the ability to do the right thing for consumers, frankly, and our retail customers and holding our price. I would say on coffee more broadly, you know, history would show that over time, costs would moderate. And so although we don't have a clear view onto if and when that takes place as we get into a new coffee season, to the extent that we do see some meaningful deflation on the commodity, we would certainly pass that along to consumers as well. So, you know, I think the headline is the portfolio itself offers a tremendous amount of options for consumers and notably value all the way to more premium offerings. Scott Marks: Appreciate that. Thanks. And the second question for me would be, you've made comments again today just about fiscal '27. In terms of EPS growth, expectations for on algo were better. Obviously, the tariff relief provides a significant tailwind. So just wondering maybe how we should be thinking about base business expectations for '27 if you're willing to comment on it. Thanks. Tucker Marshall: Yeah. Scott, it's probably early to provide the FY '27 outlook. But the essence that we are trying to communicate is that with a stabilizing commodity environment and an off-tariff environment, as we continue to generate cash and pay down debt and we deliver a level of business momentum, there could be a path to that, and that's what we were trying to just lay out as you think about a $9 midpoint at this fiscal year. And all of the puts and calls that we've had to deal with in this fiscal year as we consider the future. So, hopefully, that provides a little context. Again, as we get to our fourth-quarter earnings call, we'll be able to lay out our outlook for FY '27. Operator: Thank you. We have reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments. Mark Smucker: First of all, I would just like to thank all of you for joining our call this morning. Our second-quarter results demonstrate that our strategy is working. We delivered sequential acceleration in comparable net sales growth, which we anticipate will continue into next quarter. Our bottom-line results reflect increased investments in our brands, disciplined cost management, and strong execution. Our business continues to build positive momentum, and we are confident in our ability to deliver our financial outlook for this fiscal year while advancing our long-term objectives to increase shareholder value. As always, I would like to thank our outstanding employees for their continued hard work and dedication to our company. We wish all of you a very happy Thanksgiving and a great holiday week. Have a great day. Operator: Everyone, this concludes our conference call for today. Thank you all for participating, and have a nice day. All parties may now disconnect.
Operator: Listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch tone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. At this time, I'd like to turn the floor over to Gregory McNiff. Investor Relations. Sir, please go ahead. Thank you. Gregory McNiff: Joining me on today's call are Cheryl P. Beranek, Clearfield's President and CEO, and Daniel R. Herzog, Clearfield's CFO. As a reminder, Clearfield, Inc. publishes a quarterly shareholder letter which provides an overview of the company's financial results, operational highlights, and future outlook. You can find both the shareholder letter and the earnings release on Clearfield's Relations website. After prepared remarks, we will open the floor for a question and answer session. Please note that during this call, management will be making remarks regarding future events and the future financial performance of the company. These remarks constitute forward-looking statements for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. It is important to also note that the company undertakes no obligation to update such statements except as required by law. The company cautions you to consider risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in today's press release, shareholder letter, and on this conference call. The Risk Factors section in Clearfield's most recent Form 10-K filing with the Securities and Exchange Commission and its subsequent filings on Form 10-Q provide a description of these risks. Additionally, as announced on November 12, 2025, Clearfield, Inc. has sold its Nestor Cables business. Following the divestiture of Nestor, we are reporting only on the Clearfield segment. Beginning with this release, Clearfield is reflected as continuing operations, with Nestor classified as discontinuing operations and held for sale for fiscal 2025 and all prior periods on our financials. With that, I would like to turn the call over to Clearfield's President and CEO, Cheryl P. Beranek. Cheryl? Cheryl P. Beranek: Good morning, everyone. And thank you for joining us to discuss Clearfield's fourth quarter and full year fiscal 2025 results. I'll begin with a brief overview of the quarter, discuss our decision to divest the Nestor business, share updates on our long-term strategy, and then turn the call over to Dan for a summary of our financial performance and outlook for fiscal 2026. Fourth quarter net sales from Clearfield's continuing operations of $41.1 million were up 13% year over year. For the full year, Clearfield's continuing operations net sales grew 20% to $150 million, demonstrating solid execution as we continue to focus on growing within the industry and driving market share gains. After a thorough and comprehensive review of the NEF segment, we made the decision to divest the business. This move allows us to redeploy resources toward our core North American operations and higher return opportunities. Our acquisition of Nestor was focused on gaining access to a key technology, namely the ability to manufacture our own line of FieldShield cable, and we achieved our objective. We strengthened our vertical integration and Build America, Buy America compliance through the successful transfer of cable manufacturing technology into our US and Mexico facilities. However, expanding Nestor's business beyond Finland into the European market proved to be a lower margin opportunity. Despite our efforts to improve margins through process improvements and new product introductions, it resulted in a suboptimal use of capital. The transaction resulted in a $10.4 million noncash write-down in the fourth quarter with minimal cash impact. Importantly, the operational benefits from Nestor's integration remain embedded in our manufacturing platform. This divestiture sharpens our focus, improves our long-term margin profile, and better aligns resources with Clearfield's strategic priorities. Looking ahead, our focus remains on protecting what defines Clearfield: craftsmanship, reliability, and service while leveraging our core strength and expanding into areas where we can create the most value. We continue to execute on our Better Broadband and Beyond strategy through three core pillars: protecting our core community broadband business by ensuring that the broadband service providers who have long relied on Clearfield continue to have the products, service, and support they need to succeed; leveraging our market position into new applications and environments where fiber connectivity plays a growing role, including next-generation wireless networks from the metro core to the cell site; and expanding into adjacent markets by utilizing our core competencies to allow us to reach new customers and to strengthen our leadership in broadband fiber infrastructure. As hyperscalers rely on smaller ISPs to push part of their compute workloads closer to the edge, Clearfield's position with regional providers opens a new growth vehicle to the company. This disciplined approach positions Clearfield for measured growth as the market continues to recover. As part of this next phase, Clearfield will introduce two significant new product lines. In 2026, we will launch a complete line of splice cases, expanding our offering and deepening engagement with customers who operate in environments that require splicing. After extensive review and months of successful field demonstration, we believe this new solution represents the best in class. Following that product introduction, we will release a next-generation fiber management cassette, optimized for non-hyperscale data centers, a fast-growing market where Clearfield's modular design and innovation provide a unique advantage. These launches mark the start of a new generation of innovation as we extend our reach within and beyond traditional broadband markets. Another important element of our strategy is investing in sales development and expanding our distribution channels. We have enhanced our leadership team to support the new phase of growth. Anise Kanakam, our new Chief Commercial Officer, is integrating sales and marketing to align go-to-market strategy with product innovation. Mike Ward, who recently joined as our new Vice President of Broadband Sales, and Mark Hempel, who joined as Vice President of Distribution Channels and Strategic Alliances, bring deep industry experience and will strengthen our tier one and channel sales capabilities. Together, these leaders bring renewed focus, operational rigor, and energy to the organization, positioning Clearfield for the next chapter of growth. With respect to our distribution channels, our long-standing partners remain essential contributors to our success, connecting Clearfield Solutions to broadband service providers. Building on that strong foundation, we recently added Wiremasters as a distribution partner who has begun to distribute Clearfield's fiber optic connectivity and management products globally, with an emphasis on the defense and aerospace markets. And we plan to add a wireless-focused partner early in fiscal 2026, opening new opportunities in cellular backhaul and emerging edge applications. These efforts strengthen our access to new customer groups while maintaining close collaboration with new existing partners who continue to be key to our growth. I want to briefly comment on the BEAD program. We are pleased that 18 of the 52 submitted proposals have been approved by the NTIA. Fiber remains the overwhelming medium for delivering broadband based on the proposals submitted. We intend to vigorously pursue this opportunity and will keep you updated as we approach the deployment stage. Fiscal year 2025 was a transformational year for Clearfield, one defined by strategic focus, leadership investment, and a return to growth and profitability. As we enter fiscal 2026, we are executing with confidence on our Better Broadband and Beyond strategy, driving innovation across our core markets while expanding into adjacent opportunities that enhance long-term shareholder value. With that, I'll turn the call over to Daniel R. Herzog, who will review our fourth quarter and full year results and provide our outlook for fiscal 2026. Daniel R. Herzog: Thank you, Cheryl, and good morning, everyone. I will now review our fourth quarter results, beginning with sales. This quarter marks the first period in which Nestor's results are classified under discontinued operations on our income statement. As a result, the Clearfield segment now reflects our continuing operations, and all quarter, full year, and prior period comparisons are now provided on a Clearfield continuing operations only basis to ensure clarity. Fourth quarter net sales from Clearfield's continuing operations were $41.1 million, up 13% over the same period from $36.2 million in the prior year. Gross margin improved from 26.6% to 34.6%, which was driven by better manufacturing efficiencies and overhead absorption with higher volume. Net income per share from continuing operations was 13¢ in 2025, versus a loss of 1¢ per share in the comparable period last year. For the full fiscal year, net sales from continuing operations were $150.1 million, up 20% from $125.6 million in fiscal year 2024. Gross margin expanded from 20.6% to 33.7%, mainly as a result of better overhead absorption with higher volume, lower inventory reserve charges as a result of improved inventory utilization, along with increases in production efficiency from our continuous improvement programs. While we reported an overall loss per share for fiscal 2025 of 58¢, Nestor's discontinued operations and our impairment write-down of that business contributed a net loss of $1.03 per share. This was offset by net income per share of 45¢ from Clearfield's continuing operations, which compares to a net loss per share of 58¢ in the comparable period in fiscal 2024. These results underscore the strength of our continuing operations moving forward, which continue to demonstrate solid execution and share gains. We ended the quarter with approximately $166 million in cash and investments, up from $153 million in the prior year, reflecting continued strength in our balance sheet and disciplined operational execution. This financial position enables us to invest in innovation, product development, and market expansion programs that will drive long-term value creation. The company also invested $16.5 million in repurchasing 551,000 shares during the fiscal year. In addition, our board of directors has increased our share buyback authorization from $65 million to $85 million, providing us with $28.4 million available for additional repurchases when added to the $8.4 million repurchase amount remaining on September 30, 2025. For the full year fiscal 2026, we expect net sales from continuing operations in the range of $160 to $170 million. We expect growth to be driven by steady demand for fiber connectivity with continued strength across our large regional and MSO customers. We expect the late start to the BEAD program and the recent government shutdown to pressure investments both from private funding as well as government programs in our community broadband market early in the year. We expect operating expenses as a percentage of revenue to remain consistent with fiscal 2025 and earnings per share from continuing operations in the range of 48¢ to 62¢. For 2026, we anticipate net sales from continuing operations in the range of $30 million to $33 million, total operating expenses remain consistent with 2025, and net loss per share in the range of 8¢ to breakeven. The earnings per share ranges are based on the number of shares outstanding at the end of the fourth quarter and do not reflect potential share repurchases completed. And with that, we will open the call to your questions. Operator: We will now begin the question and answer session. Gregory McNiff: To ask a question, Operator: you may press star then 1 on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the key. If at any time your question has been addressed, and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Ryan Boyer Koontz with Needham and Co. Please go ahead. Ryan Boyer Koontz: Great. Thanks. Good morning. I wanted to ask about your comments about the shutdown. Obviously, it may be some impacts on BEAD here, but were there other programs, subsidy programs, or customer behaviors you could point to that might have impacted, you know, either revenue or bookings or your outlook for Q4? I'm sorry. Your fiscal Q1. Cheryl P. Beranek: Mhmm. Right. Yeah. Good morning, Ryan. We saw it in everything, you know, kind of across the board, probably, you know, A chem, probably the most effective. You know, not that it's going to diminish the amount of money available, but it did affect bookings, you know, in the fourth quarter that would then both because of our short lead times, both ship in the fourth quarter and lead into first. So it's, you know, an unfortunate circumstance and one of those things that, you know, I guess we all don't even realize how much government funding and government affect us. Ryan Boyer Koontz: Do you, Cheryl, do you have a kind of a timeline when you expect that to catch up to normal? I would think, maybe over the next few quarters? Or is it just a Cheryl P. Beranek: Yeah. We'll be back to normal by the second quarter as it relates to the government shutdown. So the government shutdown did affect, you know, bookings and our forecast for a soft first quarter into next year. But I don't expect it to affect the total year. So second quarter, we should be normalized. Ryan Boyer Koontz: Got it. And specifically there then within your reported fourth quarter, Community Broadband looked a little soft. I that's what you're pointing to there? In the Yeah. The Cheryl P. Beranek: Right. The government the community broadband, it was soft, I mean, in the fourth quarter. It's actually kind of flat over last year, which is really unusual. Even down a little bit over last year. Community broadband is part of was partly the government shutdown. I would say more affected over the course of the year by the delay in BEAD. You know, certainly, the smaller the service provider, the more the delay in BEAD has affected both their deployments and their planning. You know, their engineering dollars and their engineering availability, and then, you know, financing, setting aside money to deal with BEAD. And we even saw it in private investment as well. Kind of in that smaller space because, you know, community broadband is more than just the tier three operator. It's, you know, some of the private equity money that is, you know, being used at the smaller level. And we just saw money being set it was kind of sitting on the sidelines waiting for BEAD to figure out where it's going to be deployed. Because, you know, you we don't sometimes think about that where the BEAD dollars go affects where the private investment the timing of private investment because you want to leverage the money that or the fiber that's going into a BEAD network can be leveraged for, you know, a middle mile and other work elsewhere. So it does have a follow-on or a kind of a waterfall effect. So we're anxious to get the BEAD awards out. And while it won't the 26 yeah. I think we're going to see 26 have BEAD dollars. But the biggest impact of it is going to be private money coming back because BEAD is now actually finally figured out. Ryan Boyer Koontz: Got it. Helpful. And, Dan, on the gross margin outlook there relative to where you are in continuing operations. How do you think about broadly margins going forward? Is it purely a matter of scale at this point? And you expect some modest improvements in gross margin going forward with higher revenues? Daniel R. Herzog: Yep. That's exactly how to read that, Ryan. Obviously, volume dependent. So first quarter would be looking a little bit lighter. But, and scaling, with the revenue increases from there. Mhmm. Ryan Boyer Koontz: Got it. And, Cheryl, any thoughts about industry fiber supply right now? Is that coming up much of a concern? Have you heard that from your customers at all in terms of raw fiber? Unfortunately. Cheryl P. Beranek: Over and over. And then and then in every customer regardless of the size. So the data center glut of utilization of fiber is affecting Corning's allocation. And then it affects Corning's allocation to other service providers, which in turn, you know, will affect, you know, broadband deployments. So we're aggressively help both for our own sake as well as for our customer's sake. Sourcing all of and identifying equivalent fibers that can be approved in those networks. Ryan Boyer Koontz: Got it. Really helpful. That's all I've got for now. Thank you. Yeah. Operator: Mhmm. The next question comes from Scott Searle with Roth Capital. Please go ahead. Scott Searle: Hey, good morning. Thanks for taking the questions. Hey, maybe just a couple of quick calibration questions. Dan, I'm just wondering what Nestor was in September just to kind of look at our published numbers apples to apples. And then looking into December, could you give us a little bit of color in terms of the sequential outlook by the different customer classifications? It sounds like community broadband will be under a little bit of pressure. Given BEAD and government shutdowns, but I'd love to have a little bit of color on that front. And what you need in terms of turns to get to the lower end of the range and what the visibility is in the immediate outlook? Then I had a follow-up. Daniel R. Herzog: Yes, I'll take the first one there. Nestor finished their fourth quarter with $9.4 million in revenue. So with the Clearfield being $41.1 million. So that would have put us at $50.4 million roughly exactly. Scott Searle: Helpful. And then in terms of the December outlook, Cheryl P. Beranek: Mhmm. Yes. Community broadband is definitely a bit pressured as I indicated both from the government's and, you know, and the private money that goes around it. We continue to be extremely pleased with our work in the large regional group as well in the regional MSO markets. They now comprise about close to 40% of our business. And, you know, that really is a means of leveraging our existing sales channel in that, you know, the large regional and the regional cable operator, typically, and we'll have deployments in the same neighborhoods as the community broadband team. And so our work, our reputation, and our sales channel excuse me, in community broadband is what we're able to leverage for that MSO in large regional markets. Anyone knows our larger customers, than the community broadband team. Is, and it means we'll get some larger orders some opportunity to scale with it. So, with community broadband coming back, in fact, let me look through for a second. I mean, the MSOs were up for the year close to 40%. Large regionals for the year were up close to 60%. So with that momentum and with community broadband, hopefully, we anticipate coming back in the second quarter. We could have, you know, a really strong, bill season for next year. I just wanted to go back a little bit to the lack of fiber that Ryan brought up earlier. And that's one of the reasons that we're if people look at our long-term annual forecast, our annual forecast is guided by what we can see. That's part of our record reputation, as a company is to be, I wouldn't say conservative, but I would say deliberate about our forecast. And with the lack of fiber, being outside of our control, that could be one of the contributing factors of our long-term numbers. Scott Searle: Great. Thank you. And Cheryl, if I could, just to follow-up in terms of the annual outlook, starting the year slow, but it sounds like you start to see normalization in the second quarter. The math on the $160 to $170 million range implies kind of mid-forties through the rest of the year, so I assume that's kind of ramping. But I'm wondering what you're factoring into that forecast. Is it just normalization of the existing customer base and spending patterns? Much are you factoring in for BEAD? And if you got some new products, seem like they're kind of intriguing in terms of your next-gen splicing and data center. I'm wondering how they fit into the equation well. Cheryl P. Beranek: Right. We are not identifying a significant amount of revenue for new product introductions. Only a few million dollars because, typically, you know, you need a full especially for outside plant products, you need a full year for them to go through an outside weather cycle before you have a long-term commitment from, for, you know, high high-end revenue. We see high the new product splice case and really excited about the NextGen, cassette line. As being more significant revenue in '27. Scott Searle: Very good. And just in terms of how you're thinking about BEAD, in that numbers, in that $160 to $170 million? Definitely. Yeah. I would say the we're looking at, you know, probably Cheryl P. Beranek: less than $10 million, and that's going to be remember, they gotta build first with passing home, with kind of middle mile stuff and the actual construction of placing cabinets is probably gonna be in our fourth quarter, and that's one of the things that we have to remember for our numbers is that since our numbers end in September, we tend to miss some of the fall numbers, in the bill season. So as best with would you so next year's fourth quarter and first quarter will be significantly stronger than what we're seeing here. Scott Searle: Great. And Leslie, if I could, new products what does that do to your addressable market? You know, because ettes, I'm sure, is just extending your existing position. But is what does the data center do? And I'll get back in the queue. Cheryl P. Beranek: The next generation cassette line is all about new customers, as well as being, eventually, there'll be transformational back to our existing customers. So the, as we talked about the next center, to go after the non-hyperscale data center is a I use the word disciplined approach. Because we could go after hyperscalers, and we would lose. Because, you know, that's a high volume, low mix solution That's not the way Clearfield is designed. It's not the way our manufacturing lines are set up. We compete aggressively in a low volume, high mix world. And so data centers at the edge that push to the edge where we're gonna see our customers and smaller data centers picking up the compute power requirements, you know, from the big guys as they move out that's where we're really gonna have a significant opportunity. Because it's our space. It's a space in which that high volume manufactured doesn't work. You gotta be able to do a lot more you know, push and pull. And so the new data center cassette is gonna allow a lot of unique configurations inside of a particular nine-inch panel, and so that you can design by cassette. So you can expect to see that launched around BICSI in January, and it'll be fully on debut and on display in that January show. Scott Searle: Great. Thanks so much. I'll get back in the queue. Operator: As a reminder, if you would like to ask a question, The next question comes from Timothy Paul Savageaux with Northland Capital Markets. Please go ahead. Timothy Paul Savageaux: Hey, good morning. I want to stay on the BEAD theme here. With a couple of questions. First, we've seen some of your peers in the access system space talk about receipt of initial orders for BEAD. I think historically, maybe you have some correlation there on the cabinet side, but you know, it sounds like you're talking about an overall uptick in activity with these approvals. There was maybe some delay from shutdown. But can you talk to when you expect initial orders, or have you seen them yet for BEAD? Cheryl P. Beranek: Right. You know, because of our short lead time, you know, what we're seeing is quoting activity, but not necessarily, you know, shipping, you know, activity associated with it. You know, we know pretty much what customers have been identified as anticipating to be receiving money. And so that's freed up some planning dollars. I would expect we'll see but we I don't think we'll see significant revenue until the summer construction season, so third and fourth quarter. Timothy Paul Savageaux: Yeah. It makes sense. And just to get a sense of the magnitude of that opportunity, We had a recent you know, big round of approvals I think that was maybe $9 billion in the aggregate. And I think the total is beyond that. I think you mentioned it earlier. And you know, in terms of opportunity for Clearfield, total award value. I used to I think we used to talk about maybe four to 5% of that As addressable by the company. Does that remain the case? And you know, because just on that recent round of approvals that, you know, get you close to $500 million, which is, you know, pretty relative to what you're doing now. So are those metrics we can still think about? Cheryl P. Beranek: They absolutely are. So four to 5% of the cost of deployment are products that we offer. We increasingly are working to become that portfolio of supplier so that we would get, you know, the solutions of both being able to pass and to connect the home. The full line and next generation of splice cases is a part of that strategy, keeping our portfolio customers out away from our competition and being able to give those customers who are using our competition splice cases a reason to be able to come back, you know, to our generation and fully being, you know, integrated into our world. You know, every time we place a patch only cabinet, somebody else's splice case was being used, and then previously somebody else's vault. So completing out our product line is really a defensive, more aggressive move in order to put that together. You know, our competition likes to you know, Adtran said, you know, they're gonna get 25% of the BEAD market. Calix put numbers out there with big numbers. You know, we could tout $500 million, and that's accurate. But remember, this is a four to five-year build. So we want to make sure that we don't get everybody's you know, their eyes bigger than their stomach. You know, we think we're gonna get a big part of that share, but it would be irresponsible for me to give you a particular number. Timothy Paul Savageaux: Got it. Very much then. Good and helpful color. Cheryl P. Beranek: You're welcome. Operator: This concludes our question and answer session. I would like to turn the conference back over for any closing remarks. Cheryl P. Beranek: Yes. Well, thank you so much for the opportunity to, you know, to speak with you this morning. Our apologies that our numbers were delayed by a week, but you can understand with the divestiture of Nestor that we had a few numbers to be able to tie out and put together. We wish our friends at Nestor well. We think the opportunity to focus, you know, having been able to bring that infrastructure into our world, be able to transform Clearfield into a vertically integrated supply chain is really exciting for our potential gross margin and our ability to be that portfolio supplier is exciting. We like I said, we wish Nestor well. We think the transformation of Clearfield into being a bigger, broader supplier with a fully integrated line as we move forward will be opportunistic for our world. And '26 will be transformational putting us together for that long-term strategy plan of Better Broadband and Beyond. Thank you for our world. I'm grateful to you now at Thanksgiving time, and I wish you the best and the most joyous of Thanksgiving holidays. Enjoy your families. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Conversation: Justin Platt: Good morning, everybody. Thank you for joining us today. Welcome to the Marston's preliminary results for financial year '25. My name is Justin Platt, CEO. And with me, I have Stephen Hopson, our new Chief Financial Officer. We'll take you through our results today, and we'll do that with the following running order. I'll start with the headlines. Stephen will then share the financial results, and I'll then give some insight into the strategic progress we've been making through the year before wrapping up and taking any questions you might have. So the headlines, 2025 has been a very strong year for Marston's. It's been a year when we've been very focused on delivery, delivery of the strategy we outlined a year or so ago at the Capital Markets Day. And the results bear out that the strategy is working and driving real progress for us as a business, with profit before tax of GBP 72 million, that's year-on-year growth of 71%, and that's on top of the 65% growth we delivered a year ago. And that profit delivery has helped us drive cash flow. So cash flow at GBP 53 million. That's ahead of our GBP 50 million target, and it's also earlier than planned. Alongside that, it's really pleasing we've made great progress with our new pub formats, 31 launches this year. They're performing very strongly for us and driving big revenue uplifts. It's very clear now that these formats can be a significant growth engine for us in the future. And we've been doing all of that while giving our guests a great time. So record satisfaction scores with a reputation score at 816. So overall, a really good set of results, and it's a set of results that leave us feeling very positive in our outlook going forward. So that's the summary. I'll now hand over to Stephen, and he'll take you through the financials. Stephen Hopson: Thanks, Justin, and good morning, everyone. As Justin said, this is my first set of full year results at Marston's, and I joined the business at what is clearly an exciting time for Marston's. As these numbers show, we're making great progress and delivering against our goals with lots more to come. On my first slide, I'd like to begin by looking at some of the key group financial metrics. Total revenue was GBP 898 million, which showed growth of 1.6% on a like-for-like basis. EBITDA was up 7% to GBP 205 million, with the margin expanding by 140 basis points to 22.8%. That's been driven by good operational discipline, particularly on labor and controlling input costs alongside the revenue growth. As a result of the EBITDA growth and lower finance costs, PBT stepped on significantly. Underlying profit before tax was GBP 72 million, nearly 3x where we were just 2 years ago. And importantly, this has translated into stronger cash generation. Recurring free cash flow was GBP 53 million, which is up 22% year-on-year and ahead of our GBP 50 million recurring free cash flow target. Finally, we've made real progress on the balance sheet. Net debt has reduced from 5.2x, to 4.6x EBITDA as we continue to delever. So overall, excellent progress on both profit and cash. Turning now to look at our income statement in a bit more detail on the next slide. As I mentioned, FY '25 marked another year of substantial profit growth for Marston's with PBT up 71%. Reported revenue was flat, although this masks the impact of the FY 2024 disposal program, which I'll show on the next slide. I've already mentioned that EBITDA was up 6.5%, and that GBP 12.6 million of EBITDA improvement basically flowed through to operating profit, which was up 8.6% to GBP 159.9 million. Net finance costs were significantly lower year-on-year as a result of ongoing delevering and last year's CMBC disposal, leading to that very significant jump upwards in PBT. And whilst our effective tax rate increased, this simply reflects a return to the U.K.'s headline rate of corporation tax after a period of a lower rate. Together, this income statement shows a stronger and more profitable business with improved earnings quality and stronger margins. Turning to revenue performance. As I've already touched on, revenue for 2025 was GBP 898 million and was broadly flat year-on-year, but I would like to pick out 2 points on this chart. First, that the revenue includes a negative movement of about GBP 40 million in relation to the disposal of pubs over FY 2024 and 2025. To put the disposals into context, about GBP 50 million of assets were sold as part of the disposal program. So it's important to consider that impact when assessing year-on-year revenue progression. And the second point is that our like-for-like performance continues to be ahead of the market, which grew by 0.7% in the year, with positive contributions across all key categories of drink, food and machines. Turning now to look at margin. A key target for the group outlined at the CMD was to grow our underlying EBITDA margin by 200 to 300 basis points from FY '24 levels, giving a target range of 23.4% to 24.4%. And I'm pleased to say that this year, we've delivered 140 basis points of margin expansion, achieving total EBITDA margin of 22.8% in the year. Labor productivity gains were the single biggest contributor, supported by the rollout of improved scheduling tools, which Justin will cover in a bit more detail later on. The labor productivity benefits in the year were enough to fully offset the increases in the National Living Wage and National Insurance contributions, which came in from April 2025. We also saw benefits from improved food and drink margins, energy savings and other operational efficiencies. These gains were partially offset by inflationary pressures, including those employment cost increases that I mentioned and some investment in key areas, including more marketing. But overall, we've made real progress embedding cost discipline and delivering margin expansion across the business, and we feel that our EBITDA margins really do benchmark very well across the whole pub sector. We view ourselves as a high-margin local pub company, and we see further opportunity to increase the EBITDA margin in FY '26 as we move towards our CMD target. Turning now to look at capital expenditure. Total CapEx for the year was GBP 61.2 million, which is equivalent to 6.8% of revenue, and we're now approaching the 7% to 8% of revenue range that we talked about in the CMD. This is an increase from GBP 46.2 million last year, with the main driver being our pub format conversions, which I'll come back to shortly. Of this total, GBP 53.2 million was in maintenance and other CapEx deployed across our 1,300-strong pub estate. This includes works such as maintenance, estate management, investment in new IT platforms and other items. But I also want to pull out a bit more granular information on our pub format conversions, which are very important to our overall growth plans and which Justin will cover in more detail. In the year, we covered 31 conversions to our differentiated formats, which are delivering strong results. Average revenue uplifts were 23% year-on-year, and EBITDA returns are over 30% to date, in line with our CMD targets. At an average cost of GBP 260,000 a site, we believe these conversions represent excellent value for money. And of course, we've only completed a small number so far in comparison to our estate. So there's a lot more to go at in this space. Clearly, the driver of increasing our capital expenditure is to improve the quality of our estate. So let's turn to that now. On this slide, we show that we ended the year with 1,328 pubs following the continuation of our estate optimization strategy. This included a small number of disposals in the T&L estate as well as conversion of some pubs to the partner model. As a result, the managed and partnership estate consisted of 1,182 pubs and the T&L estate had 146 sites at the year-end. EBITDA per pub increased to GBP 154,000, which, as you can see, is a 28% improvement over the last 2 years. This uplift reflects both operational improvements and tighter estate management with gains in both, our managed and partnership estate and the remaining T&L pubs. The result is a higher-quality, better-performing pub estate that's delivering stronger returns at a site level. I think this is a really important slide as it shows how the improvements being made to the business model are feeding through at pub level. Turning now to our cash performance in the year, which was another highlight. The takeout from this slide is that we delivered and, in fact, exceeded our CMD target of GBP 50 million of recurring free cash flow ahead of schedule, with GBP 53.2 million delivered in the period. And how was that delivered? Well, cash from ops increased year-on-year by GBP 5.6 million, which included the improvements in EBITDA I described earlier. Within that number, we also had a GBP 6 million saving from lower contributions to our DB pension scheme. And offsetting that, we had a small working capital gain, but it wasn't as large as last year's gain. Finally, we started making cash tax payments again of GBP 5.3 million as our profits improved. And as a smaller side, investors and analysts should note that in FY '26, we expect to move into the very large company corporation tax regime, which will accelerate our cash tax payments this year. And then in the second line on the chart, we had a GBP 15 million saving on interest, offset by GBP 15 million more CapEx year-on-year, as I just described, together with lower banking fees. So recurring cash was strong and now over GBP 50 million, which we expect to be able to exceed again this year. I also wanted to draw out on this slide that this strong free cash flow is fully absorbed by scheduled debt repayments, GBP 43.8 million of securitized debt repayments and GBP 8.6 million of lease liabilities. Clearly, this does mean that the group is delevering, as I'll show on the next slide, but also that our cash generation is currently fully utilized. And then just to complete the chart, after other movements in borrowing and disposals, there was a cash outflow of GBP 9.6 million in the year. And I'm now going to return to that progress about delevering in the group. This slide shows the different elements of the group's financing structures and the overall movement in net debt year-on-year. So starting at the bottom, net debt, excluding lease liabilities, reduced by GBP 46.2 million, to GBP 837.5 million. This takes our net debt-to-EBITDA multiple, excluding leases, down to 4.6x from 5.2x last year. That continues the recent downward trend and reflects the group's stronger cash generation and disciplined approach to capital investment. And then to briefly cover what makes up our financing structures, the largest element shown at the top is the securitization, which provides long-term predictable financing for the group. It does also impose some restrictions, both in terms of the assets that are tied up in the securitization structure and in our ability to move assets and cash around the group. However, these restrictions are manageable at present. Swaps are in place to fix the interest that we pay on the securitized debt. Other lease-related borrowings are essentially loans that were raised against other properties in the group outside the securitization. They were legally structured as sale and leasebacks, but where we have the option to buy back the properties at the end of the period for a nominal fee. Therefore, we treat these properties as effective freehold. And as noted in the slide, we're currently paying interest only on those borrowings. And I've put a new slide in the appendices showing investors how those structures will work over coming years. Our GBP 200 million bank facility was renewed in the year and now extends to July 2027 with relatively low drawings at the year-end, and cash balances ended the year at GBP 35.9 million. So in summary, we're continuing to delever at pace while preserving the secure long-term funding arrangements in the group. If I then broaden this to look at the group's whole balance sheet rather than just the net debt elements, this slide shows the evolution of our balance sheet and our net asset value per share, which increased to GBP 1.25 this year. And actually, the movements year-on-year are pretty straightforward. Our balance sheet is underpinned by GBP 2.2 billion of property assets, of which 81% of the estate by number of pubs are effective freeholds. The net book value of those assets increased by over GBP 100 million in the year, reflecting our annual estate reval and also our ongoing investment into the business. Net debt, as I've just described, reduced GBP 837.5 million, excluding lease liabilities, and lease liabilities were GBP 5.5 million lower. So total net debt was GBP 51.7 million lower year-on-year. Other liabilities increased by GBP 28.4 million, almost entirely due to an increase of GBP 28.5 million in deferred tax liabilities relating to the upward property revaluation. So overall, the property reval with its associated tax movements as well as the net cash generation of the group, drove GBP 136 million increase in net assets, which was a 21% increase year-on-year, to GBP 791 million, which equates to GBP 1.25 per share. Given the progress made on the balance sheet, I want to finish by looking at our capital allocation framework. And if I start by saying that this is not a change to our capital allocation policy, which remains consistent with what we laid out at the CMD, we remain focused on delivering sustainable shareholder value through a disciplined balance of investment in the business, delevering and ultimately, shareholder returns. That said, there are a couple of updates we wanted to share this morning. On the right-hand side of the chart, you'll see our continued progress on leverage, which, as I mentioned, has reduced substantially. We are pleased with that progress, but would like to see leverage continue to decrease. And today, we're committing to reduce leverage to below 4x on a pre-IFRS 16 basis. When we get to that level, we anticipate the start of capital returns to shareholders through dividends, share buybacks or a combination of both. What that looks like will depend on circumstances at the time, including the share price and investor preferences. To be clear, we also expect to see the group continue to delever below 4x even after the recommencement of shareholder returns. We believe this disciplined approach continues to be the right strategy to create and sustain long-term value. So to conclude, we've delivered a strong financial performance this year with clear progress on margin, profit and cash flow, and we expect further progress this year. And before I hand back to Justin, I'll briefly touch on 5 forward-looking points. First, we remain confident in the trading outlook for FY '26 with like-for-like sales currently tracking in line with last year and Christmas bookings up 11%. Second, we expect further progress towards our margin target of 200 to 300 basis points of growth versus 2024 following the 140 basis point gain this year. Our format growth engine will be accelerated this year with at least a further 50 refurbishments and our CapEx is expected to be within the target range of 7% to 8% of total revenue. And after achieving our CMD target ahead of schedule this year, we expect to deliver another year of GBP 50 million in recurring free cash flow in FY '26. And lastly, we've significantly reduced our debt profile over the past couple of years and expect to continue to do so with leverage now at 4.6x and progressing well towards our sub-4x target. So overall, we're delivering against our targets, and we remain firmly on track to drive further financial and strategic progress in the year ahead. Thanks very much, and I'll now hand back to Justin. Justin Platt: Thank you, Stephen. So I'll now take you through the progress we've been making as we've implemented our strategy through the year. You will remember from the Capital Markets Day, we're very focused on being a high-margin, highly cash-generative local pub company. And we'll do that with a portfolio of brands that appeal across a range of consumer segments. 5 key value drivers that get us there: executing a market-leading operating model; using CapEx to deliver differentiated formats; unlocking value with digital transformation; expanding our excellent managed and partnership management models; and in time, supporting that with targeted acquisitions. So I'll now deep dive on each of those value drivers to give you a flavor of some of the work that we've been doing. The first one I will spend some time on is the operating model. Really, this is the bread and butter of running a great pub business. It's the balance of revenue growth, cost efficiency and guest satisfaction. So first of all, I'll talk to revenue. Really good momentum this year. We've continued to do well, especially in our peak trading periods. Across our peak trading periods, we're up almost 6% on the year. And that's enabled us to grow our like-for-likes ahead of the market at 1.6%. And a lot of what's behind that is our event plan. Our event plan has been a key thing for us this year. In 2025, Marston's Pubs have been home to a darts tournament led by Luke Humphries, the world #1. Paddington and his new movie joined us from Peru. We had a national Trivial Pursuit quiz event. And through the summer, when Oasis Mania was sweeping the U.K., we had a series of '90s throwback events with tribute bands and the like in our pub life. So all of these are designed to give people reasons to visit our pubs, a range of guest demographics. I think that's essential at any time of year, but especially so in the summer when, of course, this year, we had no big football tournament. So events are big success for us and an important driver in supporting our revenue growth. So secondly, on costs. As Stephen has shown you, we've made excellent progress during '25 on our journey to being a high-margin business in adding 140 basis points to our margin despite significant and well-known headwinds. And we've done this with a relentless drive for efficiency across all areas of our cost base. The biggest area of our cost base is labor, where we've saved almost GBP 10 million, a little bit more than 1 percentage point on our margin. And this has been about continually getting smarter with the way we use our technology to enhance and optimize our labor teams and our labor schedules, all about getting the right people in the right place at the right time. I think probably the best way to bring to life for you the work we've done on labor is to pick a case study of one of our pubs. The lady pictured on the right is Kati. She's one of our fantastic general managers. She runs the King Charles pub in Chesham, a lot of work with our labor planning this year. They've actually reduced their labor costs through the year by 8%. And despite doing that, they've grown their revenue by 19% and also grown their guest satisfaction well ahead of our company average. So a good example in the way labor is playing out for us in one of our pubs, but it also represents our approach across the company. So secondly, in terms of food and drink, our formats allow us to simplify the ranges we offer because we're a lot clearer about the demographic by format. And so that allows you to be clear which food offer and which drink offer you need by pub. So that's allowed us to simplify our range. That's helped us with efficiencies. But alongside that, we've also renegotiated our key food and drink contracts to drive efficiencies where we can. So that's labor and food and drink. Finally, energy and estates. Every pound counts on energy. We've been that way for a number of years now, whether it be the usage that we manage, but also the contracts, there's a relentless focus on attempting to drive efficiencies there. But as Stephen said, we take a very judicious approach to estates more broadly with our CapEx, looking at our maintenance cycles, spending strictly in maintenance cycles, and that helps us on efficiencies with our repairs budget. So overall, really good progress on the cost side of things. And then finally, on the operating model, guest satisfaction. I mean this is all about ensuring that when our guests come and see us, they have a great time. And it's very pleasing in the context of the efficiency gains I've just talked to that we're still delivering better and better experiences through our guests. So from a score of 766 in '23 to 800 last year, 816 this year is a very pleasing performance. And this really is a combination of many of the initiatives coming together, whether it be our events program, and the visual there is of our Oktoberfest event that we run during September, whether it be through digital ordering or some of the menu enhancements we've made. All of these things together add up to make a difference to the guest experience. It's worth saying, though, that the #1 factor that dominates, that really drives a great guest experience is, really strong guest service. That requires almost an obsession, a relentless obsession with getting that right day in, day out. And the work on that is never done. Our teams are very focused on delivering that experience all the way through the year. And as I say, it's pleasing that this year, we've been able to continually improve on that. So that's the operating model. When you take revenue, cost, satisfaction together, it's good that we've made strong progress across the piece. And this has been complemented with the work we've done on the digital transformation value driver. I think a key example of this would be the new order and pay app that we launched in March. Really well received. It's paying dividends with our guests in terms of both revenue and reputation, and it's complementing the personal service for those guests who want it. So we've got a 10% revenue uplift when using the app. And those pubs with a higher mix of order and pay usage do significantly better on reputation. What's also good about the app is it can work hand-in-hand with our events. So the Trivial Pursuit: Win a Wedge event drove a big uptake in the use of the app. So good progress overall on this area, digital, but a lot more opportunity here in the future as digital transformation can help us both on revenue and on cost. The third value driver I want to focus on is our new pub formats. So against 5 core consumer target segments across the market, we've designed 5 pub formats that are specifically designed to meet the needs of those target audiences. And through a series of test and learn launches in '25, we've been assessing the potential of these pubs to drive appeal and importantly, drive powerful CapEx returns. Now in May, I did a deep dive on the Two-Door format. So I thought this time around, we'd share some more information on the Grandstand brand. Grandstand is a local sports pub. So it targets adults who want an entertainment experience when they go to their local pub. I mean this is an absolute sports lover's dream. It's similar to a city center sports bar environment, but in the local community pub. Number of constituent parts to it. At its heart, state-of-the-art technology ensures that we've got 3-meter stadium screens, amazing sound systems. Alongside that, there's great match-day food suited to watching the big game. And these pubs will always be run by sports enthusiast general managers who know what their guests want and can work with them to give them a great experience. It's an absolute must visit for the big game, the atmosphere that we create. But more than that, because it's a local pub and it's a great environment, it's a place that you would want to go to on any night of the week, and we support that with a program of sports events through the week to give people reasons to come every night. So Grandstand has done really well this year. The guest reaction and the returns that we've had have been very, very impressive, and it's been a key part of our test and learn year. And test and learn overall this year has exceeded our expectations. We've done 31 launches through the year. So we did 21 Two Doors, 5 Grandstand and 5 Woodie's. Woodie's is our new family pub. All have done well. Guests love them. They've driven strong uplifts in revenue of 23% and all of that off relatively modest levels of CapEx. We've been driving ROIC of more than 30% on only GBP 260,000 per pub. So the test and learn phase really has proven the potential of this stream for us, real growth opportunity as we roll out across the estate. And all of our pubs have been mapped to the format opportunity they can play to over time. So over time, this really does give us an opportunity as a significant driver of growth. So great progress across our value drivers in '25, and this leaves us feeling very positive as we look towards 2026. Through this year, we'll have a big program of exciting events, all designed to encourage guests to come and visit us, not least with a big football tournament on the horizon that everybody will be very much focused on in the summer. And we'll complement that with our revenue management and order and pay disciplines to drive spend per guest. But alongside the demand drive, as I've just said, our new formats will play an increasingly important role in driving growth through the year. Given our success in '25, we're now accelerating the rollout plan. We'll have 50 or so launches focused on Two Door and Grandstand, and all of these will make a meaningful difference to both revenue and EBITDA performance through the year. So to summarize, another year of strong delivery in '25, significant growth in both profit and cash flow. We're very excited by the growth potential of our new formats, and we see a very promising outlook for the year ahead as we continue to deliver as a reliable growth company. And with that, we can now take some time for questions. Operator: [Operator Instructions]. The first question we have comes from Douglas Jack of Peel Hunt. Harold Jack: So I've got 2 questions, if that's okay. In terms of the new formats in 2026, is the choice of Grandstand and Two Door largely because they're the ones that have the greatest uplift potentially, adding to the number of reasons to visit, I think, obviously, they've got quite a lot of opportunity there. And then the second one was about margins. In 2026, what are the best margin opportunities do you see over this year? Justin Platt: Thanks for your questions. I'll take the first one on formats and then, Stephen, if you want to come to margins. In terms of choices, as you know, we were very clear to have the plank of a test and learn phase first to guide our implementation. So the primary choice is certainty of return in the sense that Two Door and Grandstand both launched earlier in the year last year than Woodie's, which allowed us to get more data on those through the year. Most of the Woodie's launches came sort of the summer onwards. So whilst all are performing well, we've just got longer data on the other 2. The other attraction, of course, with Grandstand is you absolutely want a bigger footprint of those pubs in the market in a year with the World Cup, which we've certainly got an eye on. But really, it's about certainty of returns, Doug. Stephen Hopson: And Doug, on your question on margins, I mean, yes, look, we've made really good progress in 2025. I think we do expect EBITDA margins to increase in 2026, but not to the same extent as 140 basis points we did in 2025. I mean I think the best opportunities for me, so there's a bit of flow-through stuff. So we made really good progress on labor. And Some of those things didn't come through until the second half last year. And so I think some of them will help H1 2026. And also, that is a continuing journey for us. So matching right people, right place, matching demand with supply of labor is something that we're going to be relentlessly focused on going forward. That may come through in terms of reduced cost. It may come through in terms of better customer service and therefore, improved sales, but I think there will be some upside from that. And then I think on gross margins, I mean, we've got pretty good visibility of both food and drink cost prices moving into next year. We're lock in quite a few contracts on that quite early. And I think, therefore, that gives us certainty on those lines. We'll continue the journey on things like revenue management and upselling and so on, and it should be an opportunity to move that further forward as well. Operator: The next question we have comes from Karan Puri of JPMorgan. Karan Puri: I've got 2 quick ones. One, on the 1.6% like-for-like momentum in '25. Just wondering if you could provide a split between pricing and volumes, number one. And number two, just coming back on the cash tax payment in '26. I know it's going to be higher than 2025, but in terms of magnitude, if you could share a bit more on that front would be helpful. Justin Platt: So I'll start with the like-for-likes. As we said in the release, food, drink and machines were all in growth, and that's a mix across them. As you'd expect in that, revenue management has played an important part for us and will continue to do so, particularly actually the premiumization as consumers are upgrading to more premium beers and also adding and upgrading on the menu. And then the second one, Stephen? Stephen Hopson: Yes, the cash tax. So yes, you're right. We flagged that it would increase. Last year, the cash tax payments were GBP 5.3 million. That will approximately double next year, to about GBP 10 million, Karan. So that's about the extent of it. We are still using some losses from previous trading period. So the cash tax is still relatively low, but it will be about GBP 10 million in FY '26. Karan Puri: Perfect. And then just a quick follow-up on that one. So do we -- can we expect it to be sort of normalized cash tax starting in 2027? Or will you still benefit from some loss in the previous period there as well? Stephen Hopson: Yes. 2027 will still be a little bit low. And then from 2028, it will go back to normalized levels. So it will be a step-up in 2027, but it won't be up to normalized levels, yes. And then from 2028, you should expect normalized levels of cash tax. Operator: [Operator Instructions]. The next question we have comes from Anna Barnfather of Panmure Liberum. Anna Barnfather: Just a couple of questions. Firstly, on the reformats, you've mentioned sort of acceleration sort of 50. Could you update us on your thinking of what proportion of the estate at this stage you think could benefit from a reallocation into 1 of the 5 formats? So how many of your sort of 1,300 pubs? And have you only done managed or have you done partnership ones as well? The second question, I was just thinking about the sort of peak trading. Obviously, you're doing really well in those big events, with peak trading periods up 5.8%. Are you tempted to sort of reduce opening hours on the sort of nonevent days? Or is there any sort of thinking on that as a way to cut down on overheads? And then just third question on the revenue mix. I think obviously, higher margins and gross margins, can you just give us a bit more color on perhaps some of the shifts in your sales mix? Justin Platt: Thanks, Anna. I'll take the first 2 and then Stephen, if you could take the third one. Let me start on peak trading, and then I'll come back to formats. We do look at our hours on a regular basis, but there's not a massive need to start big closure periods by any means. I mean one of the things that's most notable in pub trading today certainly versus 5 years ago is the growth of the early evening at the expense of the late evening. So if you look at booking patterns now, peak time for a table, the busiest time to get a table is 6:30 to 7:00. You go back 5 years, that was more like 8:00. So there's definitely an earlier day point to your business. And we do look at hours, but I don't think there's anything significant there in cost, particularly the local community environment where people are around the corner from their houses quite a lot. On the formats. So first of all, yes, we've actively launched formats across our managed and our partner estate, and they're performing equally well in each, neither is a differentiator actually in terms of performance, but they do work across both managed and partner. And then in terms of the numbers, as we showed earlier, 5 formats. The 2 that we didn't deep dive on were locals pubs and adult dining, signature pubs. Both of those, we have some of them in market already. I would say in terms of the opportunity, it's probably the locals pubs is the only bit that we wouldn't see as a sort of significant ROIC north of 30% opportunity, which probably takes you to 75% or so of our estate with the opportunity for those new formats. Stephen Hopson: And then, Anna, on the revenue mix, I mean, we're about 35% food in our business overall, but there is a big variation in that, as you'd expect between format and some of those local pubs versus, for example, our adult dining business, which is very, very different. And that has been growing. I mean, clearly, food across the market really has been growing quicker than drink over a period of time, but it's not huge. I mean that number has probably changed by 0.5% year-on-year. So it's not a huge mix. So hopefully, it gives you some idea about the sort of the food and drink pub. Operator: [Operator Instructions]. The next question we have comes from Fintan Ryan of Goodbody. Fintan Ryan: Two questions from me, please. Firstly, can you give us a sense of what your sort of base case expectations are for the budget tomorrow in terms of, I guess, labor costs, anything that you might be expecting or hoping for business rates. Just to sort of get a sense of what the base case is for the outlook currently and maybe what can change within the next 24-odd hours. And then secondly, could you give some color on like like-for-like trading in Q4 and over the last 8 weeks, obviously, you reported flat like-for-likes. How much -- what's been sort of the volume versus pricing split in that? Can you give some color on the visibility for the Christmas trading? Obviously, you've got bookings up 11% year-on-year, but like typically how much of bookings are -- of your Christmas trading are bookings? And what you'd be at this point, assuming for incremental pricing for FY -- for the calendar '26, would be great. Stephen Hopson: Thanks, Fintan. If I start on, I guess, the hot topic of the day and tomorrow, which is the budget and expectations for that. I mean, our base expectations and sort of what's embedded into the guidance that we've given to the market is that we expect National Living Wage to increase, obviously. Our expectations are about a 4% increase in the headline rate of National Living Wage, and we're expecting the differential for under 21-year-olds to close slightly compared to where it is at the moment. We're not expecting any further changes to things like National Insurance. And then really, I know there have been lots of stories in the press, but at the moment, we're not making any expectations on changes for things like machine, gaming duty or business rates either. I mean the Chancellor has flagged that there'll be a review of the way business rates is levied. So that will be interesting to see. But we're not making any assumption on that because simply, we just don't have the information available to us at this point. Justin Platt: And before I answer the like-for-like, Fintan, if you've got any assumptions on the budget tomorrow, please share them with the group. In terms of the like-for-likes, look, as you know, quarter 1 is all about Christmas. October and November are relatively small months in the grand scheme of things. December performance is really what matters. And within that, it's the key 2 weeks from kind of 19th of December until 2nd of January, quite time, tight time. And bookings pace, as we've said, is very good at 11%, and that's off the back of last year. I think we grew Christmas at about 11% last year in like-for-like terms. So it's pleasing the stage we're at. But to your point, walk-ins are also important at Christmas. So we've still got a lot of work to do in order to land that. And that's both in encouraging people to spend their Christmas with us but also then in managing spend per guest, so we drive the revenue return as well. Fintan Ryan: Great. And just in terms of the pricing and current expectations? Justin Platt: Well, again, we -- as you know, we don't -- we kind of manage price through the year in a broader revenue basis. So in terms of our revenue management initiatives around booking density, around premiumization. And yes, lead price is part of that mix, but we don't have like a hard and fast target. It's overall spend per that we look at. Operator: Ladies and gentlemen, at this stage, there are no further questions. I would now like to hand back to the management team for closing comments. Justin Platt: Well, just to say, thanks, everybody, for joining us. Really good engagement. Obviously, we'll all see what comes tomorrow. And I'll wish you an early best wishes for the festive season. Thank you. Operator: Thank you. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines. Justin Platt: Good morning, everybody. Thank you for joining us today. Welcome to the Marston's preliminary results for financial year '25. My name is Justin Platt, CEO. And with me, I have Stephen Hopson, our new Chief Financial Officer. We'll take you through our results today, and we'll do that with the following running order. I'll start with the headlines. Stephen will then share the financial results, and I'll then give some insight into the strategic progress we've been making through the year before wrapping up and taking any questions you might have. So the headlines. 2025 has been a very strong year for Marston's. It's been a year when we've been very focused on delivery, delivery of the strategy we outlined a year or so ago at the Capital Markets Day. And the results bear out that the strategy is working and driving real progress for us as a business, with profit before tax of GBP 72 million, that's year-on-year growth of 71%, and that's on top of the 65% growth we delivered a year ago. And that profit delivery has helped us drive cash flow. So cash flow at GBP 53 million. That's ahead of our GBP 50 million target, and it's also earlier than planned. Alongside that, it's really pleasing we've made great progress with our new pub formats, 31 launches this year. They're performing very strongly for us and driving big revenue uplifts. It's very clear now that these formats can be a significant growth engine for us in the future. And we've been doing all of that while giving our guests a great time. So record satisfaction scores with a reputation score at 816. So overall, a really good set of results, and it's a set of results that leave us feeling very positive in our outlook going forward. So that's the summary. I'll now hand over to Stephen, and he'll take you through the financials. Stephen Hopson: Thanks, Justin, and good morning, everyone. As Justin said, this is my first set of full year results at Marston's, and I joined the business at what is clearly an exciting time for Marston's. As these numbers show, we're making great progress and delivering against our goals with lots more to come. On my first slide, I'd like to begin by looking at some of the key group financial metrics. Total revenue was GBP 898 million, which showed growth of 1.6% on a like-for-like basis. EBITDA was up 7% to GBP 205 million, with the margin expanding by 140 basis points to 22.8%. That's been driven by good operational discipline, particularly on labor and controlling input costs alongside the revenue growth. As a result of the EBITDA growth and lower finance costs, PBT stepped on significantly. Underlying profit before tax was GBP 72 million, nearly 3x where we were just 2 years ago. And importantly, this has translated into stronger cash generation. Recurring free cash flow was GBP 53 million, which is up 22% year-on-year and ahead of our GBP 50 million recurring free cash flow target. Finally, we've made real progress on the balance sheet. Net debt has reduced from 5.2x to 4.6x EBITDA as we continue to delever. So overall, excellent progress on both profit and cash. Turning now to look at our income statement in a bit more detail on the next slide. As I mentioned, FY '25 marked another year of substantial profit growth for Marston's with PBT up 71%. Reported revenue was flat, although this masks the impact of the FY 2024 disposal program, which I'll show on the next slide. I've already mentioned that EBITDA was up 6.5%, and that GBP 12.6 million of EBITDA improvement basically flowed through to operating profit, which was up 8.6% to GBP 159.9 million. Net finance costs were significantly lower year-on-year as a result of ongoing delevering and last year's CMBC disposal, leading to that very significant jump upwards in PBT. And whilst our effective tax rate increased, this simply reflects a return to the U.K.'s headline rate of corporation tax after a period of a lower rate. Together, this income statement shows a stronger and more profitable business with improved earnings quality and stronger margins. Turning to revenue performance. As I've already touched on, revenue for 2025 was GBP 898 million and was broadly flat year-on-year, but I would like to pick out 2 points on this chart. First, that the revenue includes a negative movement of about GBP 40 million in relation to the disposal of pubs over FY 2024 and 2025. To put the disposals into context, about GBP 50 million of assets were sold as part of the disposal program. So it's important to consider that impact when assessing year-on-year revenue progression. And the second point is that our like-for-like performance continues to be ahead of the market, which grew by 0.7% in the year, with positive contributions across all key categories of drink, food and machines. Turning now to look at margin. A key target for the group outlined at the CMD was to grow our underlying EBITDA margin by 200 to 300 basis points from FY '24 levels, giving a target range of 23.4% to 24.4%. And I'm pleased to say that this year, we've delivered 140 basis points of margin expansion, achieving total EBITDA margin of 22.8% in the year. Labor productivity gains were the single biggest contributor, supported by the rollout of improved scheduling tools, which Justin will cover in a bit more detail later on. The labor productivity benefits in the year were enough to fully offset the increases in the National Living Wage and National Insurance contributions, which came in from April 2025. We also saw benefits from improved food and drink margins, energy savings and other operational efficiencies. These gains were partially offset by inflationary pressures, including those employment cost increases that I mentioned and some investment in key areas, including more marketing. But overall, we've made real progress embedding cost discipline and delivering margin expansion across the business, and we feel that our EBITDA margins really do benchmark very well across the whole pub sector. We view ourselves as a high-margin local pub company, and we see further opportunity to increase the EBITDA margin in FY '26 as we move towards our CMD target. Turning now to look at capital expenditure. Total CapEx for the year was GBP 61.2 million, which is equivalent to 6.8% of revenue, and we're now approaching the 7% to 8% of revenue range that we talked about in the CMD. This is an increase from GBP 46.2 million last year, with the main driver being our pub format conversions, which I'll come back to shortly. Of this total, GBP 53.2 million was in maintenance and other CapEx deployed across our 1,300 strong pub estate. This includes works such as maintenance, estate management, investment in new IT platforms and other items. But I also want to pull out a bit more granular information on our pub format conversions, which are very important to our overall growth plans and which Justin will cover in more detail. In the year, we covered 31 conversions to our differentiated formats, which are delivering strong results. Average revenue uplifts were 23% year-on-year and EBITDA returns are over 30% to date, in line with our CMD targets. At an average cost of GBP 260,000 a site, we believe these conversions represent excellent value for money. And of course, we've only completed a small number so far in comparison to our estate. So there's a lot more to go at in this space. Clearly, the driver of increasing our capital expenditure is to improve the quality of our estate. So let's turn to that now. On this slide, we show that we ended the year with 1,328 pubs following the continuation of our estate optimization strategy. This included a small number of disposals in the T&L estate as well as conversion of some pubs to the partner model. As a result, the managed and partnership estate consisted of 1,182 pubs and the T&L estate had 146 sites at the year-end. EBITDA per pub increased to GBP 154,000, which, as you can see, is a 28% improvement over the last 2 years. This uplift reflects both operational improvements and tighter estate management with gains in both, our managed and partnership estate and the remaining T&L pubs. The result is a higher-quality, better-performing pub estate that's delivering stronger returns at a site level. I think this is a really important slide as it shows how the improvements being made to the business model are feeding through at pub level. Turning now to our cash performance in the year, which was another highlight. The takeout from this slide is that we delivered and, in fact, exceeded our CMD target of GBP 50 million of recurring free cash flow ahead of schedule, with GBP 53.2 million delivered in the period. And how was that delivered? Well, cash from ops increased year-on-year by GBP 5.6 million, which included the improvements in EBITDA I described earlier. Within that number, we also had a GBP 6 million saving from lower contributions to our DB pension scheme. And offsetting that, we had a small working capital gain, but it wasn't as large as last year's gain. Finally, we started making cash tax payments again of GBP 5.3 million as our profits improved. And as a smaller side, investors and analysts should note that in FY '26, we expect to move into the very large company corporation tax regime, which will accelerate our cash tax payments this year. And then in the second line on the chart, we had a GBP 15 million saving on interest, offset by GBP 15 million more CapEx year-on-year, as I just described, together with lower banking fees. So recurring cash was strong and now over GBP 50 million, which we expect to be able to exceed again this year. I also wanted to draw out on this slide that this strong free cash flow is fully absorbed by scheduled debt repayments, GBP 43.8 million of securitized debt repayments and GBP 8.6 million of lease liabilities. Clearly, this does mean that the group is delevering, as I'll show on the next slide, but also that our cash generation is currently fully utilized. And then just to complete the chart, after other movements in borrowing and disposals, there was a cash outflow of GBP 9.6 million in the year. And I'm now going to return to that progress about delevering in the group. This slide shows the different elements of the group's financing structures and the overall movement in net debt year-on-year. So starting at the bottom, net debt, excluding lease liabilities, reduced by GBP 46.2 million, to GBP 837.5 million. This takes our net debt-to-EBITDA multiple, excluding leases, down to 4.6x from 5.2x last year. That continues the recent downward trend and reflects the group's stronger cash generation and disciplined approach to capital investment. And then to briefly cover what makes up our financing structures, the largest element shown at the top is the securitization, which provides long-term predictable financing for the group. It does also impose some restrictions, both in terms of the assets that are tied up in the securitization structure and in our ability to move assets and cash around the group. However, these restrictions are manageable at present. Swaps are in place to fix the interest that we pay on the securitized debt. Other lease-related borrowings are essentially loans that were raised against other properties in the group outside the securitization. They were legally structured as sale and leasebacks, but where we have the option to buy back the properties at the end of the period for a nominal fee. Therefore, we treat these properties as effective freehold. And as noted in the slide, we're currently paying interest only on those borrowings. And I've put a new slide in the appendices showing investors how those structures will work over coming years. Our GBP 200 million bank facility was renewed in the year and now extends to July 2027 with relatively low drawings at the year-end, and cash balances ended the year at GBP 35.9 million. So in summary, we're continuing to delever at pace while preserving the secure long-term funding arrangements in the group. If I then broaden this to look at the group's whole balance sheet rather than just the net debt elements, this slide shows the evolution of our balance sheet and our net asset value per share, which increased to GBP 1.25 this year. And actually, the movements year-on-year are pretty straightforward. Our balance sheet is underpinned by GBP 2.2 billion of property assets, of which 81% of the estate by number of pubs are effective freeholds. The net book value of those assets increased by over GBP 100 million in the year, reflecting our annual estate reval and also our ongoing investment into the business. Net debt, as I've just described, reduced GBP 837.5 million, excluding lease liabilities, and lease liabilities were GBP 5.5 million lower. So total net debt was GBP 51.7 million lower year-on-year. Other liabilities increased by GBP 28.4 million, almost entirely due to an increase of GBP 28.5 million in deferred tax liabilities relating to the upward property revaluation. So overall, the property reval with its associated tax movements as well as the net cash generation of the group drove GBP 136 million increase in net assets, which was a 21% increase year-on-year, to GBP 791 million, which equates to GBP 1.25 per share. Given the progress made on the balance sheet, I want to finish by looking at our capital allocation framework. And if I start by saying that this is not a change to our capital allocation policy, which remains consistent with what we laid out at the CMD, we remain focused on delivering sustainable shareholder value through a disciplined balance of investment in the business, delevering and ultimately, shareholder returns. That said, there are a couple of updates we wanted to share this morning. On the right-hand side of the chart, you'll see our continued progress on leverage, which, as I mentioned, has reduced substantially. We are pleased with that progress, but would like to see leverage continue to decrease. And today, we're committing to reduce leverage to below 4x on a pre-IFRS 16 basis. When we get to that level, we anticipate the start of capital returns to shareholders through dividends, share buybacks or a combination of both. What that looks like will depend on circumstances at the time, including the share price and investor preferences. To be clear, we also expect to see the group continue to delever below 4x even after the recommencement of shareholder returns. We believe this disciplined approach continues to be the right strategy to create and sustain long-term value. So to conclude, we've delivered a strong financial performance this year with clear progress on margin, profit and cash flow, and we expect further progress this year. And before I hand back to Justin, I'll briefly touch on 5 forward-looking points. First, we remain confident in the trading outlook for FY '26 with like-for-like sales currently tracking in line with last year and Christmas bookings up 11%. Second, we expect further progress towards our margin target of 200 to 300 basis points of growth versus 2024 following the 140 basis point gain this year. Our format growth engine will be accelerated this year with at least a further 50 refurbishments and our CapEx is expected to be within the target range of 7% to 8% of total revenue. And after achieving our CMD target ahead of schedule this year, we expect to deliver another year of GBP 50 million in recurring free cash flow in FY '26. And lastly, we've significantly reduced our debt profile over the past couple of years and expect to continue to do so with leverage now at 4.6x and progressing well towards our sub-4x target. So overall, we're delivering against our targets, and we remain firmly on track to drive further financial and strategic progress in the year ahead. Thanks very much, and I'll now hand back to Justin. Justin Platt: Thank you, Stephen. So I'll now take you through the progress we've been making as we've implemented our strategy through the year. You will remember from the Capital Markets Day, we're very focused on being a high-margin highly cash-generative local pub company. And we'll do that with a portfolio of brands that appeal across a range of consumer segments. 5 key value drivers that get us there: executing a market-leading operating model; using CapEx to deliver differentiated formats; unlocking value with digital transformation; expanding our excellent managed and partnership management models; and in time, supporting that with targeted acquisitions. So I'll now deep dive on each of those value drivers to give you a flavor of some of the work that we've been doing. The first one I will spend some time on is the operating model. Really, this is the bread and butter of running a great pub business. It's the balance of revenue growth, cost efficiency and guest satisfaction. So first of all, I'll talk to revenue. Really good momentum this year. We've continued to do well, especially in our peak trading periods. Across our peak trading periods, we're up almost 6% on the year. And that's enabled us to grow our like-for-likes ahead of the market at 1.6%. And a lot of what's behind that is our event plan. Our event plan has been a key thing for us this year. In 2025, Marston's Pubs have been home to a darts tournament led by Luke Humphries, the world #1. Paddington and his new movie joined us from Peru. We had a national Trivial Pursuit quiz event. And through the summer, when Oasis Mania was sweeping the U.K., we had a series of '90s throwback events with tribute [ bans/bands ] and the like in our pub life. So all of these are designed to give people reasons to visit our pubs, a range of guest demographics. I think that's essential at any time of year, but especially so in the summer when, of course, this year, we had no big football tournament. So events are big success for us and an important driver in supporting our revenue growth. So secondly, on costs. As Stephen has shown you, we've made excellent progress during '25 on our journey to being a high-margin business in adding 140 basis points to our margin despite significant and well-known headwinds. And we've done this with a relentless drive for efficiency across all areas of our cost base. The biggest area of our cost base is labor, where we've saved almost GBP 10 million, a little bit more than 1 percentage point on our margin. And this has been about continually getting smarter with the way we use our technology to enhance and optimize our labor teams and our labor schedules, all about getting the right people in the right place at the right time. I think probably the best way to bring to life for you the work we've done on labor is to pick a case study of one of our pubs. The lady pictured on the right is Kati. She's one of our fantastic general managers. She runs the King Charles pub in Chesham, a lot of work with our labor planning this year. They've actually reduced their labor costs through the year by 8%. And despite doing that, they've grown their revenue by 19% and also grown their guest satisfaction well ahead of our company average. So a good example in the way labor is playing out for us in one of our pubs, but it also represents our approach across the company. So secondly, in terms of food and drink, our formats allow us to simplify the ranges we offer because we're a lot clearer about the demographic by format. And so that allows you to be clear which food offer and which drink offer you need by pub. So that's allowed us to simplify our range. That's helped us with efficiencies. But alongside that, we've also renegotiated our key food and drink contracts to drive efficiencies where we can. So that's labor and food and drink. Finally, energy and states. Every pound counts on energy. We've been that way for a number of years now, whether it be the usage that we manage, but also the contracts, there's a relentless focus on attempting to drive efficiencies there. But as Stephen said, we take a very judicious approach to estates more broadly with our CapEx, looking at our maintenance cycles, spending strictly in maintenance cycles, and that helps us on efficiencies with our repairs budget. So overall, really good progress on the cost side of things. And then finally, on the operating model, guest satisfaction. I mean this is all about ensuring that when our guests come and see us, they have a great time. And it's very pleasing in the context of the efficiency gains I've just talked to that we're still delivering better and better experiences through our guests. So from a score of 766 in '23 to 800 last year, 816 this year is a very pleasing performance. And this really is a combination of many of the initiatives coming together, whether it be our events program, and the visual there is of our October Fest event that we run during September, whether it be through digital ordering or some of the menu enhancements we've made. All of these things together add up to make a difference to the guest experience. It's worth saying, though, that the #1 factor that dominates, that really drives a great guest experience is, really strong guest service. That requires almost an obsession, a relentless obsession with getting that right day in, day out. And the work on that is never done. Our teams are very focused on delivering that experience all the way through the year. And as I say, it's pleasing that this year, we've been able to continually improve on that. So that's the operating model. When you take revenue, cost, satisfaction together, it's good that we've made strong progress across the piece. And this has been complemented with the work we've done on the digital transformation value driver. I think a key example of this would be the new order and pay app that we launched in March. Really well received. It's paying dividends with our guests in terms of both revenue and reputation, and it's complementing the personal service for those guests who want it. So we've got a 10% revenue uplift when using the app. And those pubs with a higher mix of order and pay usage do significantly better on reputation. What's also good about the app is it can work hand-in-hand with our events. So the Trivial Pursuit: Win a Wedge event drove a big uptake in the use of the app. So good progress overall on this area, digital, but a lot more opportunity here in the future as digital transformation can help us both on revenue and on cost. The third value driver I want to focus on is our new pub formats. So against 5 core consumer target segments across the market, we've designed 5 pub formats that are specifically designed to meet the needs of those target audiences. And through a series of test and learn launches in '25, we've been assessing the potential of these pubs to drive appeal and importantly, drive powerful CapEx returns. Now in May, I did a deep dive on the Two-Door format. So I thought this time around, we'd share some more information on the Grandstand brand. Grandstand is a local sports pub. So it targets adults who want an entertainment experience when they go to their local pub. I mean this is an absolute sports lover's dream. It's similar to a city center sports bar environment, but in the local community pub. Number of constituent parts to it. At its heart, state-of-the-art technology ensures that we've got 3-meter stadium screens, amazing sound systems. Alongside that, there's great match-day food suited to watching the big game. And these pubs will always be run by sports enthusiast general managers who know what their guests want and can work with them to give them a great experience. It's an absolute must visit for the big game, the atmosphere that we create. But more than that, because it's a local pub and it's a great environment, it's a place that you would want to go to on any night of the week, and we support that with a program of sports events through the week to give people reasons to come every night. So Grandstand has done really well this year. The guest reaction and the returns that we've had have been very, very impressive, and it's been a key part of our test and learn year. And test and learn overall this year has exceeded our expectations. We've done 31 launches through the year. So we did 21 Two Doors, 5 Grandstand and 5 Woodie's. Woodie's is our new family pub. All have done well. Guests love them. They've driven strong uplifts in revenue of 23% and all of that off relatively modest levels of CapEx. We've been driving ROIC of more than 30% of only GBP 260,000 per pub. So the test and learn phase really has proven the potential of this stream for us, real growth opportunity as we roll out across the estate. And all of our pubs have been mapped to the format opportunity they can play to over time. So over time, this really does give us an opportunity as a significant driver of growth. So great progress across our value drivers in '25, and this leaves us feeling very positive as we look towards 2026. Through this year, we'll have a big program of exciting events, all designed to encourage guests to come and visit us, not least with a big football tournament on the horizon that everybody will be very much focused on in the summer. And we'll complement that with our revenue management and order and pay disciplines to drive spend per guest. But alongside the demand drive, as I've just said, our new formats will play an increasingly important role in driving growth through the year. Given our success in '25, we're now accelerating the rollout plan. We'll have 50 or so launches focused on Two Door and Grandstand, and all of these will make a meaningful difference to both revenue and EBITDA performance through the year. So to summarize, another year of strong delivery in '25, significant growth in both profit and cash flow. We're very excited by the growth potential of our new formats, and we see a very promising outlook for the year ahead as we continue to deliver as a reliable growth company. And with that, we can now take some time for questions. Operator: [Operator Instructions]. The first question we have comes from Douglas Jack of Peel Hunt. Harold Jack: So I've got 2 questions, if that's okay. In terms of the new formats in 2026, is the choice of Grandstand and Two Door largely because they're the ones that have the greatest uplift potentially, adding to the number of reasons to visit, I think, obviously, they've got quite a lot of opportunity there. And then the second one was about margins. In 2026, what are the best margin opportunities do you see over this year? Justin Platt: Thanks for your questions. I'll take the first one on formats and then, Stephen, if you want to come to margins. In terms of choices, as you know, we were very clear to have the plank of a test and learn phase first to guide our implementation. So the primary choice is certainty of return in the sense that Two Door and Grandstand both launched earlier in the year last year than Woodie's, which allowed us to get more data on those through the year. Most of the Woodie's launches came sort of the summer onwards. So whilst all are performing well, we've just got longer data on the other 2. The other attraction, of course, with Grandstand is you absolutely want a bigger footprint of those pubs in the market in a year with the World Cup, which we've certainly got an eye on. But really, it's about certainty of returns, Doug. Stephen Hopson: And Doug, on your question on margins, I mean, yes, look, we've made really good progress in 2025. I think we do expect EBITDA margins to increase in 2026, but not to the same extent as 140 basis points we did in 2025. I mean I think the best opportunities for me, so there's a bit of flow-through stuff. So we made really good progress on labor. And Some of those things didn't come through until the second half last year. And so I think some of them will help H1 2026. And also, that is a continuing journey for us. So matching right people, right place, matching demand with supply of labor is something that we're going to be relentlessly focused on going forward. That may come through in terms of reduced cost. It may come through in terms of better customer service and therefore, improved sales, but I think there will be some upside from that. And then I think on gross margins, I mean, we've got pretty good visibility of both food and drink cost prices moving into next year. We're lock in quite a few contracts on that quite early. And I think, therefore, that gives us certainty on those lines. We'll continue the journey on things like revenue management and upselling and so on, and it should be an opportunity to move that further forward as well. Operator: The next question we have comes from Karan Puri of JPMorgan. Karan Puri: I've got 2 quick ones. One, on the 1.6% like-for-like momentum in '25. Just wondering if you could provide a split between pricing and volumes, number one. And number two, just coming back on the cash tax payment in '26. I know it's going to be higher than 2025, but in terms of magnitude, if you could share a bit more on that front would be helpful. Justin Platt: So I'll start with the like-for-likes. As we said in the release, food, drink and machines were all in growth, and that's a mix across them. As you'd expect in that, revenue management has played an important part for us and will continue to do so, particularly actually the premiumization as consumers are upgrading to more premium beers and also adding and upgrading on the menu. And then the second one, Stephen? Stephen Hopson: Yes, the cash tax. So yes, you're right. We flagged that it would increase. Last year, the cash tax payments were GBP 5.3 million. That will approximately double next year, to about GBP 10 million, Karan. So that's about the extent of it. We are still using some losses from previous trading period. So the cash tax is still relatively low, but it will be about GBP 10 million in FY '26. Karan Puri: Perfect. And then just a quick follow-up on that one. So do we -- can we expect it to be sort of normalized cash tax starting in 2027? Or will you still benefit from some loss in the previous period there as well? Stephen Hopson: Yes. 2027 will still be a little bit low. And then from 2028, it will go back to normalized levels. So it will be a step-up in 2027, but it won't be up to normalized levels, yes. And then from 2028, you should expect normalized levels of cash tax. Operator: [Operator Instructions]. The next question we have comes from Anna Barnfather of Panmure Librium. Anna Barnfather: Just a couple of questions. Firstly, on the reformats, you've mentioned sort of acceleration sort of 50. Could you update us on your thinking of what proportion of the estate at this stage you think could benefit from a reallocation into 1 of the 5 formats? So how many of your sort of 1,300 pubs? And have you only done managed or have you done partnership ones as well? The second question, I was just thinking about the sort of peak trading. Obviously, you're doing really well in those big events, with peak trading periods up 5.8%. Are you tempted to sort of reduce opening hours on the sort of nonevent days? Or is there any sort of thinking on that as a way to cut down on overheads? And then just third question on the revenue mix. I think obviously, higher margins and gross margins, can you just give us a bit more color on perhaps some of the shifts in your sales mix? Justin Platt: Thanks, Anna. I'll take the first 2 and then Stephen, if you could take the third one. Let me start on peak trading, and then I'll come back to formats. We do look at our hours on a regular basis, but there's not a massive need to start big closure periods by any means. I mean one of the things that's most notable in pub trading today certainly versus 5 years ago is the growth of the early evening at the expense of the late evening. So if you look at booking patterns now, peak time for a table, the busiest time to get a table is 6:30 to 7:00. You go back 5 years, that was more like 8:00. So there's definitely an earlier day point to your business. And we do look at hours, but I don't think there's anything significant there in cost, particularly the local community environment where people are around the corner from their houses quite a lot. On the formats. So first of all, yes, we've actively launched formats across our managed and our partner estate, and they're performing equally well in each, neither is a differentiator actually in terms of performance, but they do work across both managed and partner. And then in terms of the numbers, as we showed earlier, 5 formats. The 2 that we didn't deep dive on were locals pubs and adult dining, signature pubs. Both of those, we have some of them in market already. I would say in terms of the opportunity, it's probably the locals pubs is the only bit that we wouldn't see as a sort of significant ROIC north of 30% opportunity, which probably takes you to 75% or so of our estate with the opportunity for those new formats. Stephen Hopson: And then, Anna, on the revenue mix, I mean, we're about 35% food in our business overall, but there is a big variation in that, as you'd expect between format and some of those local pubs versus, for example, our adult dining business, which is very, very different. And that has been growing. I mean, clearly, food across the market really has been growing quicker than drink over a period of time, but it's not huge. I mean that number has probably changed by 0.5% year-on-year. So it's not a huge mix. So hopefully, it gives you some idea about the sort of the food and drink [ pub/part ]. Operator: [Operator Instructions]. The next question we have comes from Fintan Ryan of Goodbody. Fintan Ryan: Two questions from me, please. Firstly, can you give us a sense of what your sort of base case expectations are for the budget tomorrow in terms of, I guess, labor costs, anything that you might be expecting or hoping for business rates. Just to sort of get a sense of what the base case is for the outlook currently and maybe what can change within the next 24-odd hours. And then secondly, could you give some color on like like-for-like trading in Q4 and over the last 8 weeks, obviously, you reported flat like-for-likes. How much -- what's been sort of the volume versus pricing split in that? Can you give some color on the visibility for the Christmas trading? Obviously, you've got bookings up 11% year-on-year, but like typically how much of bookings are -- of your Christmas trading are bookings? And what you'd be at this point, assuming for incremental pricing for FY -- for the calendar '26, would be great. Stephen Hopson: Thanks, Fintan. If I start on, I guess, the hot topic of the day and tomorrow, which is the budget and expectations for that. I mean, our base expectations and sort of what's embedded into the guidance that we've given to the market is that we expect National Living Wage to increase, obviously. Our expectations are about a 4% increase in the headline rate of National Living Wage, and we're expecting the differential for under 21-year-olds to close slightly compared to where it is at the moment. We're not expecting any further changes to things like National Insurance. And then really, I know there have been lots of stories in the press, but at the moment, we're not making any expectations on changes for things like machine, gaming duty or business rates either. I mean the Chancellor has flagged that there'll be a review of the way business rates is levied. So that will be interesting to see. But we're not making any assumption on that because simply, we just don't have the information available to us at this point. Justin Platt: And before I answer the like-for-like, Fintan, if you've got any assumptions on the budget tomorrow, please share them with the group. In terms of the like-for-likes, look, as you know, quarter 1 is all about Christmas. October and November are relatively small months in the grand scheme of things. December performance is really what matters. And within that, it's the key 2 weeks from kind of 19th of December until 2nd of January, quite time, tight time. And bookings pace, as we've said, is very good at 11%, and that's off the back of last year. I think we grew Christmas at about 11% last year in like-for-like terms. So it's pleasing the stage we're at. But to your point, walk-ins are also important at Christmas. So we've still got a lot of work to do in order to land that. And that's both in encouraging people to spend their Christmas with us but also then in managing spend per guest, so we drive the revenue return as well. Fintan Ryan: Great. And just in terms of the pricing and current expectations? Justin Platt: Well, again, we -- as you know, we don't -- we kind of manage price through the year in a broader revenue basis. So in terms of our revenue management initiatives around booking density, around premiumization. And yes, lead price is part of that mix, but we don't have like a hard and fast target. It's overall spend [ per ] that we look at. Operator: Ladies and gentlemen, at this stage, there are no further questions. I would now like to hand back to the management team for closing comments. Justin Platt: Well, just to say, thanks, everybody, for joining us. Really good engagement. Obviously, we'll all see what comes tomorrow. And I'll wish you an early best wishes for the festive season. Thank you. Operator: Thank you. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.
Operator: Good morning, and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Tuya Inc.'s Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be informed that today's conference is being recorded. I'll now turn the call over to your first speaker today, Ms. Regina Wang, Investor Relations Senior Manager of Tuya. Please go ahead. Regina Wang: Thank you, operator. Hello, everyone, and welcome to Tuya's Third Quarter 2025 Earnings Conference Call. Joining us today are Founder and CEO of Tuya, Mr. Jerry Wang; and our Co-Founder and CFO, Mr. Alex Yang. The third quarter 2025 financial results and website of today's conference call are available on our IR website at ir.tuya.com, and a replay will be posted shortly after our conclude. Before we continue, please note that our safe harbor statement in the earnings press release apply to today's call as we may make forward-looking statements. With that, let me now turn the call over to our Founder and CEO, Mr. Jerry Wang. Jerry will deliver his remarks in Chinese, which will be followed by a corresponding English translation. Jerry, please. Xueji Wang: [Interpreted] Hello, everyone. Thank you for joining Tuya's earnings call for the third quarter of 2025. In the third quarter, the external environment remains volatile, continuing the trend seen since the beginning of the year. The global consumer electronics industry experienced an uneven recovery with customer demand becoming more cautious in the ongoing macro uncertainties. In addition, the high base from the same period last year created added pressure on year-over-year growth. Against the backdrop, our total revenue for the quarter reached approximately USD 82.5 million, marking our ninth consecutive quarter of year-over-year growth and underscoring the strength of Tuya's business model. Gross margin remained above 48%. This result further reflects the resilience of our business structure and the steady improvements we have made in product mix and operating efficiency over recent quarters. In terms of profitability, supported by an improved gross margin profile, greater expense efficiency and sustained scale leverage, our non-GAAP net margin reached 24.4%, while GAAP net margin was 18.2%. Notably, GAAP net margin expanded by more than 23.6 percentage points year-over-year. Overall, while maintaining key investments in business development, we have continued to optimize our expense structure, enabling incremental revenue and gross profit to translate more effectively in operating profit. At the same time, on the strategic execution front, we continue to fully embrace AI and deepen its integration across our ecosystem. As of the end of Q3, smart devices equipped with AI capabilities accounts for 93.99% of total shipments, an increasement from the previous quarter, demonstrating that AI is swiftly becoming the default configuration from smart devices. On the user side, AI adoption is also scaling quickly. AI has clearly moved beyond single category features like AI voice to a broader spectrum of product categories. Tuya's AI agent service now handle 135 million daily interactions for global users, supporting diverse scenarios such as AI node, AI translate, AI health, AI energy, AI pet care, AI [ play ], AI gaming, AI secure [indiscernible] and AI robotics. AI continues to penetrate a broader range of daily devices and [ lab ] scenarios, laying the foundation for large-scale product innovation and long-term valuation creation. During the quarter, we also began global beta testing of our new AI agent app with Tuya ecosystem users, aligned with our Smart Life smart living mission, we are currently developing a universal AI life assistance for global users, which is scheduled for official release at the CES show in the United States in just over a month. Now let me turn the call over to our Co-Founder and CFO, Alex Yang, who will share more details about our financial performance and business progress. Yi Yang: Hello, everyone. This is Alex. I will now provide more details on the third quarter's results. Please note that all the figures are in U.S. dollar based and all the comparisons are year-over-year based. And we delivered a total revenue of approximately USD 82.5 million in the third quarter, representing a 1.1% year-over-year increase. Despite a strong comparison base last year and continued caution in external demand, we achieved our ninth consecutive quarter of year-over-year growth, underscoring our resilience and stability in our business. With the total revenue, our PaaS business delivered strong results, generating USD 59.2 million, a 2.4% year-over-year increase, driven primarily by our strategic focus on the customer demand and product optimization. In Q3, the number of PaaS premium customers reached 280, further strengthening our core customer base. In addition, fueled by growth in the cloud software products revenue, the SaaS and others business showed consistent expansion, generating USD 11.5 million this quarter, a 15.4% increase year-over-year. This momentum was driven by continued rise in installed devices and a high proportion of recurring revenues. Revenue from Smart Solutions reached USD 11.8 million during this quarter. We strategically scaled by lower efficiency projects and prioritize scalable high-value solutions such as AI energy management solution and spatial AI solution to further improve overall gross margin and cash recovery efficiency. From a regional perspective, in China market, AI Toy continued to show healthy growth in the third quarter. More than 50 customers, including brands, channel partners and solution providers, they launched products powered by Tuya and key product capabilities also continue to advance such as multimodal interactions, long-term memory and emotion expressions with several connectivity versions coming soon as well. These improvements further strengthened the foundation of expanding into new product categories and regional markets. In the European market, demand from AI-powered solutions such as AI cloud storage and AI energy saving solutions continue to rise. At the same time, we added several new industrial clients in the energy and HVAC sectors during this quarter. In Asia Pacific, deployment of Cube, the privatized platforms for several Southeast Asian telecom operators are scaling rapidly with additional cities entering the delivery phase. The Singapore HDB, Housing & Deployment Board of Singapore projects also progressed into implementation with the first bench of the hardware and software solutions delivered and installed in this quarter. In North America, AI-enabled products such as smart bird feeders continue to record healthy growth. The strong adoption validates the commercial potential of niche scenarios that integrates emotional values, frequent content interactions and long-term subscription model and underscores the structural growth opportunities for AI products in mature consumer markets. In summary, despite pressure in the global consumer environment, Tuya leveraged its diversified product portfolios and strong software capabilities to achieve a structural growth. Those trends further strengthen our resilience against external macro volatilities and uncertainties. Moving to gross margin. Our blended gross margin for Q3 in 2025 was 48.3%. Total gross profit reached approximately USD 39.8 million, representing a 6.1% year-over-year increase. This growth was primarily driven by concurrent improvements in both our revenue mix and cost structure. By segment, the PaaS gross margin rose to 48.8%, continued to upward trend from the second quarter of 2025. SaaS and others maintained a strong gross margin of 70.8%, remaining above 70% level. Smart Solutions posted a gross margin of 23.8%, slightly higher than last year's 23.5%. Overall, our Q3 performance in line with our expectations and continue to reinforce the profitability foundation at this stage. On the expense side, we continue to maintain prudent and disciplined financial management. Even as both our scale and profitability expanded, total operating expenses declined to $36 million. down 34.1% year-over-year. GAAP operating margins improved significantly to 4.6% and GAAP net margins increased 23.6 percentage points year-over-year to 18.2%, while ensuring that R&D investment in key AI initiatives and platform development remain intact, and we continue to exercise strategic cost control to balance growth quantity and profitability. On the cash flow front, operating net cash flow continued to grow steadily this quarter, reaching USD 30 million, a 25.7% increase year-over-year. Our cash collection cycles remain stable and cash flow quantity materially improved. At the end of the Q3, our net cash balance stayed above USD 1 billion, giving us ample flexibility to balance shareholders' returns, manage external uncertainties and support long-term strategic investment. Next, I'd like to briefly highlight some recent progress in our AI capabilities and developers ecosystem, which serves as a crucial foundation for Tuya long-term growth. At the end of the Q3, Tuya's platform had 1.62 million registered developers, representing a 23% year-over-year increase. AI adoptions across smart devices also continue to accelerate. Commercial AI developers have collectively created more than 12,000 AI agents on the Tuya platform, covering a broad range of smart products categories, including toys and pet products, electronic, home appliances, IP cameras and wearables. Meanwhile, we continue to deepen and strengthen our AI developer ecosystem, anchored by TuyaOS, TuyaOpen and the T-Series AI Developer Board. On the open source front, TuyaOpen has seen steady growth in both documentation and code engagement. Since the beginning of this year, the GitHub repository star count has increased by about 80%. To date, over 2.3 million lines of codes have been contributed to open source projects. Beyond the rise of the Tuya developer participation, the overall quality of the ecosystem is also improving significantly. In summary, despite the prevailing external uncertainties, we still demonstrate strong resilience and operational agility, achieving solid financial growth and impressive profitability, which steadily advancing the AI plus IoT developer ecosystem across our core business segments. Thank you, all. Operator. We can begin Q&A session right now. Operator: [Operator Instructions] Our first question comes from the line of Yang Liu from Morgan Stanley. Yang Liu: I have one question regarding the business outlook with more and more trade deals settling down in the international trade market, what is the business outlook going into fourth quarter this year, which is the peak season? And also, what is your early look for customers' demand going into 2026? Yi Yang: Thanks, Liu. I'd like to share 3 points. So the first one is that this year, we still see that with the kind of the softened demand on the growth side. And because of the uncertainties on the global macroeconomy situation this year. And so this year, the Q4, we'll see that the regular promotion season will be kind of the soften versus the last year. So we will keep a closing eye to review that while we already have the stable -- kind of the stable turns across multiple countries that whether the demand will be going to return steadily on December. So that will be the short term. And for 2026, what we see here is that because like Jerry shared earlier before, that all those kind of AI features and smartphone portfolios become more and more inevitable trend for the entire sector. So which means that more and more consumers are already starting to familiar with this type of products, they really become the beginning users of these type of things. And all the major brands and the players, manufacturers in industries are already starting to enter these sectors and bring that into their growth factors. So those type of trend will never stop. So in 2026, we'll have a very positive outlook about the growth -- keep growing the entire business sectors. And the third one I'd like to share is that by reviewing all the technology improvements in the past decade, and we review AI will be one of the booster that bring the IoT experience into next level because in the past, the smart home experience is majorly focused on the connectivities, some automation and control. But while coming out with the AI capabilities, the user experience will come to a next level to more friendly, more easy to use and more smart. And so that's why we decided to provide a new AI assistant for life, which connecting all the home scenarios and to ordinary people and have more people be able to enjoy the smart devices experience. So that will lower another bar for the entry user. So combine that 3 together, the short times, we will see that 2025, there is still some uncertainty and pressure on that. But it's become more and more inevitable and become a default options for major brands and players there, and we're trying to bring the bar lower for more users who are not become the smart devices user as well. So I think that will be the overall -- it's very positive in the long term and [ constant ] in short term. Operator: Our next question comes from the line of Timothy Zhao from Goldman Sachs. Timothy Zhao: Congrats on the solid results. I have 2 questions here. One is regarding the AI home agent that you just mentioned. Just wondering if you can share more color on the detailed specs and the use case of these AI agents that you are going to officially release at CES next month? And how do you think about the impact on the overall business of Tuya with this new product? Secondly, is about the AI overall impact on your PaaS and SaaS and smart solution business. Just wondering for example, for the segment growth this quarter, would you please break down in terms of by volume and by pricing? Has AI brought any positive impact on the overall pricing of your product and services and also the impact on the gross profit margin? Yi Yang: Okay. Thank you, Timothy. So the first one is that -- so we define this as AI assistant. So it's bigger than agent. And because we think that if we review the live scenarios, even only for home that you find that you have multiple things you want someone to help you with. So this is AI assistant come with multiple agents that can help you to do almost everything you need in a home. So that's the first one. That's how we design this new assistant. And the key value for the other part, we believe in 2 things. The first one is that while coming out with the adaptions of the GenAI app, including the GPT, including like the Gen-1, et cetera, you found that the AI can help you to do a lot of things, a lot of tasks on the software side. But there's no assistant focus on home. That's what you need for your home and how you want to taking care of the home. So for us is that we design the different type of agents and capabilities focus on those scenarios people want to interact and people want to have a better life quality or easier life experience in home. That's the first one. And the second one is that the key differentiation of this assistant among any generic assistant is that this assistant will naturally be able to interact with the physical scenarios through the hundreds of millions of the Powered by Tuya devices. So which means that we're trying to bring kind of science fiction to come true, like the JARVIS in Iron Man's house, every people appreciate that. Every people, I mean, admire that, but there is no that type of JARVIS yet. So we want to create that type of experience for the global people. So that's how we define the key features and value for the user side. And I think the -- what does it mean for the ordinary users. I think the key part is that right now, we found the smart devices is still kind of complicated. They become way more easier than 10 years before, but still kind of complicated to -- I mean, to learn to use, to interact with by many nonuser, I mean, for those beginners. So those bar is still there. But coming out through the assistant, so you don't have to learn to use the app anymore. And you don't even need -- you just need to know how to speak, right? Like how you can tell the housekeeper to do something, how to tell a servant to do something, it's same like the assistant will be able to take the orders and to do all those kind of complicated operation for you. So we believe that will lower the bar significantly to the -- for the new users for home. And right now, we see that while the penetration of even smart home is still in the low digits and by the entry bar, we'll be able to open more doors for those new users while they found that the smart devices will be accessible for them to use. So that's for the AI assistant part. And the second part -- second question is for the AI. And so first one is that this year, we consider the beginning year of the AI device. So we are very happy to see that finally, our education to the market, to the developers, to the customers are already starting to offer some feedback. So like the numbers we shared before, by end of the Q3, over 93% of the products we shipped this year already been turned on some AI capability. So which means that my customers, my developers are already very actively to try whatever AI features or capabilities they can provide through their devices, even their existing devices. So that's the first one. So we really have a lot of innovative developers trying to try the ideas and try to educate the end users and test end users' feedback. And we believe that will be a very, very typical starting point for any new technology adoption. And so we really have that kind of scale test field taking places. And the second one is that we still provide the AI seamlessly through our 3 business model. So including the PaaS, including the solution, including the SaaS, right now, we have different type of AI offering in different business model as well. So which means that for my customer side, on the procurement perspective, so they don't have to learn how they will be able to purchase something from Tuya differently. It's a similar like offering, but come with different features. And maybe come with a different pricing, maybe not. So for that part is that we try to open -- have almost all my customers defaultly be able to try AI -- try to bring AI into their existing products and solutions. And through that seamless integration into my existing business models, we believe that, that will help in 2 things. The first one is that coming out with a new feature set, any new feature set will bring new demand. So that will be able to speed up the penetration and adoption of the entire market. And we're looking forward to have the AI coming as a booster. And the second one is that with some really new feature set that we reprice that and that will improve our GPM as well. But we're looking forward to have the GPM impact coming very soon because it's still in the beginning. So we try to promote the market. We try to incubate the market in the beginning, but not running very aggressively on the profitability side on that type of niche sector. So that's the overall outlook, Timothy? Operator: Our next question comes from the line of Mingran Li from CICC. Mingran Li: Congrats on the solid results, and 2 questions from my side. First is that following adjustment of recent global tariff policy, could management share more color on the downstream order recovery progress in your overseas market, especially in North America? My second one is that could management share the latest progress on the AI technology, particularly in terms of commercialization? Yi Yang: Yes. So the first one is that a couple of weeks ago that we get a temporary 1-year terms between China and U.S., right? And so which means that all the merchants importers right now, they have stable cost levels at a specific timing. And so that will be the good things, at least we get some certainty. But the promotion for this year will be pretty locked in. So those kind of new terms will be able to impact for next year's demand. So we're looking forward to have that to be a positive impact. And right now, on the customers and importer side, they still kind of review, okay, what will be the tune for next year and they'd like to review what will be the turns of sell-throughs for this promotion season starting from this week, right? We have the Black Friday this week. So we're looking forward to have more feedback in December, like I described. And while people already know that what cost they're going to get for next year over a year and what will be the demand looks like and then how they set the [ teams ] for the new projects and the new sell-in reordering. So that's the first one. So still under review. And the second one is for the AI. I think that I already answered part of that to Timothy earlier for the earlier questions. So the first one is that right now, we're offering AI across almost all my categories. We have some generic AI capabilities, can work on anything. And we also have some differentiated vertical AI capability for specific type of the products. But all those kind of offerings are seamlessly integrated into my existing 3 services, the PaaS, the solution and the SaaS. That's the first one. And in this year, on the new device side, including the PaaS and solutions, we're really happy to see some breakthroughs into some new sectors like the toys, and we shared that earlier last quarter as well. So this will be 2, 3 new vertical categories come up with a large total addressable market size and that we didn't touch before. And the IoT never get be able to enter that sector. But coming out with AI, so right now, we'll open the door. And in this year only, we're running 3 quarters only, that's many of the key players in the industry, starting from China in the toy industry and already starting to profit with us. And in Q3, we already helped the customer to launch a lot of use cases to test the demand. And it turns out that the end users love it. And so I would say the trial sales for many of the customers works out. So we're looking forward to continue to improve the experience and also the customers starting to reordering and running a new type of promotion across its all sales channels to scale it. So that's why we see that the AI open new doors. So that's the second one. And the third one is that not only upgrades, kind of upgrades on existing categories and open new categories. So the third one we try to open is the 2C experience. So we're looking forward to using the new AI assistant to open all the new home users doors, especially for those ones who still don't have any smart devices, they still consider that type of devices will be kind of complicated for them. So we're using assistant to help them up. That's it. Operator: Our next question comes from the line of Matt Ma from Jefferies. Matt Ma: So I just have one question regarding smart solutions. So the smart solutions revenue declined by around 14% in third quarter. Just wondering what is the reason behind it? And then could management provide any growth outlook for the segment in 2026? And also any thoughts on product category expansion going forward? Yi Yang: Yes. So I think the first one is that in 2026, we're looking to have a better year versus 2025 because we should have less turbulence for the macroeconomy side on a global basis. And so like I described that the customers right now in many vertical sectors, the customers already think that the AI features or AIoT features will become more and more default for them. So like some categories that every single new project they've been doing, they have to come along with the AIoT. So we become to take a larger portion in their pie. So that's the first one. So we will see that the penetration will grow. I mean, for the overall industries, we continue to grow steadily, no matter what. It's only a matter of speed, which year will be the tipping point. And -- so that's the first one, 2026, and we keep closing eye. We think that we can share more colors around the second half of December, while the customers have more feedback on the end demand side and while they're starting to set the tunes for 2026 because they don't like to run in a very conservative operation base for a long time. They're really running for 2025. So that's -- I think that's for the first one. And the second one... Matt Ma: The second one is also regarding -- yes, it's also regarding smart solutions. So just want to understand what is our thoughts on product category expansion for smart solutions going forward. Yi Yang: Sorry, I missed one part. And so I think that for smart solutions, and we're very carefully looking for the expansion to new categories because we're already learning that business model for over 2 years. So I think for smart solutions, we still kind of focus on some strategically highly value categories. And for those ones that the AI can bring a total difference, like to bring some innovative idea to come true without the AI, it never exists and also to some categories that we're really helping customers to do a differentiation to help them out. So usually, the solutions is the one we design for the customers for their flagship model. So that's what we put out. So right now, the solutions, the major categories will be the video and related multimodeling capabilities, the control panels that's super comprehensive interactions on the touch panel side and including the gateways focused on specific scenarios and energy. So I think that for the middle term that we continue to put focus and scale those kind of verticals unless we see some opportunities with the scalabilities in some new vertical categories. Operator: There are no further questions at this time. I'll now hand the conference back to the management team for closing remarks. Regina Wang: Thank you, operator, and thank you all for participating on today's call and for your support. If you have any further questions, please feel free to reach out to our IR team. We look forward to speaking with you at our upcoming investor event. Thank you, everyone, and have a great day. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect your lines. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Dominic Blakemore: Good morning, and welcome to our full year results. 2025 was another great year for Compass. We delivered strong organic growth and margin progress with profit up nearly 12%. Cash conversion was also very good as we generated $2 billion of free cash flow for the first time. Net new business, the cornerstone of our growth was 4.5%, underpinned by strong new business wins and client retention of over 96%. This was the fourth consecutive year we've delivered net new growth within our 4% to 5% target range. This performance, together with a significant market opportunity, reinforces confidence in the sustainability of our growth algorithm and our ability to deliver long-term compounding shareholder returns. I'll talk more about this later. But before I do, first over to Petros to give you more details on the financials. Petros Parras: Thanks, Dominic. Good morning, everyone. We've made good progress across all our key metrics as we delivered profit growth ahead of revenue growth. Importantly, free cash flow was also strong, growing faster than profit. Let's start by looking at revenue growth. Net new business continues to be in the middle of our 4% to 5% target range with pricing and volume growth consistent with the first half of the year. With our disposal program now complete, acquisitions are contributing to growth. Operating profit increased nearly 12% to over $3.3 billion. Interest was $315 million, reflecting higher debt due to acquisitions. For fiscal year '26, we expect an interest charge of around $350 million, reflecting the purchase of Vermaat, subject to regulatory approval. As anticipated, our effective tax rate was 25.5%, and this is expected to be the rate in 2026. Importantly, earnings per share were up by just over 11% in constant currency. And turning to cash, CapEx was 3.3% of revenue. Consistent with our guidance, we expect CapEx to be around 3.5% of revenue this year. Working capital improved in the second half, in line with our normal seasonal profile and was broadly neutral for the year. We expect a similar profile in 2026. As a result of our strong cash management, free cash flow conversion improved to 88%. Turning to the regions. In North America, organic revenue increased by over 9%. Operating profit was up nearly 11%, reflecting margin progress. In International, organic revenue growth was nearly 8%. Operating margin was up 20 basis points to 6.1% as the region benefited from overhead leverage, resulting in strong profit growth of nearly 13%. Group organic revenue growth was nearly 9%, with the fourth quarter particularly strong as we benefited from increased catering and hospitality events across certain sectors. Excluding these one-off factors, our underlying Q4 growth was around 8%. We expect this to moderate further in 2026, reflecting a lower inflation. Group margin increased to 7.3% in the second half of 2025 with our unit margin now fully recovered. Looking forward, we are confident of further margin progress whilst balancing growth and investment. We see opportunities to improve margin in both regions and to leverage group overhead. We expect to continue to make incremental gains in North America as we continue to improve productivity across our MAP framework and better utilizing tech and data. In International, as you are aware, we've invested in sales and retention to drive higher net new business growth. We expect faster margin progress in this region as we leverage these investments and benefit from M&A synergies. Dominic will talk about this later. Turning to the balance sheet. Net debt-to-EBITDA was 1.4x. As you are aware, last year, we acquired high-quality businesses, including Dupont and 4Service to capitalize on attractive growth opportunities through further subsectorization. This year, we expect to complete Vermaat along with other bolt-on deals. As a result, leverage is likely to be above our target range in 2026, peaking at the half year. However, our capital allocation model remains unchanged, and we expect to deleverage in 2027 as the business grows and we deliver the M&A synergies. With our disposal program now complete, M&A is contributing to profit. Including Vermaat, we expect acquisitions to add around 2% to profit growth in 2026. Now turning to fiscal year '26 guidance. We expect operating profit growth of around 10% on a constant currency basis, driven by organic revenue growth around 7%, around 2% profit growth from M&A and ongoing margin improvement. Now back to Dominic. Dominic Blakemore: Thanks, Petros. As you've seen, the business continues to perform well and is in great shape. We're often asked, what's the secret to our success and continued market outperformance. There are 2 key factors. First, we have a unique sectorized business model, which is decentralized with many of our brands still led by the original founder owner entrepreneurs. This model, which was strengthened through M&A over many decades, is incredibly difficult to replicate. And second, we combine the advantages of this localized approach with the benefits of scale, particularly in food procurement and technology. In short, we combine the best of both worlds. We operate in a hugely attractive market with a significant runway for growth, which is continuing to expand. We're investing organically and in M&A to provide us with additional capabilities to accelerate sub-sectorization. For food services alone, our addressable market is worth around $360 billion, of which we have less than 15% market share. And in addition, we see further growth opportunities in targeted high-value support services, where we estimate the market could be worth at least $800 billion. It's worth remembering we're already one of the world's leading support services businesses, generating more than $6 billion of revenue. The business and industry segment of the food services market is worth around $130 billion on its own. You may think as the most outsourced sector, it would have one of the lowest growth rates. In fact, the opposite is true. This year, B&I is our best-performing sector with organic revenue up 11% and the highest net new business growth. We continue to invest in this hugely innovative and dynamic sector, increasing our addressable market by entering new subsectors or through flexible offers such as vending. Our experience in B&I bodes really well for the rest of the group. Our volumes are benefiting from increased participation in our restaurants as we deliver an even more attractive food proposition. The advantages of our business model mean we can provide a high-quality offer at a superior value compared to the high street. As a reminder, we typically don't pay many of the expenses that retailers do as we operate on client premises. We also leverage our procurement scale and have more menu flexibility, allowing us to change ingredients more easily to help mitigate inflation. Our clients also recognize the importance of food and often subsidize our offer. They are hosting more events on site and increasingly use food as a cultural glue and a key enabler for networking and team collaboration. Acquisitions enhance our capabilities and accelerate subsectorization. Targets are usually sourced locally and have been known to us for several years. We look for exceptional businesses with entrepreneurial teams and attractive returns. And the businesses we acquire benefit from continued autonomy under our decentralized model. We provide them with access to Foodbuy as well as global best practice sharing. Having completed many acquisitions over the years, we've established a proven track record of successful M&A. In vending and micro markets, we've been operating a rollout strategy of many small bolt-on deals in North America. Together with strong organic growth, Canteen has now grown revenues to over $4 billion. These acquisitions are hugely value accretive to Compass with returns typically above our cost of capital from year 1. We're also investing in GPOs and recently acquired Regency Purchasing in the U.K. As well as scale, we've benefited from their technology and systems, helping build out sectorization. Regency volumes have doubled since we bought the business with double-digit ROCE in year 2. And most recently, we acquired 4Service in the Nordics, accelerating access to the multi-tenant building subsector in particular. Integration is ahead of schedule, delivering high single-digit growth with financials ahead of our investment case. We've also recently agreed to acquire Vermaat, subject to regulatory approval, a truly exceptional premium food services provider with a market-leading presence in the Netherlands. Vermaat will further improve our ability to deliver tailored on-site concepts and innovative retail solutions as well as providing us with outstanding talent. Once approved, we expect Vermaat to be margin and EPS accretive to Compass in our first full year of ownership. As Petros said earlier, over recent years, we've invested in technology and data to support our sales processes, procurement functions and to drive operational efficiencies. We think of it as benefiting both growth and margin as well as automating some daily tasks for our colleagues. For example, we're optimizing every stage of the sales funnel by using improved processes and data. We now have more visibility of future gross new wins by more accurately tracking the size of the pipeline, our probability and win rates. We've increased the use of automation tools for bid writing to improve their quality and to reduce preparation time. Tech and data are also transforming the client and consumer experience. We have a strong competitive advantage in this space, having invested in digital for many years with around 1,600 people now working in this area alone. With hubs in the U.S., U.K., France and India, we share innovations and best practice across our businesses, leveraging our breadth and our scale. We're using AI to improve our customer proposition using proprietary analytical tools to optimize our product mix and pricing. This helps us to better match our offer to changing customer demand as well as benchmarking pricing in our sites with the local high street. And finally, when it comes to our frontline colleagues, we're increasingly using AI to automate day-to-day tasks such as recruitment. In the U.S., we streamlined our hiring process and reduced the number of recruiters. In Japan, we've implemented an AI chatbot for our frontline colleagues, which answers any queries they may have in seconds, delivering impressive productivity gains. In summary, 2025 has been another strong year for Compass as we continue to deliver on our growth algorithm. We expect to sustain this performance in the long term, delivering high single-digit profit growth with the building blocks being mid- to high single-digit organic revenue growth, ongoing margin progress and contributions from bolt-on M&A now that our disposal program is complete. For 2026, profit growth is expected to be even higher at around 10% as we benefit from the Vermaat acquisition. Now over to Q&A. The operator will share instructions on how to ask questions. [Operator Instructions] Operator, over to you. Operator: [Operator Instructions] Our first question comes from Jamie Rollo from Morgan Stanley. Jamie Rollo: Three questions, please. First of all, could you talk a bit about what drove that very strong fourth quarter for organic sales, about 9%. I think you said 1% was from sort of one-offs. Maybe talk a bit about what those were. I think we saw a similar thing a year ago and even the year before that, the sort of one-off benefits to keep happening. But also the 7% guidance looks quite conservative even in the context of an underlying sort of plus 8% exit rate. So how should we think about the sort of cadence of organic sales through the year? Secondly, again, it's a question on the guidance, but on the margin side, so 1% profit growth from underlying margins, about 7 basis points, again, looks a little bit conservative. I think for that alone adds about 5 basis points to the group because it's double-digit margin. So could you talk about the upside to margins? And also, how should we think about that 200 basis points gap between North America and International sort of closing, if at all? And then finally, you've given us sort of lots of the AI benefits to the business and your clients on Slide 24. Could you talk a bit about how you might mitigate against sort of the impact of job losses driven by AI on sort of office meal demand in general, please? Dominic Blakemore: Jamie, thanks for your questions. Let me hand over to Petros for the first 2 questions on run rate and margin guidance, then I'll pick up on the AI point. Petros Parras: We feel our Q4 underlying rate is about 8%, as you said. We had particularly strong volumes in B&I, Education and Sports & Leisure that we're pleased with. Some of this, we believe it's a onetime in nature. And practically, we have taken this in our guidance for '26. If you think about what has changed as we move to '26 versus '25, it's to do with inflation. We're seeing inflation slowing down a fraction faster than what we thought last year, end of the last year. Spot rate and inflation about 4% blended. We believe it's going to be close to 3%. And we mitigate part of this for our clients. So when you consider our guidance for next year, it assumes a lower rate of inflation within the 7%. It assumes a 4% to 5% corridor in a fifth consecutive year of delivering our strategy and a net positive contribution for volume. When it goes to margin, I think you give us too much credit of being able to forecast 7 basis points or 10 basis points on a going-forward basis. I think our approach there is profit has to grow faster than revenue, call it the 10 basis points on average. What is interesting is our unit profit margin has exceeded what used to be pre-COVID, which gives us sound financials within the units in operations. We benefited from overhead leverage, and we expect to make consistent margin progression going forward. We do not see a ceiling to it. You will continue to see international business to grow faster with some group overhead leverage and some marginal gains in North America. I'll take a pause, and I'll pass to Dominic. Dominic Blakemore: Very good. Thank you, Petros. Jamie, when it comes to AI, I think in summary, we see it as a net positive for the business. As you rightly say, we shared some examples today of where we're deploying data and AI within the business, most specifically around our growth processes where we think we can get better outcomes on the pipeline build, the preparation for meetings and the conversion into growth. So we're very, very excited about what we're seeing there. We're also very targeted around purchasing and the value we can derive from our purchasing processes and the efficiencies we can introduce for our frontline teams to enable them to dedicate more of their time to their consumer and their clients. When it comes more specifically to the question you raised around net employment numbers, I mean, first of all, just a reminder, B&I is our fastest-growing sector as a group and also both within North America and international. Over 50% of that growth is coming from first-time outsourcing, which is very exciting. And as you've heard Petros say, we had strong volumes in quarter 4 within B&I. So we think our B&I sector is in rude health right now. When it comes to AI, look, we're seeing new clients emerge, particularly on the West Coast, where we've got a number of smaller start-ups, which we are serving through our commissaries and SME type offer. We're seeing some of those scale into significant clients, and we're excited by that. When we talk to our clients in the technology sector, they're very focused on talent retention and attraction, particularly as they seek to get the right capabilities to be best placed with AI. And I think we have a very important role to play there in them helping address that. And then lastly, we're seeing new subsectors emerge like data centers. So with regard to data centers, there's an opportunity for remote feeding through the construction phase. And then once in operation, there's an opportunity for us to provide on-site services, either in the form of restaurants and cafeterias or micro markets. And of course, there's a whole range of different FM services that we're well placed to provide to them in an environment where those services are very highly valued. So right now, we are seeing it as an opportunity, both in terms of what it's bringing to our business and the opportunity it's providing within our client estate. Operator: We now take our next question from Kate Xiao from Bank of America. Kate Xiao: My first question is also on AI. I guess thanks for explaining all of the benefits. I guess, any way you could help us quantify the positive impact on the business, either on the revenue enhancement side or cost savings? Any kind of examples or quantification you could give there would be really helpful. And then my second question is on your secured new business, $3.8 billion. That's up 11% year-on-year, which is very, very encouraging. I guess, could you elaborate a little bit on this number? I think the definition is the new business wins over the past 12 months. So would some of the business already be in the FY '25 revenue number already? Or is it mostly the pipeline for FY '26 growth? Dominic Blakemore: Thank you, Kate, and welcome. I think this is your first call with us. When it comes to quantifying AI, look, we don't think we're in a place to do that right now. I think like many things we see, we see puts and takes that drive volumes and new business opportunity. At the moment, on the sort of volumes and new business side, as you heard me say, we think it's a net positive. And then with regard to the savings that we're generating within the business, I think what we're seeing most of all is an opportunity for greater effectiveness and the ability to redeploy our people's time on more value-creating opportunities. We're certainly seeing that within sales. And what would I say, maybe we're generating 15% to 20% time efficiency, which can be redirected into more value-creating preparation for meetings and bid preparation, for example. So that's really how we're thinking about it. It's how do we redeploy effort and time into the bigger opportunities. And then specifically on the new business ARO, yes, $3.8 billion. We're super pleased. We need to continue to grow that relentlessly year in, year out. Our pipelines look very attractive. More importantly, almost than the gross new business wins, our pipelines are growing at the rate we need to see them grow. You've seen us speak today to the increase in the market that has come by way of some of the acquisitions we've made, which opens the total addressable market up for us. So we've now got a market which is over $360 billion. That's what's really exciting. The more we can target sectors and subsectors of opportunity where our operating model is best placed to win, then the more sustainable we believe the growth is. As you heard Petros say, we're super excited that this is 4 years now reported within 4% to 5%. We're well placed to see another year of growth within the 4% to 5%. And our objective is to continue to build our TAM and our processes deploying AI such that we can sustain those growth rates and those retention rates over the long term and deliver within the growth algorithm that we've shared with you. As you rightly say, some of that business will have deployed in financial '25 and will be rolling into '26 on an annualized basis. Some of it will be yet to deploy in '26. And the odd contract would have been one which will deploy in future years as we've also witnessed in the past where we've got some business that comes online. So the correlation between new business won and the in the year benefit within that 4% to 5% range is rolling. But we're really pleased that we've delivered that 11% increase year-on-year, which gives us every confidence that we can sustain the 4% to 5% as the business scales and the absolute numbers get bigger. Operator: And our next question comes from Simon LeChipre from Jefferies. Simon LeChipre: Three as well, if I may. First of all, on the $3.8 billion new business wins, I'm not sure you mentioned the mix of FTO within this number. I think it was 48% by Q3. So keen to get an update on this. Secondly, on net new, just wondering if net new was also within the 4% to 5% range for the international region. And lastly, I mean, in the U.S., you mentioned some opportunities in data centers. But more broadly, do you believe you could benefit from different investment plan going on like the Infrastructure investments, CHIPS Act and so on. Just wondering if it's something relevant for you. Dominic Blakemore: Thank you, Simon. Yes, let me pick up on your third question, and then I'll hand the first 2 to Petros. Absolutely, we're super excited by investment in new -- all new forms of technology, and we see those as opportunities for us. So I obviously referenced data centers, but yes, semiconductor manufacturer where it's been onshore in particular, is presenting opportunities for us. We're seeing data centers all around the world as an area of opportunity for us. And particularly where we see the build of new energy technology, those present opportunities for us. So there are -- as we've always witnessed, there are new sectors and subsectors of business and industry that emerge at pace and scale. And we believe that we've got a range of offers that can play into those, which means we've always got what the client is looking for. What's really important is that we're spotting these trends. We're moving quickly, and we are building an offer that is compelling for the client in their needs. Petros? Petros Parras: On the $3.8 billion Dom referenced, it's growing 11%. FTO around 45%, which is very pleasing to see. If you go back to pre-COVID, it was about 1/3 of our source of new business wins, continues to be elevated, which plays back to the complexities of the clients and our ability to serve and solve some of the challenges. I would say it's broad-based and represents a fair share of our sectors. And as Dom referenced, particularly with B&I continue to have great momentum within this $3.8 billion. When it goes to net new international, let's take a step back here. And if you look at from 2019 all the way back, international was nearly flat. We have 4 years of consistent good growth. We have 4 years of elevated net new for this part of the business. And the most pleasing thing for us is retention. You look at retention, we used to be in the low 90s. We are mid-90s sustainably. We would like to do better as we move forward in international business. We have opportunities. If you look in North American business, retention, some of our international business, the more sectorized we become, the more GPOs we deploy the Compass full toolkit, we should be in a position to drive marginal gains in international business. But we recognized consistent and good growth, and we're working towards sustaining this good growth in international part of the business. Dominic Blakemore: Yes. I mean I would probably just add to that. If there's anything that pleases me most about the business, it's the performance of the international region. We've seen an acceleration in our net new and improvement in our retention. As Jamie pointed out earlier, there's still a couple of points difference between the margins of North America and International. We see an opportunity to close that gap over time. We think the North America margin will continue to nudge forward. We see an opportunity for the international margin to grow faster as we make margin-accretive acquisitions, as we move toward GPOs in each of the individual international geographies, we see a good opportunity on margin there. There's still a delta in retention between North America and international. We think we can close that gap too as we deploy our processes, and we're seeing consistent improvement. What's most important, though, is the sustainability and consistency of that. And we're starting to build a bit of a track record, as Petros said, over the last few years, and we need to sustain that going forward, and we're confident we can. Having said all of that, I'd also just like to remind us that the North America performance was extremely strong last year, and we're incredibly proud of that. We think that we have every reason to believe that, that's sustainable, too. Operator: And our next question will come from Jaafar Mestari from BNP Paribas. Jaafar Mestari: I have 3 questions, if that's okay. Firstly, because you've provided this all-in guidance, which includes M&A and Vermaat, just a couple of questions on this. One, what timing of the Vermaat consolidation have you assumed in the guidance? And two, how should we look at the $350 million net finance cost guidance in this context? Is it $300 million run rate until the Vermaat consolidation and then it's $350 million as you pay for it? Or does the financing that you have in place mean that it's $350 million regardless of the exact timing of the deal closing? And then more fundamentally, one of your competitors has announced they would be investing in sales force -- in their sales headcount in at least one large U.S. vertical because they signed so little. Another one of your competitors paid their sales team $25 million extra bonus because they signed so much this year. How do you keep and motivate your hunters? You've talked about the founders involvement. Could you give us some more color on the sales teams themselves who bring in $3.8 billion? How many are they? What sort of background? What sort of support do they have, how they run and how they paid? Dominic Blakemore: I'll speak to the question on our sales resource, and then I'll hand over to Petros for the first 2 questions around Vermaat. Look, I think the first thing to say is the consistency of our track record. You've seen us deliver the new business growth now globally across North America and international, as I said, over 4 years. We've got great line of sight of the fifth year. More importantly, we've been doing that in North America for certainly the 13 years I've been with the group and probably over 20 years. So there is a consistency to our process and execution that I think is critical to the strength of our performance. We've got longevity and tenure in many of the people who work with us. Our organization, as we talk about often, is designed around sectors and subsectors. So we have dedicated sellers for each of the offers that we provide to our clients. We have dedicated sellers who are focused on the first-time outsourcing opportunity. Often that's a longer sell. And so we are incentivizing them over multiyear rather than individual year's performances. I won't speak to the independent -- the individual reward structures, but we have processes that have worked for us repeatedly. Our pipeline looks out 1 and 3 years, and we're excited by that. When you speak about the different competitive pressures, again, having been around this business for a while now, I've seen the competitive pressures ebb and flow. I see no real difference today to that which we've experienced previously. I think it's really important that we keep doing what we're doing. And that starts with expanding the TAM so that we've got ever more opportunity, being relentlessly focused on what the pipelines look like 1, 2, 3 years out, being relentlessly focused on our retention and how we secure and preempt to minimize the retention risk. We've seen a consistent improvement in retention. We put that down to our SAG processes, our non-SAG processes, which we're getting more dedicated to all of the time. And actually, the use of data around consumer NPS and our client feedback on an anonymized basis is allowing us to make even better decisions around that. So we just remain relentlessly focused on doing what we're doing on sharing our best practices and scaling our teams. We're always adding sellers into the business to ensure we can continue to grow at scale. But what I come back to is how important it is to continue to expand the TAM to give us the marketplace to grow into. And again, elevating the conversation, we have a 15% global market share in an industry that's still 50% self-op. There's huge runway for all of us to grow into. Petros Parras: On Vermaat, just to remind everyone, it's still subject to regulatory clearance. We have taken an assumption on contribution as of the first quarter of '26. We have line of sight we are in the final stint of this being closed, and we remain very excited to welcome the Vermaat team within the Compass Group family. When it goes to the interest expense for next year, about $350 million. This assumes Vermaat including the numbers and a bit of [ in-field ] M&A that we'll continue to invest in the business as we move forward. Jaafar Mestari: So just to be clear, it's going to be $350 million regardless of that timing? Petros Parras: Yes. Jaafar Mestari: Can I have a short follow-up on this, please? What's your assessment of the EPS accretion of the deal? You said positive for this year because you're presumably closing it late in the year, but you immediately have that higher finance costs. It doesn't look like we can justify even a decimal upside to consensus EPS. But if we annualize this on the full year, what sort of accretion do you think this deal if everything happened at the same time, interest costs and consolidation, please? Petros Parras: I think in Dominic's script, I think we say it's going to be accretive on EPS and a full year of ownership. You have to appreciate depending on when this deal is going to close, there is a different contribution of profit vis-a-vis the interest cost, will be accretive to growth as it closes. And importantly, with the synergy cases as we go in delivering good growth and some synergies on the cost lines, we should be able to drive further EPS accretion on a year 2 and year 3 basis. Operator: Our next question will come from Leo Carrington from Citigroup. Leo Carrington: If I could ask 3 as well, please. Firstly, on the North America H2 margins, which were flat despite the organic growth. Is there anything to call out as weighing on the margins this year, possibly the $440 million of M&A spend -- anything there would be useful. Secondly, I do appreciate the focus of yours is on B&I today. But in health care, your U.S. peer on a big multisite contract. Is this part of an acceleration in outsourcing in North America healthcare segment that you can also see or something of a one-off? And then lastly, I was interested in the Slide 29 showing the guidance evolution pre post pandemic. What exactly do you attribute the improvement, the increase in like-for-like volume growth to that you expect to see? Dominic Blakemore: Okay. Thank you, Leo. Why don't I take your second and third question and then Petros can speak to North American margins. Look, first of all, yes, I mean, the health care sector remains incredibly exciting for us. It's one of the sectors with the most significant first-time outsourcing opportunity, both in North America and international. We are seeing contracts come out on a multisite, multiservice basis, which are first-time outsourcing opportunities. So whether we would call that an acceleration or it's the normal trend, I think we'll determine as we go. But there are some very exciting opportunities in the sector, and that's been the case both in North America and international. And I could say the same for higher ed as well. So look, our sectors remain vibrant. We see lots of opportunities, not just in B&I, but across all of the sectors and really informs our sort of confidence today in sustaining our net new growth algorithm and the ever-expanding TAM. And then when it comes to like-for-like volume growth, look, I think there's quite a few puts and takes that we could pull apart, whether it's sort of return to office over time and so forth. But I think the biggest single trend to me is the one that we sort of called out in the slides today. And that is, I think, the greater appreciation of the value that we offer relative to the high street. I'm very confident that the quality of what we offer is on a par. I think we've got some exceptional consumer offers now within our estate, but we're providing that to our consumers at a very, very significant discount to the high street. And through this period of elevated pricing, that delta has become ever more. We talked about why that is. Obviously, it's the fact that we typically aren't paying utilities on site. But I think our scale of purchasing is just so much greater than the high street competitor set. That provides advantage and our menu flexibility is so much greater. And I think therein lies a huge opportunity to create value for our consumer. That combined with the opportunity or the case where many of our clients are partially or fully subsidizing the offer. I think that's meant that we are capturing more people on our estate and they're having more daypart occasions with us. And I really do believe that, that is what is behind our successful volume growth. And I think you can see that in a number of our sectors. And then when you think more about where you've got the type of consumer that would be within the sort of Sports & Leisure, the event sector, I think we've got even better at retailing, understanding per capita spend, consumer trends. We've got data analytics businesses that are helping us drive an understanding of those. And we're working very closely with our clients because the clients see it such an important part of their hospitality performance to be able to drive that. And hence, we benefit from that, too. I think you see that in the Q4 volumes, where we have a positive calendar of events, we're also performing positively on volumes. Petros Parras: On North America, we're really pleased on what the business has achieved. If you really step back and you look at North America operating margin is fully recovered to pre-COVID. Within '25, there was noticeable margin progress as this business grows. I want to remind you, business is 65% bigger to pre-COVID and enjoying this elevated growth and still delivering margin progress is quite remarkable for our teams, I think. On a going-forward basis, we will expect still to do some marginal gains as we grow, more of an overhead leverage. And we remain positive on the trajectory of this business. If you're referring to the half 2 versus half 1, we made progress versus both halves of last year. And as we came to a fully normalized world on recovering the margin, there is some seasonality in there. North America has always been stronger margin in the first half to second half. Dominic Blakemore: Yes. I would add on margins as a group, I probably feel as confident as I've ever been that we will see steady, consistent incremental margin progress in North America and International. Why is that? Just remind ourselves of the portfolio work we did where we exited a number of the more volatile markets. I think we've got much more consistent business now. We've got a much more sustainable foundation and base, and I think we can grow from that consistently from here. So that's what's informing our confidence both in North America and International that we should see consistent, steady margin progression. Operator: Our next question will come from Estelle Weingrod from JPMorgan. Estelle Weingrod: I've got a first question on North America. You talked about the very good performance of B&I. Can you give us an update on other segments, in particular, higher education? Any indication on the full terms enrollment numbers? And the second question on Europe. Can you provide a bit more granularity on the underlying momentum? You mentioned B&I and Sports & Leisure. Can you be more specific perhaps on a country basis or at least any country you call out underpinning this solid momentum? And have you noticed or have you witnessed any signs of a softer macro in some countries in Europe, like in France impacting volumes? Dominic Blakemore: Petros, do you want to take the North American higher-ed question, and I'll speak to Europe. Petros Parras: So North America, as Dominic referenced, very strong B&I, low double-digit growth, broad-based across all subsectors. If you look in the rest of the sectors, we're in the high single-digit growth territory, which is quite pleasing. It's what we call broad-based growth. And actually, if you look at our sector footprint, we expect to be this way as we are fully sectorized and we're winning good businesses within every sector. When it comes to education, I think enrollments came in good, in line with our expectations, continues to have some good momentum in the education business as we move to the fiscal year '26 year. Dominic Blakemore: And with regard to Europe, yes, I mean, actually, Estelle, you spoke to it. We are 2/3 of B&I business in Europe. So for us to grow, we need to be seeing positive growth in B&I, which is the case. We've got a very exciting pipeline. We've won some really nice opportunities in the Nordic region, in France, in Germany, we continue to perform extremely well in Spain and in Turkey. So we've got a strong portfolio of countries that are all growing together. Importantly, and going back to the earlier conversation, what's really stepped up has been our retention performance in Europe. Again, if we compare it to the years that Petros described when we were sort of flatlining for growth, the real difference there is that 3 percentage point improvement in our retention rates, which we believe are sustainable. We've got very rigorous retention processes that we've trained out and we're managing through the region, and that gives us good confidence in momentum. We've got a very exciting pipeline for Europe. And I think the other feature is, for example, we've launched our Levy Sports & Leisure brand into Europe, and we're managing that across all of our international markets now actually. And we're seeing good momentum as we start to win our first accounts. Obviously, we talked about not in Europe, but the Australian Tennis Open, which was won last year. But also we're seeing our first ones in the sports areas in Europe, which is exciting. And then lastly, obviously, the acquisitions we've made 4Service in the Nordics and others are starting to give us access to new subsectors within B&I, which gives us even increased confidence on sustaining those growth rates in Europe. So look, we think that it's an ever-improving performance that we can expect in Europe, and we'll continue to nudge up within our net new growth range of 4% to 5%. On the macro point, sorry, at this point, we aren't seeing any degradation on our volumes from the macro, but we remain watchful. And look, I know there's some concern out there about are we likely to enter any recessionary conditions across the piece. I think a reminder, first of all, we're not seeing it. And then secondly, we do believe that the resiliency of this business can demonstrate itself in those times. First of all, our clients look for value and cost savings. And whenever there's been a tighter macro, we've seen an acceleration in first-time outsourcing and also in rebidding of contracts for more value. And I think we're very, very well placed there. And then secondly, if the consumer is looking for value in tougher times, then I think everything I said about what's driving the volume performance will stand us in incredibly good stead. So look, I think we feel well placed whatever may be ahead of us. Operator: The next question will come from Ivar Billfalk-Kellyfrom UBS. Ivar Billfalk-Kelly: You've mentioned FM a couple of times in passing on the calls, where it usually feels like we go several quarters without it being mentioned at all. Can this be an indication that it's a bigger focus going forward? And can you talk about the relative margin contribution of FM services compared to the traditional food service and the outlook for growth? Secondly, you're investing in M&A and GPOs in the U.K. You still don't have much in the way of GPOs in the rest of Europe. What would realistic time lines be for rollout of GPOs in your Continental European operations? And what's actually needed for them to be successful? And thirdly, on the health care in North America, as I understand, a lot of the U.S. health groups already have their own GPOs. And since GPOs are a key element of your offering, what is your relative positioning compared to your peers, given I understand the GPOs in health care actually like you to use them rather than your own procurement. Any comments there would be helpful. Dominic Blakemore: Thank you for those questions. Actually, really interesting and thoughtful. First of all, FM, yes, look, we're predominantly a food services group, 85% of our business is food. But look, that 15% that we deliver support services across a spectrum of different services in FM is $6 billion. That makes us the fifth or sixth biggest support services company globally. We also operate support services with great capability in many markets. We've quietly got on with that. It's been growth neutral. So it's been growing at par with our food service business and actually is also margin neutral, so on a par with our food services business. So it's a good business for us. Where we sell it alongside our food as a multiservice offer or an integrated offer, it can be very sticky with clients. Typically, we've seen it in the defense sector, the remote sector, the health care sector and increasingly within the education sector. Within B&I, it's often sold separately rather than as an integrated offer. But look, we think it's an attractive market that in a number of countries, we are well placed for. We quantified the market today within our slides $800 billion. It's very fragmented. So there's a long runway for opportunity for growth. We're clearly not prioritizing that over our food service business, but we will consistently execute. And we really just wanted to remind everyone today of the scale of that business and the capabilities that we offer. And that I think if you're very selective in the services you provide and where you work with clients, then it can be an attractive adjacency to food. On the M&A for GPOs, you're absolutely right. We've been building out our U.K. Foodbuy business very successfully over time. We gave some great examples today, particularly Regency. Our U.S. Foodbuy business continues to be incredibly accretive for us and an important part of our portfolio. We have a Foodbuy business in Canada, Australia and the U.K. We already operate GPOs today in some of our European markets. So we operate them in the Scandinavian area within Belgium. We haven't yet built those out in some of the other bigger individual countries. It is an area of focus for us. You asked what is the sort of recipe for success. Actually, when we take a step back, what enabled both the U.S. and the U.K. to build credible and scale Foodbuy offer was first acquiring the capabilities of a GPO and then bringing the Compass volumes into that GPO to get aggregate scale and then to franchise the capabilities and the services alongside the scale into the third-party market so that we can grow disproportionately with our own estate, our acquisitions and the third-party growth. And we think that really is the sort of the recipe for success in other markets, and it's one that you should expect to see us pursue over time. And then finally, with regard to the North American health care GPOs. Yes, we partner with many health care GPOs that operate for themselves across their own health care estate. Remember, they're typically buying pharmaceuticals, equipment, linen and other nonfood categories where they've got significant scale, actually bringing their food volumes into our significant food buying volumes can yield even more value for them. So we think there's a really interesting and exciting way to partner with the North American health care GPOs to give them more value and bring more volume into our model. Operator: We have time for one final question today. Neil Tyler from Rothschild. Neil Tyler: Just a couple of quick follow-ups actually to previous questions. Firstly, just touching on the last question around FM support services. In your prepared remarks, I may have misheard, but I think you mentioned that you would consider adding to those services through M&A. I just wanted to make sure I understood that correctly in isolated instances, obviously, but if you could clarify there. And then secondly, Dominic, going back to the point or the focus you put on the expanded addressable market, the additional sort of $40 billion or so. Can you just talk a little bit more about where that's come from? You mentioned it's come through the acquired expertise over the last 12 months or so. And are there opportunities to continue to replicate what's happened over the last 12 months through further M&A? Dominic Blakemore: Yes. Thank you, Neil. Look, on the first point, I think we'll consider tuck-in bolt-ons wherever appropriate within our portfolio to ensure that we've got the right offer for our clients and that we can continue to either defend our estate or to grow the TAM. And that would apply within bolt-ons within FM and Support Services as necessary. Separately, your question on the TAM, yes, I think it's been a really positive feature and one of the driving reasons for the M&A that we've done over recent years. If you think about 4Service, it's given us access to the multi-tenant market where previously we would seek to win business through our clients, we now partner with the real estate owners as they construct new facilities, which are multi-tenanted and multiservice. It's an exciting segment that we weren't previously as exposed to and didn't necessarily have the capabilities for. It's a trend in the Northern European countries, and it gives us the capabilities that we can build into other European markets. I think that's a great example. We've done a number of micro market acquisitions in the U.K. to build a canteen type micro market offer in the U.K. That comes first with technology and then by building a regional presence such that we can offer our clients national coverage with a technology-enabled solution. That's opened up the micro market and vending subsector in the U.K. to us where we previously didn't have the capability or range of services to deliver that, that's something that we feel we can replicate in other international countries, given the learnings that we've had in the U.S. and Canada, in particular. The HOFMANN acquisition gave us access through a high-quality frozen offer into SMEs where we can deliver in at a lesser scale, a consistently high-quality offer that can be frozen and used over time. That's an exciting part of the market that we previously didn't necessarily access. And with Vermaat, although not yet closed, they have an exciting joint program, which is a sort of technology-enabled delivered in solution, which, again, we can leverage and learn from. So I think all of the M&A, we talk about giving ourselves access to capability, both in terms of the business model and offer, but also the people running the businesses. And I think those are great examples of that and where we'll focus as we go forward. Operator: With this, I'd like to hand the call back over to Dominic Blakemore for closing remarks. Over to you, sir. Dominic Blakemore: I mean just quick to say thank you all for joining us today, and we look forward to hosting you with the first quarter results in February next year. In the meantime, wishing those of you a happy Thanksgiving or happy Christmas holidays. Operator: 6 Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
Operator: Welcome to Fisher & Paykel Healthcare's Results Conference Call. My name is Lisa, and I'll be your operator for today's call. [Operator Instructions] Please note, this conference call is being recorded. I'd now like to turn the call over to Marcus Driller, VP Corporate. Marcus Driller: Thank you, Lisa. Well, good morning, everyone, and welcome to the conference call for Fisher & Paykel Healthcare's First Half Results for the 2026 financial year. On the call today are Lewis Gradon, Managing Director and Chief Executive Officer; Lyndal York, Chief Financial Officer; Andy Niccol, Chief Operating Officer; Justin Callahan, VP, Sales and Marketing; and Andrew Somervell, VP of Products and Technology. Lewis and Lyndal will first provide an overview of the results, and then we'll move on to questions. We'll be discussing our results for the 6 months ended 30 September 2025. Earlier today, we provided our 2026 interim report, including financial statements and commentary on our results to the NZX and ASX. These disclosures can be accessed on our website. With that, I'd now like to turn the call over to Lewis. Lewis Gradon: Okay. And thank you, Marcus. Good morning, everyone, and thanks for joining us here this morning. I'm going to be referring to the investor presentation pack that we released to the NZX and the ASX earlier today. So we'll start on Page 2 with a recap of some of the recent highlights. I'm pleased to note that the company has achieved $1 billion in first half revenue for the first time, and we really appreciate the contributions of our people right around the world during this half. Thank you, everyone. We continue to roll out our latest Nova Nasal OSA mask during the period, and this is now available in New Zealand, Australia and major markets in Europe. At our investor event in Royal Melbourne Hospital in Australia this year, we showcased the complexity involved in how clinical practice changes. And one way we contribute to that journey is hosting clinical forums and that's where interested health care professionals can get together, compare their clinical practice, compare their results with clinical data and the clinical practice guidelines. And over the last half, we hosted over 100 of these forums globally. Our U.S. team was honored to be recognized with the Zenith Award from the American Association for Respiratory Care and we got the construction of our fifth building at our East Tamaki campus here in Auckland, New Zealand underway, and they're making good progress as we speak. So turn now to Page 3. Operating revenue for the first half was $1.089 billion, up 14% on the prior period or that's 12% at constant currency terms. Net profit after tax was $213 million, and that's up 39% on the prior period or 28% in constant currency. Lyndal's going to unpack the financial results in more detail shortly. So we'll move on to the Hospital product group on Page 5. Operating revenue was $692 million. That's up 17% on the first half last year or 15% in constant currency, and that's come from a broad-based strength right across the hospital consumables business. New applications consumables revenue was up 18% or 16% in constant currency. And when we consider the robust growth that we're lapping from the first half last year, we think this result probably does reflect a consistent ongoing change in clinical practice. Hospital hardware revenue grew 21% in constant currency. And as you all know, hardware revenue can be quite variable on a month-to-month basis. And so we do anticipate that the full year hardware results will probably moderate down from this first half year result. So turn now to Page 7 for Home Care. Home Care operating revenue was $396 million, up 10% on our first half last year or 8% in constant currency. I would say, mask growth was 8% or 6% in constant currency. Our latest range of OSA mask has performed well and the Solo range and the Nova Micro range are available in most major markets. And as I mentioned earlier, Nova Nasal is in the early stages of its rollout, with a U.S. launch planned for later in our second half. Our home care result also has a strong contribution from OSA hardware growth, which we're not expecting to repeat in the second half. And if anything, we feel it might be a pull forward of demand from the second half. I'll pause there for now and hand over to Lyndal. Lyndal York: Thanks, Lewis, and good morning, everyone. On Page 8, our gross margin was 63% for the half. This is an increase of 110 basis points or 60 basis points in constant currency over the same period last year. The range of margin improvement efforts across our business, including manufacturing efficiency and other efficiency gains continued making a positive impact. U.S. tariffs on hospital products sourced from New Zealand impacted our gross margin by 32 basis points in this half. If the current global tariffs remain in effect as they currently are, our gross margin would be impacted by approximately 130 basis points on an annualized basis with approximately 75 basis points impacting in the 2026 full financial year. Our ongoing investment -- our ongoing improvement efforts are anticipated to more than offset this to provide an overall gross margin improvement for the full year FY '26 of roughly 50 basis points in both constant currency and reported currency using end of October exchange rates. Moving on to Page 9. Total operating expenses grew 8% or 6% in constant currency compared to the prior period. This reflects the higher investments made over the last few years and modest increase in people in the last financial year. Operating margin was 26.3% for the half, an increase of 335 basis points or 286 basis points in constant currency over the same period last year. This reflects the improvement in gross margin as well as our operating expenses growing below revenue growth. R&D expenses grew 4% to $114 million and were 10% of revenue for the half. We continue to estimate that about 60% of our R&D spend is eligible for the 15% R&D tax credit. SG&A expenses were $285.5 million this half, an increase of 10% or 7% in constant currency. Moving to Page 10. Operating cash flow this half was $245.8 million, up 5% from last year. Tax payments this half of $119.6 million were up from $53.8 million in the same period last year. Capital expenditure, which includes purchases of intangible assets, was $61.8 million for the half, up from $55.1 million in the same period last year. This includes the progress on the construction of the fifth building at our East Tamaki campus in New Zealand. Capital expenditure for the full 2026 financial year is expected to be approximately $210 million. Within this is around $125 million on land and buildings, including the next payment on our Karaka land purchase. Looking at the balance sheet, debtor were largely in line with last year at 43 days. Net cash at the 30th of September 2025 was $237.8 million, and our gearing ratio was minus 13.5%. Interest-bearing borrowings were $55 million, all of it being current. Turning to Page 11. We have declared a fully imputed interim dividend of $0.19 per share. This represents a 52% payout of our first half profit and is an increase on the interim dividend declared last year. It will be paid on the 16th of December. Looking now at foreign currency on Page 12. Foreign currency movements positively impacted our net profit after tax by $19 million compared to the same period last year. This largely reflects the movement in spot rates and hedging results when compared to the same period last year. In this half, hedging losses were $6.2 million after tax and foreign exchange losses on balance sheet translations were $1 million after tax. At end of October rates, we would have an overall positive impact on net profit after tax of approximately $10 million to $15 million for the full financial year FY '26 when compared to the full financial year FY '25. This includes hedging losses in FY '26 of $20 million after tax and losses on balance sheet translation of about $0.5 million after tax for the full 2026 financial year. Now back over to you, Lewis. Lewis Gradon: Okay. Thanks, Lyndal. So turning now to our outlook on Page 13. At 31 October exchange rates, we now expect full year operating revenue to be in the range of approximately $2.17 billion to $2.27 billion. And net profit after tax to be in the range of approximately $410 million to $460 million. And this revenue guidance revision is driven by currency movements since our last update in August. Our Hospital consumables second half growth can be influenced by year-on-year variations in the Northern Hemisphere winter respiratory season, and we don't have any additional insights into the potential impact at present. The available data does indicate that last winter was a historically strong season and so a similar season this year would be pushing our results towards the top end of our guidance. And conversely, a lower season would be tending to push us towards the lower end of guidance. Net profit after tax guidance incorporates this FX-driven revenue update, a 75 basis point impact to gross margin due to tariffs, good progress on gross margin improvements achieved during the first half and maintaining our operating expense growth below our long-term aspirational revenue growth. So I'll end my remarks here, so that we can open the line to questions. Marcus Driller: Thanks, Lewis. Lisa, if I could ask you to please open up the lines for questions. And can I please ask everybody to limit your questions to 2. This is to ensure that everybody has an opportunity to participate and then you can rejoin the queue for additional questions. Operator: [Operator Instructions] Marcus Driller: Okay. So the first question comes from the line of Lyanne Harrison at BofA. Please go ahead, Lyanne. Lyanne Harrison: Congratulations on hitting that $1 billion revenue for the first half. I might start with guidance and a question for Lyndal. I know you mentioned that FX is driving that increase or upgrade in guidance that you provided today. But for the NPAT level, you mentioned FX tailwinds of about $10 million to $15 million. But from a guidance perspective, your range increased by about $20 million. Can you talk to what else might be in that? Lyndal York: Yes, Lyanne, that's sort of what Lewis mentioned in terms of the gross margin improvement activities continuing on through the second half and growing our operating expenses below that long-term revenue aspiration to aim for some continued modest growth there. Lyanne Harrison: Okay. And then on the gross margin, can you talk a little bit more, obviously, got very good gross margin expansion this half one on a constant currency basis. Can you talk about what aspects contributed most to that gross margin expansion? Lyndal York: Yes. Look, it's really everything that we do in the business. We've been back to sort of business as usual across our business with everything playing a role there. It's our manufacturing teams, getting the manufacturing efficiencies, doing all their continuous improvement projects, getting really strong improvement out of that, a bit of pricing through the sales team that we typically get and just sort of all of that playing a role into the gross margin improvement. And so as we anticipate, pre-COVID, we're able to improve gross margin about sort of 100 to 150 basis points on average per year, and we saw delivering that. Lewis Gradon: Maybe one other little bit of color, Lyanne, the complexity in that answer is in the operations and manufacturing space. Typically, that's over 3,000 improvement projects per year, all individually relatively small, but all adding up. Marcus Driller: Thanks, Lyanne. Next question comes from Dan Hurren, MST. Dan Hurren: Look, thanks for the guidance on the tariff impact and that color there. But I was hoping you could help us understand like how that tariff experience is playing out in the ground with price efficiencies? Lewis Gradon: Sure, Dan. We're thinking of is just another cost-in just like all other cost-ins and it's in the bag of just business as usual cost-ins. We're running the business as we normally would. We're running our continuous improvement projects as we normally would. So today that's really no material impact on the ground at all. Dan Hurren: And look, a follow-up then. If we -- if you have a look around, it appears that Fisher & Paykel will probably be more gentle on price compared to other tariff impacted companies and broadly the same channel. Is there a potential that the price becomes a more of a lever over time as sort of the -- as the world gets used to these tariffs. Lewis Gradon: Could look at that 2 ways down. I mean we've got wonderful opportunities with every single customer we have to improve clinical practice. We don't have a single hospital anywhere in the world let alone in the United States, that's fully penetrated using all of our therapies for every patient that could. So we think we get a much better result spending our time talking about improving clinical practice, improving current outcomes. We think that gives us a better result in the short term and the long term, gives the customers a better result. So that's where our focus is at present. Marcus Driller: Thanks, Dan. Next question come from Stephen Ridgewell at Craigs Investment Partners. Stephen Ridgewell: Just had a couple of questions on the hospital business performance, particularly during the first half and perhaps what you're seeing going to the second half. Hospital devices were a standout with constant currency growth of 21% in the period. Unless you may recall back in May, I think the indication was you weren't expecting too much from Airvo 3 or Airvo 3 NIV in terms of being a material driver. I'm just wondering, was that 21% growth we've seen, does that include a strong contribution from those products or otherwise, could you just give us a little bit color as to perhaps what's driven that strong result from Hospital Devices in the first half, please? Lewis Gradon: Yes, sure. First caveat, Stephen, is if you've been following us for more than a year or 2, you've seen that, that hospital hardware result is very lumpy, can be lumpy year-on-year, certainly lumpy half-on-half and kind of where we're going with that first half result, but I mean it's a great result, 21%. It looks like a very positive lump. We would not be surprised if it's followed by a negative lump for our second half and kind of reverting to more traditional growth for the full year, that would be our pick. And then the contribution very consistently in our business pretty much forever is a mix shift from one generation of product to the previous one. And right now, you're seeing that from 850 hardware to 950 hardware, and you're seeing that from Airvo 2 to Airvo 3. So that's certainly a contributor. Probably not much more than normal would be my pick, it's always happening. Stephen Ridgewell: And so just a follow-up to that. Have you seen within that 21% more of tilt towards growth from the Airvo product suite or pretty consistent with the humidifier controllers? Lewis Gradon: I don't think consistent out of that choice. I mean there are different stages, there are different evolutions, but nothing unusual there. Stephen Ridgewell: Okay, good. And then the second question is still on the hospital business. Again, so probably another surprise versus where the market was at was on kind of core consumables, which have come in again, a bit stronger, which given -- I know it's not purely with the respiratory data has a big influence, but we sort of see 19% constant currency growth in core. Just curious, is it sort of more market share gains have you entered some new markets or won some contracts. Just a bit of color there would be helpful to understand. Is that growth sustainable into the second half in the core consumables business? Lewis Gradon: Yes. So what we think is going on there, is during COVID an awful lot of these fully functional ventilators went out that could do invasive, noninvasive and nasal high flow. So we think, over time, people are using those ventilators across the range and they're using them for noninvasive and nasal high flow in some markets. And that does mean that for us, it looks like they're using an invasive circuit. So we think some of the noninvasive should we say growth and maybe even a little bit of the Optiflow nasal high flow growth in circuits a little bit sleeked into what looks to us and looks to you like that traditional consumables or invasive consumers. Marcus Driller: Thanks, Stephen. Next question come from Davin Thillainathan at Goldman Sachs. Davinthra Thillainathan: I just want to understand the guidance upgrade for the full year a little bit better. Just trying to make sure we understand the moving parts here. Part of it is clearly FX that is helping. But if I look at your first half results, you have come ahead of your guidance for the half, clearly indicating there's underlying momentum in the business? Because my understanding is your FX for the half hasn't really changed relative to when you set that guidance. So could you help us understand where the business outperformed in the half and perhaps why you don't expect that outperformance to flow through for the full year, if my understanding is right that your guidance upgrade is largely FX driven. Lewis Gradon: Absolutely right and good question. Thank you. So there's 2 components there. First one is hospital hardware, which we kind of just spoke to. It's quite lumpy. That performed pretty well in last couple of months. And I think probably doesn't flow into H2 like that. In fact, maybe even goes the other way. And then the other one is also hardware but OSA hardware. And this is CPAP machines where we've had a customer in a market where 3G is being turned off, accelerate the CPAP replacement cycle. So that's in our home care result. And once again, that hardware has probably come out of the second half. Davinthra Thillainathan: Okay. And then thinking about the consumables part of your business in the Hospital segment. There's a whole range of new products that have, I guess, been released progressively over the last few years. And one particular sort of therapy that seems to be getting a bit more attention from a product launch perspective is in the NIV part of your franchise. Could you perhaps help us understand that a little bit better how does NIV sort of help the business, particularly given you are focused on changing clinical practice with the high flow part of it. So perhaps just the overlap between those therapies and how you expect that part of the franchise to grow over the next few periods? Lewis Gradon: Sure. Well, I think, overall, we are building our respiratory care business that covers all respiratory care applications and usages in a hospital, whatever the requirement and wherever the patient is. So NIV plays a role in that. And the leading clinical change in that space is nasal high flow for respiratory support. But another component of that is more and more usage of NIV and another component of that is humidified NIV, probably still less than 20% of the market would be humidifying NIV. So the way we tend to think of it is our driver is a change in clinical practice towards nasal high flow. And once a customer is using that therapy to some extent, it makes a lot more sense for them to move to humidification and noninvasive therapy as well or to move to our noninvasive therapy offering. So we said it's kind of following along behind the change in clinical practice. Marcus Driller: Thanks for your questions, Davin. Next questions come from the line of Vanessa Thomson at Jefferies. Vanessa Thomson: I just wanted to ask about the respiratory season. You mentioned that last year, it looks like it was a strong season. I think when we look at all respiratory illness combined my understanding was it looked moderate. Is that wrong? Or is it that flu requires more support -- inducing more of your products than the other viruses? Lewis Gradon: So I'd kind of like to restate that, if you don't mind. So our assessment of last year, second half was that was the biggest flu season data in 15 years. So we think that was a biggie. You've got a COVID component and other components in there. So over time, you'd expect COVID to probably be coming down. And then we've kind of moved away from classifying them as high, moderate and low and all that kind of thing. It's just too murky. And what we've done last year, what we're trying to do this year is really just confine our analysis to this year versus last year and not categorize them. We've just found it too confusing. And so when we go down that route, well, last year, H2, our biggest flu season in 15 years, COVID was still relatively material. Vanessa Thomson: Okay. Thank you. Okay, and my second question, I just wanted to ask if you had seen any impact from the shutdown. I think it was around 6 weeks, and we've seen some of the distributor companies talk to some slowdown. I wanted to get that affected you at all? Lewis Gradon: Shutdown. I would say I'm looking around the room, not from hospitals, not from FDA, not from reimbursement. We're shaking our heads on that one. Marcus Driller: Thanks, Vanessa. Next questions come from Matt Montgomerie at Forsyth Barr. Matt Montgomerie: Well done on a solid result. Just on Home Care for the second half. I was wondering if you could give us a feel for where you see growth rates. Would that be roughly consistent with the first half? Lewis Gradon: Well, I think probably the case for us is you'd expect a similar result to the first half under similar conditions, certainly for masks. And I've spoken to the hardware component of that. We think our first half growth is probably coming out of the second half. Matt Montgomerie: And then secondly, on the anesthesia business, are you able to give us color for where that's in terms of growth or as a share of new apps in the first half? Lewis Gradon: Well, growth is still pretty solid, still got a 40% odd, something like that off that low base, that low base has become a bit over 10% of new apps consumables this half. Marcus Driller: Thanks, Matt. Next questions come from Craig Wong-Pan at RBC. Craig Wong-Pan: Just looking at the full year guidance ranges. If I look at what that implies for the second half growth, I calculate the midpoint would imply 6% revenue growth, but actually NPAT declining by 1% in the second half. Just wanted to understand, is there anything we should be aware of in thinking about NPAT either in the PCP or in this coming second half to explain why there might be a decline in NPAT? Lyndal York: I'll take that. It's really a case of the revenue that Lewis has spoken about, the hardware likely coming back from the second half into the first half. Margin, we're still expecting improvements, but we get the full half of impact of tariffs in the second half. So there's quite a headwind related to that. And then OpEx still managing to grow that below our long-term revenue aspiration. And so what that ends up being will depend on where we land from a revenue perspective. Craig Wong-Pan: Okay. That's helpful. And then just wanted to understand the clinical forums. I mean, Lewis, you called out 100 hosted events this kind of period. Just trying to understand, is that sort of a similar level to usual? Or is this going to be something kind of going forward to help you change clinical practice? Lewis Gradon: So our business is based on a change in clinical practice. That's what we do for living. It's pretty much what we've always done, and it's relatively unique in our space. It's a relatively unique thing to be doing. And we had an Investor Day in a hospital in Melbourne earlier this year, and we went through some of the complexities and changing clinical practice. So what I thought I'd do this time is just following up on that theme, giving people more of an understanding of what changing in clinical practice, what that really means. I'd follow up with giving you some insight into the forums that we run. Now having said all that, that is actually pretty normal to us. We generally do over 100, I'd say, every half. Just trying to give some insight to that whole process. Marcus Driller: Thanks, Craig. Next question has come from Saul Hadassin at Barrenjoey. Saul Hadassin: First one is on OpEx. I think at the full year '25 results, the guidance was for around 10% growth in operating costs in FY '26. Clearly, it's a lot lower in the first half. Maybe Lyndal, just if you can talk about where you think OpEx growth will land for the full year and what's embedded in that NPAT guidance range? Lyndal York: Yes. Look, probably sort of high single-digit growth we'd be anticipating for the full year in OpEx. Saul Hadassin: Okay. And Lewis, just your comments about sort of pull forward of sales on Home Care flow generators, but also that commentary around Hospital Hardware. You've had 2 months almost of the second half. Can you comment on what you're actually seeing on the ground in terms of those hardware sales? Is that what is giving you the guide as it relates to second half? Is it what you're already seeing? Or is that just still effectively an estimate and you don't actually have insights yet into second half performance? Lewis Gradon: It's just an estimate. I mean when we look at our hospital hardware numbers on a 6-monthly basis, you can see they're pretty lumpy. There's nothing to read into it. On a month or 2, I wouldn't read much into it. But I guess our pack is we probably wouldn't expect to see that first half again in the second half that kind of volume. Marcus Driller: Thanks, Saul. Next question comes from Marcus Curley at UBS. Marcus Curley: Just on the Home Care business, you reported 6% in masks. It's probably a touch below market. Could you just talk a little bit about what you think is happening there? Maybe it reflects weakness in the full face category again? Or just some color would be useful. Lewis Gradon: Okay. Sure. I think the fundamental is lapping 14% growth this half last year. So this half last year, we had the Solo Nasal, Solo pillows were launched that drove 14%. In the second half, we had Nova Micro launch. In the second half, we also had 3 or 4 launches from competitors in that half. And that still drive 9%. So I think this H1 story is more about what we're lapping, and it's about no new introductions for us materially during the half. Marcus Curley: Have you seen any impact on those growth rates in the installed base or resupply part of your business? Or is it too difficult to tell in terms of your visibility into that? Lewis Gradon: So as far as we can tell, I'd say no. We haven't seen any unusual impact in resupply at all. Marcus Curley: And then just on Home Care, competitive bidding most likely kicking off next year. Do you have a view on how that would affect the industry and yourselves? Lewis Gradon: Justin, what? Justin Callahan: Marcus, it's Justin here. I think, I mean, at this stage, the final rules and requirements around competitive bidding haven't been really disclosed. And we expect the market to sort of react in a reasonable way. So we're not reading too much into it at this stage. It's still pretty early. Marcus Curley: So Justin, your base view would be reimbursement levels in the U.S. relatively stable. You wouldn't be expecting a material decline? Justin Callahan: I think we'd be expecting whatever the adjustment is it would be sort of a lot more reasonable. There's a lot more sort of experience in that space now from our customers. So I think it's -- we're not expecting anything too major. Marcus Driller: Thanks, Marcus. Next questions come from Andrew Paine at CLSA. Andrew Paine: Congrats on the results. Just looking at your full year guidance of $460 million at the top end of the range for NPAT. And just kind of working down, looking at that at the top end of the range, you've done $213 million in the first half. So you need $247 million in the second half to hit the top end of the range. If we back out FX there, bringing that down to $237 million constant currency, that would imply just 6% growth year-over-year in NPAT. Obviously, you've got the tariff impact in there, which if I'm right, that's about 120 basis points annualized. So that adds another 4% but OpEx is also performing better than expected. So just trying to get a bit of color around that growth rate at the top end of the range. It looks somewhat achievable even with maybe a slightly worse flu season year-over-year. Lyndal York: Maybe one thing, Andrew, that I'll just clarify that currency is actually a headwind in our second half compared to the second half of last year. So these numbers instead of being a tailwind of the 10 that you were talking about, it's actually a headwind of close to that. So because if you remember, the first half, we've got a $19 million benefit of NPAT. And we said for the full year, probably $10 million to $15 million. So that means the second half itself has got quite a tailwind -- sorry, headwind. So -- and then it's pretty much revenue dropping down, the tariff coming in, but still getting some good improvements, excluding that tariff for gross margin and OpEx in that sort of high single digit growth. Andrew Paine: Yes. Okay. So even with the FX kind of moving favorably. I assume that's just impacted by the hedging that you have in place? Lyndal York: Yes. Look, it's a range of things. They're the biggest mover in the currency half compared to the second half last year is actually the balance sheet translations where we had a gain of about $7 million last year in the balance sheet translations. So not expecting much this year. So there's a large part of that headwind. Andrew Paine: Okay. Sure. Okay, that makes sense. And then just obviously, it's difficult to really kind of talk to this, but there's the ongoing tariff investigation. I don't know if you can provide any clarity around if a similar tariff was applied in Mexico, what that would mean in terms of margin impact to the business? Lewis Gradon: We haven't really gone there. I mean, I think -- our thinking about tariffs is somewhat colored may be compared to most but anything we think about to do with tariffs or to manage tariffs or to change things because of tariffs, that's time and effort that we're not putting into growth. So that's always as a front line for us, actually, in tariffs are the topic. Marcus Driller: Thanks, Andrew. Next questions come from Adrian Allbon at Jarden. Adrian Allbon: Maybe just a clarification question. Maybe this is for you, Lyndal. Just on your interim report, and as you get to the bottom of the comments from Neville and Lewis, there is like a discretionary bonus of $9 million to be shared amongst the employees. Just to understand that, is that a normal feature? Or is it -- and you just called it out this time? Or -- and how is it sort of accounted for? Lyndal York: Yes. So we've been doing this. This is a profit share payment that we make to all employees globally, and we've been doing it since we were formed basically... Lewis Gradon: Since before listing. Lyndal York: Since before listing. And we do normally show that amount in our annual report every year and in our interim report. So nothing's changed, nothing out of the ordinary. Adrian Allbon: Okay. And would that have been accrued until the first half anyway, just as per normal? Lyndal York: Correct, yes. Adrian Allbon: Or is it a full year payment? Lyndal York: No, no, no. It's half on that premium. Adrian Allbon: Okay. All right. No problem. Sorry about that. Just the second question, like also in that sort of interim report, like you make a call out on the RENOVATE study, which I guess in the theme of this one, like you sort of -- you are putting a bit more emphasis on the change in clinical practice. Like is my sort of read of that, that's sort of like quite -- it's a large sort of clinical trial that's sort of you're presenting some useful results in terms of for hypoxic cases using high flow as a triaging type product. Is that the right way to think about the output from that study and how you might be using it to sort of educate? Lewis Gradon: Well, I think the thing about that study is the number, I think it's towards 2,000 patients. So it's a large number of patients and covers COVID and not COVID as well. And it's a comparison against noninvasive ventilation if memory serves me correctly, which is kind of a step up. And if finds nasal high flow, the word they use is not non-inferior, non-inferior. So as we're saying -- yes, yes, you've got a therapy that the user would rather use. You've got a therapy that a patient would rather have, and it's not inferior to NIV. That would be the short version. Adrian Allbon: Right. And obviously -- but presumably, that also dovetails nicely into like the Airvo 3 being wider use across the hospital as well and simpler to use for -- as you go down the staff levels. Lewis Gradon: Yes. I mean I want to be careful. We've called out one. It had a lot of press at the time it was released. It's unusual. It's big numbers elegantly done an analyzed study, but it's one of hundreds and probably more compelling is into clinical practice guidelines around the world. And that's really stepped up the issuing of clinical guidelines from the different professional bodies. Marcus Driller: Thanks, Adrian. Next questions come from David Bailey at Morgan Stanley. David Bailey: One for Lyndal and one for Lewis. Lyndal, 50 bps in gross margin this year, including 75 bps from tariffs. So if you strip out tariffs, you're doing 125. You sort of said on a full year run rate, full year tariff impact is 130. So as I look at fiscal '27, should we be thinking that all else equal, there's an incremental 65 basis point tariff impact to come through and then the underlying will give you sort of 60. So just trying to understand the incremental change from the tariff impacts in '27, just given that we know that the underlying should be around 125 basis points or so. Lyndal York: Yes, David. Look, you're spot on that. There's another top up of that headwind of tariffs coming into FY '27. So you're right, sort of 65 bps. And look, anywhere from sort of 100 to 150 basis points on average a year, we try to do is underlying improvement. David Bailey: Okay. That's helpful. And just for Lewis, I mean there's some commentary here around clinical adoption. There's clinical evidence that comes through to the sales and marketing effort as well. Just wondering if you can sort of talk to a little bit about how those two have progressed? And then in terms of utilization of hardware and asset turns on, how is that sort of driving more consumables used per device, if you can? Lewis Gradon: Yes. So that's sort of a double bang. I'll answer the second one first because our therapies are used across such a diverse range of hospital situations from EDs to recovery rooms to general wards to ICUs, we don't really have a utilization versus consumable terms per device, model or predictor because there's so much variation in there. We can't do it. So we've kind of abandoned that measure. And then in terms of clinical evidence, sales and marketing effort, the big mover there is clinical practice guidelines. Once we have clinical practice guidelines from a reputed clinical body, our approach is generally to use the clinical practice guideline. And I think I'm looking at Justin, I don't think we've got any hospital anywhere on the planet perfectly implementing clinical practice guidelines on every patient they could. Justin Callahan: Not yet. Lewis Gradon: Any comment? Justin Callahan: Correct. Lewis Gradon: So at this stage of the nasal high flow evolution anyway, it's about the clinical practice guidelines, and that's what we utilize in our sales, if it's more than anything else. David Bailey: Yes. Understood. Okay. Maybe just a different way to ask it then is, do you think the devices are being used more broadly across the hospitals? Justin Callahan: Yes, we do. Yes, absolutely. Marcus Driller: Thanks, David. Next questions come from Christine Trinh at Macquarie Bank. Christine Trinh: Congratulations again on a strong result. Just 2 quick questions from me on the consumables space. Firstly, New Apps growth of 16%, constant currency was ahead of our expectations. Can we expect a similar level of growth going forward? And on the U.S. launch of the Nova in the second half, can we just get your expectations for contributions to growth there? We think in kind of double digits that we saw in the first half of '25. Lewis Gradon: U.S. Nova, let me talk to that first, probably late in H2. So I wouldn't be making any material contribution at this stage probably later in our second half. And then New Apps at 16%. So when we think about second half, we're moving into the seasonal hospitalization zone. And you would think that if we had a similar seasonal hospitalization, this second half compared to last year, this should probably get a similar growth rate in the second half to what you saw in the first half. This time around, because of the very high flu season numbers from last year and also COVID probably decreasing, we would characterize last year as probably really high and probably top end of range. If we had a similar season this year, we'd expect we'd be at top end. Christine Trinh: Great. And just on that Nova piece, if it's in the first half of '27, can we just get your thoughts on growth expectations for that half? Lewis Gradon: Yes, maybe way bit too far out for us at the moment, Christine. Marcus Driller: Next question comes from Marcus Curley at UBS. Please go ahead, Marcus. Marcus Curley: Could you just talk a little bit maybe a little about the trajectory on R&D. Obviously, 4% in half is low for the business. Is that just reflecting some lumpy projects? Or are you generally starting to see lower percentages of R&D for the business for the next, say, 12 to 24 months? Lyndal York: Yes, Marcus, what that is, is really reflecting the higher than sort of our normal revenue aspirational growth over the past number of years. So it's just sort of writing that as the sort of average over time. So we'd probably expect that to remain a little bit on the lower side, sort of low to mid-single digits for probably another year or 2. Marcus Curley: Great. And then just on anesthesia. Could you provide any color in terms of any noticeable difference between trace and switch specifically, is it sedation or GA driving it or both? Just can you get a bit of color in terms of the different components of the market? Lewis Gradon: It kind of depends on the release track we've taken places where we've had Trace and Switch for -- from day 1, probably on comparable contributions. And then at least in the U.S., we led with Trace, and we're still leading with Trace. That's the bulk of it in the U.S. So the answer to your question, it varies depending on what we led with when we led with it. Marcus Curley: And Switch is in the U.S. these days? Lewis Gradon: Well, it's approved in the U.S. We are still following up all the Trace opportunities in the U.S. at present. Marcus Curley: And that's different to a Switch opportunity? Lewis Gradon: Yes. That's right. Marcus Driller: Thanks, Marcus. We don't have any more questions in the queue. So I will now turn over to Lewis for some concluding comments. Lewis Gradon: All right. Well, thanks, Marcus, and thanks to everybody for your questions today. And as always, I'd like to conclude by thanking all of the people at Fisher & Paykel for your contribution this half. And we'd like to acknowledge the support of our customers, suppliers, clinical partners and shareholders. So thank you, everybody, and enjoy the rest of your day. Thank you. Operator: This concludes our call today. Thank you for your participation. You may now disconnect.
Operator: Good afternoon, and welcome to the Petco Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Tina Romani, Head of Investor Relations and Treasury. Please go ahead. Tina Romani: Good afternoon, and thank you for joining Petco's Third Quarter 2025 Earnings Conference Call. In addition to the earnings release, there is a presentation available to download on our website at ir.petco.com. On the call with me today are Joel Anderson, Petco's Chief Executive Officer; and Sabrina Simmons, Petco's Chief Financial Officer. Before we begin, I'd like to remind everyone that on this call, we will make certain forward-looking statements, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties include those set out in our earnings materials and SEC filings. In addition, on today's call, we will refer to certain non-GAAP financial measures. Reconciliations of these measures can be found in our earnings release, presentation and SEC filings. With that, let me turn it over to Joel. Joel Anderson: Thanks, Tina, and good afternoon, everyone. Thank you for joining us to discuss our third quarter results, where I'm pleased to share that we delivered another profitable quarter in line with our plan. We've continued to strengthen the foundation of our operating model, improved retail fundamentals and position Petco for sustainable, profitable growth over the long term. We delivered sales in line with our outlook and meaningfully improved our profitability, increasing operating income over the last year by over $25 million, generating $99 million in adjusted EBITDA and more than $60 million in free cash flow. I want to thank our teams across the organization for their dedication, focus and execution on our transformation initiatives that are continuing to gain traction as reflected in our improvement in profitability and cash flow in Q3 and year-to-date. You've heard me talk about the importance of culture, and you will continue to hear that as a key theme of our transformation. When I joined Petco, we had a strong culture centered around pets first. The passion of our 30,000 partners was one of the many things that attracted me to joining. Over the last 9 months as a collective leadership team, we've been building on that culture in 2 ways. First, through reinstilling retail fundamental discipline, which is driving increased financial rigor and accountability, this is a testament to how the organization has embraced new ways of working with strengthened operating principles and was a large contributor to our results. Second, creating a culture that is playing to win. We are fostering a culture equally focused on operating discipline and a winning mindset. Last month, I had the opportunity to spend time with our support center and store leaders at our Leadership Summit. Together, we aligned on what our go-forward values will be for a reimagined Petco and what that means for our customers and our plans to execute on our [ One Petco Way ] vision. We are squarely in Phase 2 of our transformation which is centered on improving profitability and strengthening our foundation from which to grow. The success to date has fundamentally changed the way we think and work to continuously identify future areas of opportunity that will further unlock long-term value. At the same time, we are now strategically shifting resources towards Phase 3, a return to growth now that our bottom line has meaningfully been improved. Last quarter, I outlined the 4 pillars that support Petco's return to growth. First, delivering compelling product and merchandise differentiation; second, delivering a trusted store experience; third, winning with integrated services at scale; and finally, serving our customer with a seamless omni experience. Let me now provide you more specific color on each pillar. Starting with compelling product and merchandise differentiation. I view this in 2 categories. On the consumable side, we have improved shopability with higher in-stock availability, our customers rely on us to have everyday go-to product, better integrated assortment planning and merchandising teams have been created an improved in-store experience as well as online. On the discretionary side, we are focused on infusing a steady stream of newness in 2026 that complements our evergreen product assortment with more seasonal and trend-driven buys. Previously, there has been a said-it-and-forget-it mentality, which is not a very aspirational shopping experience and one that we are changing. As we look forward, we see significant opportunity to change our collective merchandise mindset from solely a needs-based business to also a wants-based business by overhauling our product offering and surprising our customers with unexpected ideas for their pets. A great example with the success of our online pilot, our new My Human product line was expanded into over 200 stores. This is a small milestone but exemplifies our team's focus and ability to lean into trend forward impulse purchases. Next, moving to a trusted store experience. Joe Venezia, our Chief Revenue Officer, who joined us just about a year ago, leads our operations and services team. Since joining, he has been focused on store simplification, standardizing processes across our fleet and taking costs out of our operations. He is now shifting his focus to additionally include revenue-driving KPIs like increasing transaction size, driving sales contests and increasing customer interactions. With our passionate partners, strong customer engagement and a full suite of services, we can create both a fun and convenient experience that pet parents are unable to get anywhere else. Our store partners are a unique differentiator for Petco. We benefit from having long time, passionate and knowledgeable partners that serve our pets and our pet parents. Our opportunity today is around making it easier to run our stores, freeing up our store associates to interact with customers and use what we call their superpowers of pet knowledge, improving these areas will make it easier for us to drive sales growth in 2026. Moving now to services at scale. Our nationwide wholly owned and operated services business continues to be our fastest-growing category and is our competitive moat, given its in-person nature, high barriers of entry and difficulty to replicate, a holistic ecosystem between grooming, owned hospitals, clinics and center of store can only be found at Petco. What especially excites me here is the opportunity we have with our existing assets. I think about it in 3 ways: one, improving utilization through increased staffing and appointment availability; two, improving engagement to enhance digital capabilities; and three, improving integration of services and center of store. With regards to veterinarian staffing, I'm pleased to share that we are ahead of our doctor hiring goals that we set at the start of the year with record high doctor retention. During the quarter, we also promoted 2 of our long-time leaders to chief veterinarians, reinforcing our commitment to growing our veterinary business. Simultaneously, we are fostering a culture of team development, top talent recruitment and execution of our strategic veterinary initiatives. All of this is foundational and is critical to increasing the utilization of our hospitals. Additionally, we are increasing access to care by strategically adding hours back on peak client demand and making appointments easier to book. We are standardizing processes across our fleet to secure in-store follow-up bookings. We are increasing efficiency for our refined grooming apprenticeship model, freeing up both appointment availability and increasing volume. And finally, we are enhancing online appointment scheduling to ensure we have better coverage and better flexibility for our customers. Clearly, Q3 has been a busy yet productive time for our services businesses. Let me spend a moment on improving integration between services, and center of store as the opportunity here may not be well understood. Historically, Petco stores and services operations were run relatively siloed which was a missed opportunity. There is a tremendous value unlock when better integrating our stores and services experience. I'll give you a simple example. Previously, our veterinarians did not have access to customer purchase data. We are in the process of fixing that. And in 2026, our veterinarians will be able to see purchase history and make more informed diet recommendations based on overall pet health and specific needs. Taking that a step further, the veterinarian will be able to direct the customer to the recommended product in store, or recommend a store associate to assist. This is a simple example but illustrates how increased integration of services in stores can create a better outcome for pets and improved experiences for our customers. Now moving on to our fourth and final pillar, seamless omni integration. Layered on to everything I just discussed are enhanced digital capabilities, a more compelling membership offering, and a frictionless digital to store experience to customers wherever they choose to engage. I'm happy to report we are on plan with our improvements -- and in fact, we are starting to implement some of these changes in Q4 of this year. For example, we are transitioning the way we buy media, beginning with better targeting and bidding strategies which we expect to drive efficiencies in our marketing spend as we continue to strengthen Petco's reintroduction of our tagline, Where the Pets Go. I'm pleased with the progress of the membership program, and we will begin live testing and pilot the program this quarter in a small handful of districts. Our focus on these 4 pillars will fuel our growth, which we still expect to see in 2026. In closing, as you can hear in my voice, this has been a productive quarter at Petco, and I'm pleased with the progress we continue to make on the commitments I outlined at the beginning of the year. As each quarter passes, we get better at celebrating amazing pet experiences, executing our strategies and delivering on our promises internally and externally. The initiatives planned for the fourth quarter will advance the Petco transformation, and I look forward to sharing updates with you in March. Ahead of the Thanksgiving holiday, I want to personally express my gratitude for our partners who puts pets first every day and boldly reflect who we are and what we stand for. Our Petco Love foundation has demonstrated our long-standing commitment to saving lives, finding loving homes for over 7 million pets to improve the welfare of animals. With that, I'll hand the call over to Sabrina to take you through the specifics of our third quarter results and outlook for the remainder of the year. Sabrina? Sabrina Simmons: Thank you, Joel. Good afternoon, everyone. In the third quarter, Petco once again delivered against our commitments while building a stronger foundation from which to grow. As we've discussed all year, strengthening the health of Petco's economic model has been our top priority. I'm pleased with our progress, as demonstrated in our expanding gross margin, expense leverage and operating margin expansion, not only in the quarter but year-to-date. In line with our outlook, which reflects our decision to move away from unprofitable sales. Net sales were down 3.1%, with comp sales down 2.2%. As a reminder, the difference between total sales and comp is driven by the 25 net store closures in 2024 and the additional 9 net store closures year-to-date. We ended the quarter with 1,389 stores in the U.S. Gross margin expanded approximately 75 basis points to 38.9%. Similar to the first half, gross margin expansion was primarily driven by a more disciplined approach to average unit retail and average unit cost, including stronger guardrails and more disciplined processes to effectively manage our pricing and promotional strategies. It's important to note that in this quarter, tariffs began to more meaningfully impact our cost of goods sold. Moving to SG&A. For the quarter, SG&A decreased $32 million below last year and leveraged 97 basis points. As we've discussed previously, our shift in mindset an increase in rigor around expense management is evident in our results. Savings were achieved across the board and especially in G&A areas. Notably, marketing spend was about flat year-over-year. Our expanded gross margin and expense leverage resulted in operating margin expansion of over 170 basis points. Adjusted EBITDA increased 21% or $17 million (sic) [ $17.3 million ] to $99 million (sic) [ $98.6 million ] and adjusted EBITDA margin expanded nearly 140 basis points to 6.7% of sales. Moving to the balance sheet and cash flow. Q3 ending inventory was down 10.5% while achieving higher in-stocks for our customers. We continue to manage inventory with discipline, which is one of the drivers of our improving cash profile. Free cash flow for the quarter was $61 million, and year-to-date was $71 million. Both the quarter and year-to-date were significantly above the prior year. Notably, year-to-date cash flow from operations has nearly doubled versus the prior year to $161 million. We ended the quarter with a cash balance of $237 million and total liquidity of $733 million including the availability on our undrawn revolver. And now turning to our outlook for the full year. We are once again raising our adjusted EBITDA outlook for 2025. We now expect adjusted EBITDA to be between $395 million and $397 million, an increase of roughly 18% year-over-year at the midpoint. For the full year, given we are entering the last quarter, we are narrowing our range for net sales and now expect net sales to be down between 2.5% and 2.8%. For the fourth quarter, we expect net sales to be down low single digits versus the prior year as we continue to execute on the initiatives we've outlined. We expect adjusted EBITDA to be between $93 million and $95 million. It's important to note that the impact of tariffs is sequentially more meaningful in Q4. Additionally, the significant progress we've made year-to-date against strengthening our economic model and improving our earnings profile has provided us the option to begin selectively investing behind the business where it may make sense as part of our ongoing efforts to set the stage for Phase 3, a return to profitable sales growth. With regard to other guidance items. For the full year, we expect depreciation to be about $200 million, net interest expense of approximately $125 million, about 20 net store closures and $125 million to $130 million of capital expenditures with a greater focus on ROIC. In closing, as Joel discussed, we're in a period of significant change, and I want to extend my deepest appreciation to all of our teams for embracing that change to deliver better outcomes for all of our stakeholders. With that, we welcome your questions. Operator: [Operator Instructions] The first question will come from Simeon Gutman with Morgan Stanley. Simeon Gutman: Let me -- I was intrigued by something you talked about some of the wants. Can you talk about -- can you frame what mix of the business is wants versus needs today and it may be far out there but what's the vision? And my guess is the wants aren't truly wants. I think it's -- given your background, there's probably some unique merchandising that's partially wants but curious how you can frame that and maybe tease it out a little. Joel Anderson: Thanks, Simeon. It's a great question. And yes, if you think about it in the traditional sense, consumables is traditionally a needs business. And it's the overwhelming majority of our business but even that business, Simeon, I think, has some elements to it that can be more of a want in principle. And what I mean by that, and I alluded to it in my prepared remarks, we've just had this said-it-and-forget-it mentality for our entire business. And if I just focus on consumables for a second, for example, in 2025, we our dog food business was largely all surrounded around 1 big episodic reset in the middle of the year. And we're really going to change that in '25, and as our big vendor partners come out with innovation, newness, different types of product, new flavors, cat extensions, we're going to roll that out in line with their timing, not our timing. So that's going to make more of a perception of wants rather than just needs in the sense that somebody walks in and -- is a sense of discovery and we just haven't been good at that in the past, Simeon. So I think the whole business has an opportunity to create more of a exploration throughout our store, not just our supplies business which is traditionally probably the way you were thinking there's an element to it in consumables as well. And certainly, when we get on the call in March, we'll go through that in more detail. I cut you off, Simeon. Simeon Gutman: No, I cut you off. My follow-up, it's related. You talked about integrating the store functions. You talked about wants versus need, and then there was a little bit of maybe forward investing, I think, Sabrina just mentioned. So if you -- and by the way, the business itself is getting close to lapping like whatever tough compares. It seems like it's naturally getting back to positive territory. So what kind of clicks or what's the priority among the things we heard where the top line starts to move or? Is it something we haven't heard yet? Joel Anderson: No, I don't think it's something you heard. I think, look, we're going to approach 2026 from the top line, the same way we approached 2025 from the bottom line. In 2024, we came out with the strategies that would fix the bottom line, and then we executed them in 2026 -- in 2025. We're doing the same thing for top line growth. I outlined 4 pillars. We backed it up with building blocks which I talked about many of them today. And then we're going to execute against those with the same rigor and discipline. And so it's not just to cross your fingers and hope. We've got plans around 4 pillars with a lot of building blocks for each 1 of them. And I'm really excited about all 4 of them. I alluded to some of them that we're already testing here in Q4 but all of them are making traction and some just take longer to implement than others but teams are all focused and we got a good plan. Operator: Next question will come from Oliver Wintermantel with Evercore ISI. Oliver Wintermantel: Joel, what is the realistic time line for comp stabilization? And which categories or customer behaviors would represent the biggest swing factors there? Joel Anderson: Yes. Look, I'm not going to get into 2026 today on this call and the timing of it. But certainly, what you should expect from me in March is to not only give you guidance for Q1 but we'll give you an outlook on the full year. But specifically, I can tell you all 4 of the pillars I went through today are getting traction. And -- so I would expect all 4 of them to contribute towards comp in 2026, and then we'll just outline the timing for you on the March call. Oliver Wintermantel: Got it. That makes sense. And then just on the free cash flow side, strong improvements there year-to-date and in the quarter. But how much of the Q3 working capital improvement is sustainable, and what financial or operational levels continue to support the cash generation for next year? Sabrina Simmons: Yes. I mean, I think we view cash flow and all of its levers as continuous improvement. So we certainly are focused on continuing on this path of generating strong free cash. The principal lever of core solver is net earnings. So we're going to continue to focus on our bottom line and growing net earnings. We'll continue to focus on inventory discipline. We're not done. We've made huge strides this year. in terms of rationalizing our SKUs and reducing our inventory compared to our sales which is fantastic. But I wouldn't say we're best-in-class in turns yet. We still have a lot of opportunity, so we'll be looking at that lever as well as all of our other levers to continue delivering on strong cash generation. Operator: Question will come from Michael Lasser with UBS. Michael Lasser: Can you size the magnitude of the potential investments that you would make in what form those are going to come in, whether it's labor, marketing or promotions? And are those investments necessary as you look to 2026 in order to drive top line growth. Sabrina Simmons: Well, maybe I'll just start, Michael, with the framework, and then Joel can chime in on how he feels -- he's looking at each one. What we've tried to do, and we're really pleased that we banked so much profit improvement through Q3. And this has afforded us, as I said, the option, and it's only an option to consider investing in areas that we think can drive improvements both in Q4, but also for our future. So everything you mentioned is on our plate of options certainly, marketing, certainly looking at labor. And sure, we'll always continue to look at promos to see if we can do them effectively in a way that brings value to our customer but also in a way that's very responsible as we continue to manage our margin expansion. Joel, do you want to... Joel Anderson: Yes. Yes, Sabrina, I think you nailed that pretty good. And when Michael, I look at the 4 pillars, we outlined. I don't think any of them as it relates to 2026 require any substantial step change from what we're doing today in terms of cash investment or a change in OpEx investment or something. It's really -- you take merchandise, like we're selling through our existing merchandise and we're buying into new. So that's really just a steady flow change and really don't see any episodic change in 2026 from an investment standpoint from the run rate we're already on today. Michael Lasser: I guess the question and the critical point is can Petco experience the same magnitude of the improvement in the profitability while reversing what seems like some market share losses this year and be on that path next year? Sabrina Simmons: Yes. If I'm hearing you, Michael, and I might want you to repeat the question, but we for sure, believe that investments are going to be necessary. Our whole focus and what I talked about all year long in terms of the economic model we're pursuing is delivering leverage on expenses. But as you know, if sales improve, you increase operating expenses and still deliver leverage. So we're very aware that we need to make some investments. That's why we're talking about in Q4, we may make some of those investments in advance of entering the new year because we've been able to bank so much profitability and leverage. And we will measure our success in meeting our goals and expanding margin and delivering expense leverage on a full year basis. That's another thing we always said, we never said every single quarter in the same way. It's on a full year basis. So that's why we've given ourselves the option because we know that the next phase will require investment and we are prepared to stand behind that in a responsible way that still delivers on our full year goal to deliver the model. Michael Lasser: Sabrina, could I just clarify? If we look at what the embedded EBITDA margin is in the fourth quarter versus what Petco has experienced over the last couple of quarters. It looks like the pace of improvement is going to moderate. Should we think about the magnitude of the potential investment, the option for investing would be the difference between what Petco has achieved over the last couple of quarters and what's implied in the fourth quarter? Is that how we should think about quantifying that potential investment? Sabrina Simmons: I think that's a fair framework, Michael. I would add to that, as we look to Q4, as I stated, remember, when we think about gross margin, there's more tariff impact. So that's just 1 factor. It's not enormous as we said all year. It's -- we're pleased that we're in a retail sector that doesn't have mountains of tariffs but it is an impact. So that's 1 factor. The second impact is that investment that we're talking about, and how much we will choose to do and how we'll manage through that in the fourth quarter. So yes, I think your statement, broadly speaking, is fair. Operator: Next question will come from Kendall Toscano with Bank of America Global Research. Kendall Toscano: Hopefully, you can hear me okay. I was just wondering if you could talk more about the impact of tariffs during the quarter. I know you mentioned they became more meaningful in 3Q but maybe not as much as you're expecting for the fourth quarter. But just curious what you saw in terms of COGS impact, if any, and then in maybe some categories where there was tariff impact on price? What did you see in terms of consumer elasticity? Sabrina Simmons: Yes. Thanks, Kendall. Just to go back to your statement. So the first time we saw a tariff impact flow through our P&L through cost of goods sold in any meaningful way is the third quarter because the second quarter has like, let's call it, de minimis, amounts of that. We had it on our balance sheet, we had an inventory buys but it wasn't flowing through COGS yet. The third quarter is the first quarter of that. And my only point was, in the fourth quarter, it becomes a bit more meaningful. So it's just a reminder that sequentially the tariff headwind is a bit more meaningful. But again, in the broad spectrum of things, it's a very manageable number which we've managed all year and have been revising guidance upward in the face of it. So I think that hopefully helps frame it up. We also know that it's mostly in the private label supplies area, as we've said in the past. So hopefully, that helps frame it up, too. Kendall Toscano: Got it. That's helpful. And then my other question was just in terms of some self-inflicted headwinds in the Services segment as you've deprioritized that program ahead of the planned relaunch. Just curious, as you're now getting closer to relaunching that in 2026, and it sounds like maybe starting to pilot it in the fourth quarter, what kind of tailwind would you expect to see on same-store sales growth or, I guess, just services growth? Sabrina Simmons: I think you mean our membership program? Kendall Toscano: Yes, that's what's I meant. Sabrina Simmons: Yes, that's what combined with services in the way we report services and others. So probably, Joel, if you want to start with the membership program and... Joel Anderson: Yes, because our paid membership rolls into there. But I think the more important thing to take away from that is -- and I alluded to it in my prepared remarks that we are on track with our new membership program. And in fact, here in the fourth quarter, we have begun live end-to-end testing in several markets. And so -- we really haven't seen any major glitches in fact, minor at best. And so that's a really good sign for us. We'll then take that to a few more markets and to roll out the new marketing attached to it and are still on track then for a rollout sometime in 2026 with the rest of the fleet. But membership so far has really come together nicely, and it's a really important element to our growth that's going to begin in 2026. Sabrina Simmons: Yes. And since you raised it, Kendall, on the services piece, I think you can see that, that continues to be not only a strategically important area for us but it's also an area of nice growth and continues to be. Operator: Next question will come from Kate McShane with Goldman Sachs. Katharine McShane: We wanted to ask a little bit more of a higher level question. Just your view on where you think the industry is now from a digestion standpoint where you think the industry can grow in 2026 if we do return to growth in '26 for the industry? And just what you may have been seeing out of the competitive set this most recent quarter as some of these higher tariff costs and prices have come through? Joel Anderson: Yes. Thanks, Kate. Look, overall, the competitive set really hasn't changed much from the last quarter. I would say, the -- what's changed is the consumer has been probably a little bit more cautious. I mean, obviously, with tariffs and political tensions and interest rates still high that's really been bogging down their outlook on the economy a little bit. But as far as the pet industry goes, it's been pretty stable, flattish in terms of growth I think the progress we've made on our digital side has really been promising and that will be very important to us as we turn to growth next year. But overall, we're positioned nicely. Our services business is -- Sabrina just talked about is already growing, and that is an area of growth in the pet industry, and then we'll layer in the focus we've made and the progress we've made on our digital improvements. But overall, it's pretty stable. Operator: Question will come from Chris Bottiglieri with BNP Paribas. Christopher Bottiglieri: The first 1 I had was just hoping to -- now the cash -- free cash flow profile has improved. How do you think about prioritizing the usage of cash? Is it continued debt paydown. Do you think about reaccelerate veterinary practices? Just curious how you think about that over the next few years. Sabrina Simmons: Yes. Our first priority would always be to invest in our business to sustain growth going forward. So that's definitely the priority. That said, we go back to our statement that we have a lot of assets on our books already that really are ramping up now, vet hospitals predominantly the #1 on the list that are already on our books that we are ramping up for better returns. So we don't have to make big capital investments in those, and we, in fact, you'll hear us talk about more in the Q4 call, Chris, we have a set of those that where we're going to focus on bringing utilization up in 2026 as well without any large capital investments. So I view this as really great news because it provides a nice path for return improvement while not having to invest a lot of capital in it. So of course, though, we'll be looking at pockets and areas as we move forward and we finalize what kind of remodel prototype we want to land on how we'll start to bring those into our system. But there's no huge big capital spend necessary in the horizon, likely to increase some in '26, but no big, enormous dramatic change overall in profile because we have these assets in our books where we're increasing utilization. Now beyond that, beyond that priority to first invest in our business, the second, of course, is we are always looking, as I stated, on the first call when I talk to you guys, we want to bring down our leverage on an absolute basis. We also want to bring down our ratio. We're doing a terrific job with the growth and profitability of bringing down the ratio. So it's quite remarkable. We started the year at over 4x debt to EBITDA. And if we hit the midpoint of our new guidance, we should be below 3.5x net debt to EBITDA. So quite a bit of progress. And indeed, we'll look to opportunities to even potentially do some opportunistic debt pay down. Christopher Bottiglieri: Got you. That's really helpful. And then your gross margins were, I think, down 20 basis points on the product line. Is that primarily that tariff headwind you're referring to? Or is it also somehow -- or is like -- is the elasticity offsetting the ticket increase and there's also a headwind on top. Just curious by like tariff headwinds that you're referring to there where it's manifesting? Sabrina Simmons: I have our merch margins expanded both in our products and services. Christopher Bottiglieri: Sorry, I meant quarter-on-quarter, not year-on-year. Sabrina Simmons: Oh, quarter-on-quarter, sure. Yes, I would say that is primarily a little bit of tariff headwind coming in. Year-on-year, though, we are up in both products and services. Operator: Next question will come from Steve Forbes with Guggenheim Securities. Steven Forbes: Joel, you spoke about services in stores coming together. And I guess my question is, can you help us frame up sort of how you guys see that opportunity internally, whether it be how spending per customer sort of evolves as they engage in services, if they're a store-only customer or vice versa? Like any way to sort of talk about how like the net sales per customer evolves as they broaden their engagement across the store? Joel Anderson: Yes. Look, look, I think any great bricks-and-mortar retailer has to define their moat, has to define what differentiates them from anybody else. And services is definitely 1 of our moats, right? It's 1 of our key elements that is really hard for any other pet retailer to replicate in the way we built out grooming, hospitals, vet clinics, dog walking, dog training, all those elements. And so that's obviously an area there for we've leaned in the most, and we've made incredible progress with our existing assets, utilization we've improved, engagement improved. And then what you're getting at is the integration with the center of store with product. And so -- what's key to all that, Steve, as I look to '26 is layering that in with a membership program that really helps us better understand the profile of each 1 of our customers, how many are you using services? How many use services and merchandise, how many are buying in-store and online. And you put all those elements together, it starts to create profiles of different customers. And we really see -- honestly, the better we get at services, the halo effect that has on the overall business just gets stronger because it's something that's hard for anyone else to replicate. So service is probably the area that we made the most amount of progress, pleased with the results we're seeing there. And you'll continue to see us talk about that and -- but that gives you a little color on how I see it playing out turning into 2026. Steven Forbes: And then maybe if I just do a quick follow-up on that. Is there any way to set the baseline here on just sort of what percentage of your customers today actually buy services or any sort of baseline KPI that we can sort of begin to track as we think about your progression in the business? Joel Anderson: Yes. Look, I think at this point in time, I'm not going to get into the specifics on it at that level of detail. I mean, I think the baseline KPI to track as we look into the future, it will be transactions overall and then let us manage it at the different elements we have to serve up to the customer. But services will definitely be a key component to it, Steve, as we keep growing. Operator: Last question will come from Zack Fadem with Wells Fargo. Zachary Fadem: Is there a way to quantify the impact of moving away from less profitable sales and deemphasizing the member program in Q3. As it seems like you expect your Q4 comp to step down a bit more. I'm curious to what extent you're expecting those items to also impact Q4? Sabrina Simmons: Yes. I mean I'll just start by -- it's a pretty broad range, Zack, the implied Q4, so we can land anywhere in that range. Clearly, what we've stated all year very consistently is our primary focus this year was around expanding our margins, walking those unprofitable sales and building this very strong foundation upon which to start sales growth in 2026. But Joel, I'll let you take it from there, if you want to... Joel Anderson: Yes. I think -- Sabrina, I think you nailed it. And I think I'd add to that, like you asked what's the impact? Well, the impact you're seeing quite clearly is we're growing pet EBITDA market share. And so while sales are down, EBITDA is up. So clearly, we -- I think we've done a really nice job of identifying which sales are really onetime transactions and our empty calorie as I call them, versus which customers we want to grow lifetime value and be with us for the long term. And so you've seen that play out quarter after quarter for us as sales have been down consistently low single digits but bottom lines continue to improve. So as each quarter goes by, we get better at identifying those, largely, getting them out of our base. And you layer in a membership program, more strategic media buying aspect and all that will start to lead towards improvement in the top line with the bottom line as well. Zachary Fadem: Thanks, Joel. And then just to level set as we look ahead to 2026, I mean the expectation is to return to sales growth. I'm curious how generally you would frame broader category performance in dog and cat food, supplies, services, et cetera, and then how you would layer in the impact of both your initiatives? And then net store opening and closings to kind of get to that total sales growth? Joel Anderson: Yes. Look, I think it's too early now to spell that out specifically for 2026. I mean, clearly, if you look at what we published, you can see the consumables and supplies are negative this year and we're getting growth in services. We expect a return to growth in consumables and supplies going forward. And what I've got to just outline for you or translate for you is what I laid out today in terms of 4 pillars, how does that translate into growth at what time and what period next year. But a lot -- what you guys can't see is all the progress we're making here internally. And then we just got to put the pieces together for you so you can help you think about your model. But we haven't -- I think I answered on a few questions before. We're approaching '26 the same way we approached '25, outline the strategies and then execute. And the team is just getting better at that as every passing quarter goes by. Sabrina Simmons: Yes. And Zack, just to emphasize what Joel is saying, for sure, I think your thinking is in line with ours, where you always look at what's your base sales build, then we layer on all the many initiatives, which Joel has been outlining and we'll continue to get more granular as we go into '26 but we have all of those building blocks on top of that base, and they layer on throughout the year. So what you can count on is it's a gradual ramp. And then the last thing I'll say as a little bit of a preview is we would expect fewer net closures in 2026 than we had in 2025. And again, the 2025 expectation is about 20 net store closures. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Tina Romani for any closing remarks. Tina Romani: Perfect. Thanks so much, Joel and Sabrina, and thanks, everyone, for your time. That concludes our call, and we hope everyone has a wonderful holiday. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome to Fisher & Paykel Healthcare's Results Conference Call. My name is Lisa, and I'll be your operator for today's call. [Operator Instructions] Please note, this conference call is being recorded. I'd now like to turn the call over to Marcus Driller, VP Corporate. Marcus Driller: Thank you, Lisa. Well, good morning, everyone, and welcome to the conference call for Fisher & Paykel Healthcare's First Half Results for the 2026 financial year. On the call today are Lewis Gradon, Managing Director and Chief Executive Officer; Lyndal York, Chief Financial Officer; Andy Niccol, Chief Operating Officer; Justin Callahan, VP, Sales and Marketing; and Andrew Somervell, VP of Products and Technology. Lewis and Lyndal will first provide an overview of the results, and then we'll move on to questions. We'll be discussing our results for the 6 months ended 30 September 2025. Earlier today, we provided our 2026 interim report, including financial statements and commentary on our results to the NZX and ASX. These disclosures can be accessed on our website. With that, I'd now like to turn the call over to Lewis. Lewis Gradon: Okay. And thank you, Marcus. Good morning, everyone, and thanks for joining us here this morning. I'm going to be referring to the investor presentation pack that we released to the NZX and the ASX earlier today. So we'll start on Page 2 with a recap of some of the recent highlights. I'm pleased to note that the company has achieved $1 billion in first half revenue for the first time, and we really appreciate the contributions of our people right around the world during this half. Thank you, everyone. We continue to roll out our latest Nova Nasal OSA mask during the period, and this is now available in New Zealand, Australia and major markets in Europe. At our investor event in Royal Melbourne Hospital in Australia this year, we showcased the complexity involved in how clinical practice changes. And one way we contribute to that journey is hosting clinical forums and that's where interested health care professionals can get together, compare their clinical practice, compare their results with clinical data and the clinical practice guidelines. And over the last half, we hosted over 100 of these forums globally. Our U.S. team was honored to be recognized with the Zenith Award from the American Association for Respiratory Care and we got the construction of our fifth building at our East Tamaki campus here in Auckland, New Zealand underway, and they're making good progress as we speak. So turn now to Page 3. Operating revenue for the first half was $1.089 billion, up 14% on the prior period or that's 12% at constant currency terms. Net profit after tax was $213 million, and that's up 39% on the prior period or 28% in constant currency. Lyndal's going to unpack the financial results in more detail shortly. So we'll move on to the Hospital product group on Page 5. Operating revenue was $692 million. That's up 17% on the first half last year or 15% in constant currency, and that's come from a broad-based strength right across the hospital consumables business. New applications consumables revenue was up 18% or 16% in constant currency. And when we consider the robust growth that we're lapping from the first half last year, we think this result probably does reflect a consistent ongoing change in clinical practice. Hospital hardware revenue grew 21% in constant currency. And as you all know, hardware revenue can be quite variable on a month-to-month basis. And so we do anticipate that the full year hardware results will probably moderate down from this first half year result. So turn now to Page 7 for Home Care. Home Care operating revenue was $396 million, up 10% on our first half last year or 8% in constant currency. I would say, mask growth was 8% or 6% in constant currency. Our latest range of OSA mask has performed well and the Solo range and the Nova Micro range are available in most major markets. And as I mentioned earlier, Nova Nasal is in the early stages of its rollout, with a U.S. launch planned for later in our second half. Our home care result also has a strong contribution from OSA hardware growth, which we're not expecting to repeat in the second half. And if anything, we feel it might be a pull forward of demand from the second half. I'll pause there for now and hand over to Lyndal. Lyndal York: Thanks, Lewis, and good morning, everyone. On Page 8, our gross margin was 63% for the half. This is an increase of 110 basis points or 60 basis points in constant currency over the same period last year. The range of margin improvement efforts across our business, including manufacturing efficiency and other efficiency gains continued making a positive impact. U.S. tariffs on hospital products sourced from New Zealand impacted our gross margin by 32 basis points in this half. If the current global tariffs remain in effect as they currently are, our gross margin would be impacted by approximately 130 basis points on an annualized basis with approximately 75 basis points impacting in the 2026 full financial year. Our ongoing investment -- our ongoing improvement efforts are anticipated to more than offset this to provide an overall gross margin improvement for the full year FY '26 of roughly 50 basis points in both constant currency and reported currency using end of October exchange rates. Moving on to Page 9. Total operating expenses grew 8% or 6% in constant currency compared to the prior period. This reflects the higher investments made over the last few years and modest increase in people in the last financial year. Operating margin was 26.3% for the half, an increase of 335 basis points or 286 basis points in constant currency over the same period last year. This reflects the improvement in gross margin as well as our operating expenses growing below revenue growth. R&D expenses grew 4% to $114 million and were 10% of revenue for the half. We continue to estimate that about 60% of our R&D spend is eligible for the 15% R&D tax credit. SG&A expenses were $285.5 million this half, an increase of 10% or 7% in constant currency. Moving to Page 10. Operating cash flow this half was $245.8 million, up 5% from last year. Tax payments this half of $119.6 million were up from $53.8 million in the same period last year. Capital expenditure, which includes purchases of intangible assets, was $61.8 million for the half, up from $55.1 million in the same period last year. This includes the progress on the construction of the fifth building at our East Tamaki campus in New Zealand. Capital expenditure for the full 2026 financial year is expected to be approximately $210 million. Within this is around $125 million on land and buildings, including the next payment on our Karaka land purchase. Looking at the balance sheet, debtor were largely in line with last year at 43 days. Net cash at the 30th of September 2025 was $237.8 million, and our gearing ratio was minus 13.5%. Interest-bearing borrowings were $55 million, all of it being current. Turning to Page 11. We have declared a fully imputed interim dividend of $0.19 per share. This represents a 52% payout of our first half profit and is an increase on the interim dividend declared last year. It will be paid on the 16th of December. Looking now at foreign currency on Page 12. Foreign currency movements positively impacted our net profit after tax by $19 million compared to the same period last year. This largely reflects the movement in spot rates and hedging results when compared to the same period last year. In this half, hedging losses were $6.2 million after tax and foreign exchange losses on balance sheet translations were $1 million after tax. At end of October rates, we would have an overall positive impact on net profit after tax of approximately $10 million to $15 million for the full financial year FY '26 when compared to the full financial year FY '25. This includes hedging losses in FY '26 of $20 million after tax and losses on balance sheet translation of about $0.5 million after tax for the full 2026 financial year. Now back over to you, Lewis. Lewis Gradon: Okay. Thanks, Lyndal. So turning now to our outlook on Page 13. At 31 October exchange rates, we now expect full year operating revenue to be in the range of approximately $2.17 billion to $2.27 billion. And net profit after tax to be in the range of approximately $410 million to $460 million. And this revenue guidance revision is driven by currency movements since our last update in August. Our Hospital consumables second half growth can be influenced by year-on-year variations in the Northern Hemisphere winter respiratory season, and we don't have any additional insights into the potential impact at present. The available data does indicate that last winter was a historically strong season and so a similar season this year would be pushing our results towards the top end of our guidance. And conversely, a lower season would be tending to push us towards the lower end of guidance. Net profit after tax guidance incorporates this FX-driven revenue update, a 75 basis point impact to gross margin due to tariffs, good progress on gross margin improvements achieved during the first half and maintaining our operating expense growth below our long-term aspirational revenue growth. So I'll end my remarks here, so that we can open the line to questions. Marcus Driller: Thanks, Lewis. Lisa, if I could ask you to please open up the lines for questions. And can I please ask everybody to limit your questions to 2. This is to ensure that everybody has an opportunity to participate and then you can rejoin the queue for additional questions. Operator: [Operator Instructions] Marcus Driller: Okay. So the first question comes from the line of Lyanne Harrison at BofA. Please go ahead, Lyanne. Lyanne Harrison: Congratulations on hitting that $1 billion revenue for the first half. I might start with guidance and a question for Lyndal. I know you mentioned that FX is driving that increase or upgrade in guidance that you provided today. But for the NPAT level, you mentioned FX tailwinds of about $10 million to $15 million. But from a guidance perspective, your range increased by about $20 million. Can you talk to what else might be in that? Lyndal York: Yes, Lyanne, that's sort of what Lewis mentioned in terms of the gross margin improvement activities continuing on through the second half and growing our operating expenses below that long-term revenue aspiration to aim for some continued modest growth there. Lyanne Harrison: Okay. And then on the gross margin, can you talk a little bit more, obviously, got very good gross margin expansion this half one on a constant currency basis. Can you talk about what aspects contributed most to that gross margin expansion? Lyndal York: Yes. Look, it's really everything that we do in the business. We've been back to sort of business as usual across our business with everything playing a role there. It's our manufacturing teams, getting the manufacturing efficiencies, doing all their continuous improvement projects, getting really strong improvement out of that, a bit of pricing through the sales team that we typically get and just sort of all of that playing a role into the gross margin improvement. And so as we anticipate, pre-COVID, we're able to improve gross margin about sort of 100 to 150 basis points on average per year, and we saw delivering that. Lewis Gradon: Maybe one other little bit of color, Lyanne, the complexity in that answer is in the operations and manufacturing space. Typically, that's over 3,000 improvement projects per year, all individually relatively small, but all adding up. Marcus Driller: Thanks, Lyanne. Next question comes from Dan Hurren, MST. Dan Hurren: Look, thanks for the guidance on the tariff impact and that color there. But I was hoping you could help us understand like how that tariff experience is playing out in the ground with price efficiencies? Lewis Gradon: Sure, Dan. We're thinking of is just another cost-in just like all other cost-ins and it's in the bag of just business as usual cost-ins. We're running the business as we normally would. We're running our continuous improvement projects as we normally would. So today that's really no material impact on the ground at all. Dan Hurren: And look, a follow-up then. If we -- if you have a look around, it appears that Fisher & Paykel will probably be more gentle on price compared to other tariff impacted companies and broadly the same channel. Is there a potential that the price becomes a more of a lever over time as sort of the -- as the world gets used to these tariffs. Lewis Gradon: Could look at that 2 ways down. I mean we've got wonderful opportunities with every single customer we have to improve clinical practice. We don't have a single hospital anywhere in the world let alone in the United States, that's fully penetrated using all of our therapies for every patient that could. So we think we get a much better result spending our time talking about improving clinical practice, improving current outcomes. We think that gives us a better result in the short term and the long term, gives the customers a better result. So that's where our focus is at present. Marcus Driller: Thanks, Dan. Next question come from Stephen Ridgewell at Craigs Investment Partners. Stephen Ridgewell: Just had a couple of questions on the hospital business performance, particularly during the first half and perhaps what you're seeing going to the second half. Hospital devices were a standout with constant currency growth of 21% in the period. Unless you may recall back in May, I think the indication was you weren't expecting too much from Airvo 3 or Airvo 3 NIV in terms of being a material driver. I'm just wondering, was that 21% growth we've seen, does that include a strong contribution from those products or otherwise, could you just give us a little bit color as to perhaps what's driven that strong result from Hospital Devices in the first half, please? Lewis Gradon: Yes, sure. First caveat, Stephen, is if you've been following us for more than a year or 2, you've seen that, that hospital hardware result is very lumpy, can be lumpy year-on-year, certainly lumpy half-on-half and kind of where we're going with that first half result, but I mean it's a great result, 21%. It looks like a very positive lump. We would not be surprised if it's followed by a negative lump for our second half and kind of reverting to more traditional growth for the full year, that would be our pick. And then the contribution very consistently in our business pretty much forever is a mix shift from one generation of product to the previous one. And right now, you're seeing that from 850 hardware to 950 hardware, and you're seeing that from Airvo 2 to Airvo 3. So that's certainly a contributor. Probably not much more than normal would be my pick, it's always happening. Stephen Ridgewell: And so just a follow-up to that. Have you seen within that 21% more of tilt towards growth from the Airvo product suite or pretty consistent with the humidifier controllers? Lewis Gradon: I don't think consistent out of that choice. I mean there are different stages, there are different evolutions, but nothing unusual there. Stephen Ridgewell: Okay, good. And then the second question is still on the hospital business. Again, so probably another surprise versus where the market was at was on kind of core consumables, which have come in again, a bit stronger, which given -- I know it's not purely with the respiratory data has a big influence, but we sort of see 19% constant currency growth in core. Just curious, is it sort of more market share gains have you entered some new markets or won some contracts. Just a bit of color there would be helpful to understand. Is that growth sustainable into the second half in the core consumables business? Lewis Gradon: Yes. So what we think is going on there, is during COVID an awful lot of these fully functional ventilators went out that could do invasive, noninvasive and nasal high flow. So we think, over time, people are using those ventilators across the range and they're using them for noninvasive and nasal high flow in some markets. And that does mean that for us, it looks like they're using an invasive circuit. So we think some of the noninvasive should we say growth and maybe even a little bit of the Optiflow nasal high flow growth in circuits a little bit sleeked into what looks to us and looks to you like that traditional consumables or invasive consumers. Marcus Driller: Thanks, Stephen. Next question come from Davin Thillainathan at Goldman Sachs. Davinthra Thillainathan: I just want to understand the guidance upgrade for the full year a little bit better. Just trying to make sure we understand the moving parts here. Part of it is clearly FX that is helping. But if I look at your first half results, you have come ahead of your guidance for the half, clearly indicating there's underlying momentum in the business? Because my understanding is your FX for the half hasn't really changed relative to when you set that guidance. So could you help us understand where the business outperformed in the half and perhaps why you don't expect that outperformance to flow through for the full year, if my understanding is right that your guidance upgrade is largely FX driven. Lewis Gradon: Absolutely right and good question. Thank you. So there's 2 components there. First one is hospital hardware, which we kind of just spoke to. It's quite lumpy. That performed pretty well in last couple of months. And I think probably doesn't flow into H2 like that. In fact, maybe even goes the other way. And then the other one is also hardware but OSA hardware. And this is CPAP machines where we've had a customer in a market where 3G is being turned off, accelerate the CPAP replacement cycle. So that's in our home care result. And once again, that hardware has probably come out of the second half. Davinthra Thillainathan: Okay. And then thinking about the consumables part of your business in the Hospital segment. There's a whole range of new products that have, I guess, been released progressively over the last few years. And one particular sort of therapy that seems to be getting a bit more attention from a product launch perspective is in the NIV part of your franchise. Could you perhaps help us understand that a little bit better how does NIV sort of help the business, particularly given you are focused on changing clinical practice with the high flow part of it. So perhaps just the overlap between those therapies and how you expect that part of the franchise to grow over the next few periods? Lewis Gradon: Sure. Well, I think, overall, we are building our respiratory care business that covers all respiratory care applications and usages in a hospital, whatever the requirement and wherever the patient is. So NIV plays a role in that. And the leading clinical change in that space is nasal high flow for respiratory support. But another component of that is more and more usage of NIV and another component of that is humidified NIV, probably still less than 20% of the market would be humidifying NIV. So the way we tend to think of it is our driver is a change in clinical practice towards nasal high flow. And once a customer is using that therapy to some extent, it makes a lot more sense for them to move to humidification and noninvasive therapy as well or to move to our noninvasive therapy offering. So we said it's kind of following along behind the change in clinical practice. Marcus Driller: Thanks for your questions, Davin. Next questions come from the line of Vanessa Thomson at Jefferies. Vanessa Thomson: I just wanted to ask about the respiratory season. You mentioned that last year, it looks like it was a strong season. I think when we look at all respiratory illness combined my understanding was it looked moderate. Is that wrong? Or is it that flu requires more support -- inducing more of your products than the other viruses? Lewis Gradon: So I'd kind of like to restate that, if you don't mind. So our assessment of last year, second half was that was the biggest flu season data in 15 years. So we think that was a biggie. You've got a COVID component and other components in there. So over time, you'd expect COVID to probably be coming down. And then we've kind of moved away from classifying them as high, moderate and low and all that kind of thing. It's just too murky. And what we've done last year, what we're trying to do this year is really just confine our analysis to this year versus last year and not categorize them. We've just found it too confusing. And so when we go down that route, well, last year, H2, our biggest flu season in 15 years, COVID was still relatively material. Vanessa Thomson: Okay. Thank you. Okay, and my second question, I just wanted to ask if you had seen any impact from the shutdown. I think it was around 6 weeks, and we've seen some of the distributor companies talk to some slowdown. I wanted to get that affected you at all? Lewis Gradon: Shutdown. I would say I'm looking around the room, not from hospitals, not from FDA, not from reimbursement. We're shaking our heads on that one. Marcus Driller: Thanks, Vanessa. Next questions come from Matt Montgomerie at Forsyth Barr. Matt Montgomerie: Well done on a solid result. Just on Home Care for the second half. I was wondering if you could give us a feel for where you see growth rates. Would that be roughly consistent with the first half? Lewis Gradon: Well, I think probably the case for us is you'd expect a similar result to the first half under similar conditions, certainly for masks. And I've spoken to the hardware component of that. We think our first half growth is probably coming out of the second half. Matt Montgomerie: And then secondly, on the anesthesia business, are you able to give us color for where that's in terms of growth or as a share of new apps in the first half? Lewis Gradon: Well, growth is still pretty solid, still got a 40% odd, something like that off that low base, that low base has become a bit over 10% of new apps consumables this half. Marcus Driller: Thanks, Matt. Next questions come from Craig Wong-Pan at RBC. Craig Wong-Pan: Just looking at the full year guidance ranges. If I look at what that implies for the second half growth, I calculate the midpoint would imply 6% revenue growth, but actually NPAT declining by 1% in the second half. Just wanted to understand, is there anything we should be aware of in thinking about NPAT either in the PCP or in this coming second half to explain why there might be a decline in NPAT? Lyndal York: I'll take that. It's really a case of the revenue that Lewis has spoken about, the hardware likely coming back from the second half into the first half. Margin, we're still expecting improvements, but we get the full half of impact of tariffs in the second half. So there's quite a headwind related to that. And then OpEx still managing to grow that below our long-term revenue aspiration. And so what that ends up being will depend on where we land from a revenue perspective. Craig Wong-Pan: Okay. That's helpful. And then just wanted to understand the clinical forums. I mean, Lewis, you called out 100 hosted events this kind of period. Just trying to understand, is that sort of a similar level to usual? Or is this going to be something kind of going forward to help you change clinical practice? Lewis Gradon: So our business is based on a change in clinical practice. That's what we do for living. It's pretty much what we've always done, and it's relatively unique in our space. It's a relatively unique thing to be doing. And we had an Investor Day in a hospital in Melbourne earlier this year, and we went through some of the complexities and changing clinical practice. So what I thought I'd do this time is just following up on that theme, giving people more of an understanding of what changing in clinical practice, what that really means. I'd follow up with giving you some insight into the forums that we run. Now having said all that, that is actually pretty normal to us. We generally do over 100, I'd say, every half. Just trying to give some insight to that whole process. Marcus Driller: Thanks, Craig. Next question has come from Saul Hadassin at Barrenjoey. Saul Hadassin: First one is on OpEx. I think at the full year '25 results, the guidance was for around 10% growth in operating costs in FY '26. Clearly, it's a lot lower in the first half. Maybe Lyndal, just if you can talk about where you think OpEx growth will land for the full year and what's embedded in that NPAT guidance range? Lyndal York: Yes. Look, probably sort of high single-digit growth we'd be anticipating for the full year in OpEx. Saul Hadassin: Okay. And Lewis, just your comments about sort of pull forward of sales on Home Care flow generators, but also that commentary around Hospital Hardware. You've had 2 months almost of the second half. Can you comment on what you're actually seeing on the ground in terms of those hardware sales? Is that what is giving you the guide as it relates to second half? Is it what you're already seeing? Or is that just still effectively an estimate and you don't actually have insights yet into second half performance? Lewis Gradon: It's just an estimate. I mean when we look at our hospital hardware numbers on a 6-monthly basis, you can see they're pretty lumpy. There's nothing to read into it. On a month or 2, I wouldn't read much into it. But I guess our pack is we probably wouldn't expect to see that first half again in the second half that kind of volume. Marcus Driller: Thanks, Saul. Next question comes from Marcus Curley at UBS. Marcus Curley: Just on the Home Care business, you reported 6% in masks. It's probably a touch below market. Could you just talk a little bit about what you think is happening there? Maybe it reflects weakness in the full face category again? Or just some color would be useful. Lewis Gradon: Okay. Sure. I think the fundamental is lapping 14% growth this half last year. So this half last year, we had the Solo Nasal, Solo pillows were launched that drove 14%. In the second half, we had Nova Micro launch. In the second half, we also had 3 or 4 launches from competitors in that half. And that still drive 9%. So I think this H1 story is more about what we're lapping, and it's about no new introductions for us materially during the half. Marcus Curley: Have you seen any impact on those growth rates in the installed base or resupply part of your business? Or is it too difficult to tell in terms of your visibility into that? Lewis Gradon: So as far as we can tell, I'd say no. We haven't seen any unusual impact in resupply at all. Marcus Curley: And then just on Home Care, competitive bidding most likely kicking off next year. Do you have a view on how that would affect the industry and yourselves? Lewis Gradon: Justin, what? Justin Callahan: Marcus, it's Justin here. I think, I mean, at this stage, the final rules and requirements around competitive bidding haven't been really disclosed. And we expect the market to sort of react in a reasonable way. So we're not reading too much into it at this stage. It's still pretty early. Marcus Curley: So Justin, your base view would be reimbursement levels in the U.S. relatively stable. You wouldn't be expecting a material decline? Justin Callahan: I think we'd be expecting whatever the adjustment is it would be sort of a lot more reasonable. There's a lot more sort of experience in that space now from our customers. So I think it's -- we're not expecting anything too major. Marcus Driller: Thanks, Marcus. Next questions come from Andrew Paine at CLSA. Andrew Paine: Congrats on the results. Just looking at your full year guidance of $460 million at the top end of the range for NPAT. And just kind of working down, looking at that at the top end of the range, you've done $213 million in the first half. So you need $247 million in the second half to hit the top end of the range. If we back out FX there, bringing that down to $237 million constant currency, that would imply just 6% growth year-over-year in NPAT. Obviously, you've got the tariff impact in there, which if I'm right, that's about 120 basis points annualized. So that adds another 4% but OpEx is also performing better than expected. So just trying to get a bit of color around that growth rate at the top end of the range. It looks somewhat achievable even with maybe a slightly worse flu season year-over-year. Lyndal York: Maybe one thing, Andrew, that I'll just clarify that currency is actually a headwind in our second half compared to the second half of last year. So these numbers instead of being a tailwind of the 10 that you were talking about, it's actually a headwind of close to that. So because if you remember, the first half, we've got a $19 million benefit of NPAT. And we said for the full year, probably $10 million to $15 million. So that means the second half itself has got quite a tailwind -- sorry, headwind. So -- and then it's pretty much revenue dropping down, the tariff coming in, but still getting some good improvements, excluding that tariff for gross margin and OpEx in that sort of high single digit growth. Andrew Paine: Yes. Okay. So even with the FX kind of moving favorably. I assume that's just impacted by the hedging that you have in place? Lyndal York: Yes. Look, it's a range of things. They're the biggest mover in the currency half compared to the second half last year is actually the balance sheet translations where we had a gain of about $7 million last year in the balance sheet translations. So not expecting much this year. So there's a large part of that headwind. Andrew Paine: Okay. Sure. Okay, that makes sense. And then just obviously, it's difficult to really kind of talk to this, but there's the ongoing tariff investigation. I don't know if you can provide any clarity around if a similar tariff was applied in Mexico, what that would mean in terms of margin impact to the business? Lewis Gradon: We haven't really gone there. I mean, I think -- our thinking about tariffs is somewhat colored may be compared to most but anything we think about to do with tariffs or to manage tariffs or to change things because of tariffs, that's time and effort that we're not putting into growth. So that's always as a front line for us, actually, in tariffs are the topic. Marcus Driller: Thanks, Andrew. Next questions come from Adrian Allbon at Jarden. Adrian Allbon: Maybe just a clarification question. Maybe this is for you, Lyndal. Just on your interim report, and as you get to the bottom of the comments from Neville and Lewis, there is like a discretionary bonus of $9 million to be shared amongst the employees. Just to understand that, is that a normal feature? Or is it -- and you just called it out this time? Or -- and how is it sort of accounted for? Lyndal York: Yes. So we've been doing this. This is a profit share payment that we make to all employees globally, and we've been doing it since we were formed basically... Lewis Gradon: Since before listing. Lyndal York: Since before listing. And we do normally show that amount in our annual report every year and in our interim report. So nothing's changed, nothing out of the ordinary. Adrian Allbon: Okay. And would that have been accrued until the first half anyway, just as per normal? Lyndal York: Correct, yes. Adrian Allbon: Or is it a full year payment? Lyndal York: No, no, no. It's half on that premium. Adrian Allbon: Okay. All right. No problem. Sorry about that. Just the second question, like also in that sort of interim report, like you make a call out on the RENOVATE study, which I guess in the theme of this one, like you sort of -- you are putting a bit more emphasis on the change in clinical practice. Like is my sort of read of that, that's sort of like quite -- it's a large sort of clinical trial that's sort of you're presenting some useful results in terms of for hypoxic cases using high flow as a triaging type product. Is that the right way to think about the output from that study and how you might be using it to sort of educate? Lewis Gradon: Well, I think the thing about that study is the number, I think it's towards 2,000 patients. So it's a large number of patients and covers COVID and not COVID as well. And it's a comparison against noninvasive ventilation if memory serves me correctly, which is kind of a step up. And if finds nasal high flow, the word they use is not non-inferior, non-inferior. So as we're saying -- yes, yes, you've got a therapy that the user would rather use. You've got a therapy that a patient would rather have, and it's not inferior to NIV. That would be the short version. Adrian Allbon: Right. And obviously -- but presumably, that also dovetails nicely into like the Airvo 3 being wider use across the hospital as well and simpler to use for -- as you go down the staff levels. Lewis Gradon: Yes. I mean I want to be careful. We've called out one. It had a lot of press at the time it was released. It's unusual. It's big numbers elegantly done an analyzed study, but it's one of hundreds and probably more compelling is into clinical practice guidelines around the world. And that's really stepped up the issuing of clinical guidelines from the different professional bodies. Marcus Driller: Thanks, Adrian. Next questions come from David Bailey at Morgan Stanley. David Bailey: One for Lyndal and one for Lewis. Lyndal, 50 bps in gross margin this year, including 75 bps from tariffs. So if you strip out tariffs, you're doing 125. You sort of said on a full year run rate, full year tariff impact is 130. So as I look at fiscal '27, should we be thinking that all else equal, there's an incremental 65 basis point tariff impact to come through and then the underlying will give you sort of 60. So just trying to understand the incremental change from the tariff impacts in '27, just given that we know that the underlying should be around 125 basis points or so. Lyndal York: Yes, David. Look, you're spot on that. There's another top up of that headwind of tariffs coming into FY '27. So you're right, sort of 65 bps. And look, anywhere from sort of 100 to 150 basis points on average a year, we try to do is underlying improvement. David Bailey: Okay. That's helpful. And just for Lewis, I mean there's some commentary here around clinical adoption. There's clinical evidence that comes through to the sales and marketing effort as well. Just wondering if you can sort of talk to a little bit about how those two have progressed? And then in terms of utilization of hardware and asset turns on, how is that sort of driving more consumables used per device, if you can? Lewis Gradon: Yes. So that's sort of a double bang. I'll answer the second one first because our therapies are used across such a diverse range of hospital situations from EDs to recovery rooms to general wards to ICUs, we don't really have a utilization versus consumable terms per device, model or predictor because there's so much variation in there. We can't do it. So we've kind of abandoned that measure. And then in terms of clinical evidence, sales and marketing effort, the big mover there is clinical practice guidelines. Once we have clinical practice guidelines from a reputed clinical body, our approach is generally to use the clinical practice guideline. And I think I'm looking at Justin, I don't think we've got any hospital anywhere on the planet perfectly implementing clinical practice guidelines on every patient they could. Justin Callahan: Not yet. Lewis Gradon: Any comment? Justin Callahan: Correct. Lewis Gradon: So at this stage of the nasal high flow evolution anyway, it's about the clinical practice guidelines, and that's what we utilize in our sales, if it's more than anything else. David Bailey: Yes. Understood. Okay. Maybe just a different way to ask it then is, do you think the devices are being used more broadly across the hospitals? Justin Callahan: Yes, we do. Yes, absolutely. Marcus Driller: Thanks, David. Next questions come from Christine Trinh at Macquarie Bank. Christine Trinh: Congratulations again on a strong result. Just 2 quick questions from me on the consumables space. Firstly, New Apps growth of 16%, constant currency was ahead of our expectations. Can we expect a similar level of growth going forward? And on the U.S. launch of the Nova in the second half, can we just get your expectations for contributions to growth there? We think in kind of double digits that we saw in the first half of '25. Lewis Gradon: U.S. Nova, let me talk to that first, probably late in H2. So I wouldn't be making any material contribution at this stage probably later in our second half. And then New Apps at 16%. So when we think about second half, we're moving into the seasonal hospitalization zone. And you would think that if we had a similar seasonal hospitalization, this second half compared to last year, this should probably get a similar growth rate in the second half to what you saw in the first half. This time around, because of the very high flu season numbers from last year and also COVID probably decreasing, we would characterize last year as probably really high and probably top end of range. If we had a similar season this year, we'd expect we'd be at top end. Christine Trinh: Great. And just on that Nova piece, if it's in the first half of '27, can we just get your thoughts on growth expectations for that half? Lewis Gradon: Yes, maybe way bit too far out for us at the moment, Christine. Marcus Driller: Next question comes from Marcus Curley at UBS. Please go ahead, Marcus. Marcus Curley: Could you just talk a little bit maybe a little about the trajectory on R&D. Obviously, 4% in half is low for the business. Is that just reflecting some lumpy projects? Or are you generally starting to see lower percentages of R&D for the business for the next, say, 12 to 24 months? Lyndal York: Yes, Marcus, what that is, is really reflecting the higher than sort of our normal revenue aspirational growth over the past number of years. So it's just sort of writing that as the sort of average over time. So we'd probably expect that to remain a little bit on the lower side, sort of low to mid-single digits for probably another year or 2. Marcus Curley: Great. And then just on anesthesia. Could you provide any color in terms of any noticeable difference between trace and switch specifically, is it sedation or GA driving it or both? Just can you get a bit of color in terms of the different components of the market? Lewis Gradon: It kind of depends on the release track we've taken places where we've had Trace and Switch for -- from day 1, probably on comparable contributions. And then at least in the U.S., we led with Trace, and we're still leading with Trace. That's the bulk of it in the U.S. So the answer to your question, it varies depending on what we led with when we led with it. Marcus Curley: And Switch is in the U.S. these days? Lewis Gradon: Well, it's approved in the U.S. We are still following up all the Trace opportunities in the U.S. at present. Marcus Curley: And that's different to a Switch opportunity? Lewis Gradon: Yes. That's right. Marcus Driller: Thanks, Marcus. We don't have any more questions in the queue. So I will now turn over to Lewis for some concluding comments. Lewis Gradon: All right. Well, thanks, Marcus, and thanks to everybody for your questions today. And as always, I'd like to conclude by thanking all of the people at Fisher & Paykel for your contribution this half. And we'd like to acknowledge the support of our customers, suppliers, clinical partners and shareholders. So thank you, everybody, and enjoy the rest of your day. Thank you. Operator: This concludes our call today. Thank you for your participation. You may now disconnect.