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Operator: Greetings, and welcome to the Constellation Brands Q3 Fiscal Year 2026 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Blair Veenema, Vice President, Investor Relations. Please go ahead, Blair. Blair Veenema: Thank you, Kevin. Good morning, all, and welcome to Constellation Brands' Q3 Fiscal '26 Conference Call. I'm here this morning with Bill Newlands, our CEO; and Garth Hankinson, our CFO. We trust you had the opportunity to review the news release, CEO and CFO commentary and accompanying quarterly slides made available in the Investors section of our company's website, www.cbrands.com. On that note, as a reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in the news release and website. And we encourage you to also refer to the news release and Constellation's SEC filings for risk factors that may impact forward-looking statements made on this call. Before turning the call over to Bill and Garth, please keep in mind that, as usual, answers provided today will be referencing comparable results unless otherwise specified. Lastly, in line with prior quarters, I would ask that you limit yourselves to 1 question per person, which will help us to end our call on time. Thanks in advance, and over to your questions. Operator: [Operator Instructions] Our first question today is coming from Bonnie Herzog from Goldman Sachs. Bonnie Herzog: Hope you're doing well and happy New Year. I guess I had a question on your beer op margins. They came in a lot stronger than expected in the quarter despite the volume deleverage. So hoping you could talk further on some of the puts and takes behind this strength. And then thinking about your full year guidance, which you maintain, it does imply much more modest beer op margins in the fourth quarter, which I know seasonally is a lower quarter. But is there anything else that is expected to weigh on margins in this next quarter? Maybe aluminum, or if you could just talk through that? Garth Hankinson: Thanks for the question, Bonnie, and happy New Year to you. So first starting with Q3 margins. As you indicated, volume declines certainly were a headwind in the quarter. Additional headwinds in the quarter were tariffs, as you noted, logistics and then brewery maintenance. Offsetting those headwinds, we continue to make good progress against our cost savings initiatives. We had favorable pricing from the actions we've taken in both the spring and in the fall. And then there was a depreciation timing benefit that occurred in Q3, which was favorable on a year-over-year basis. As we think about -- or move to Q4, just to underscore what you said, it is our lowest quarter from a seasonality perspective, makes up about 20% of our overall volume. So fixed overhead absorption will be most amplified in this quarter. The depreciation benefit that we saw in Q3 will actually turn into a little bit of a headwind into Q4 as additional assets come online or are put into service. And then tariffs will be a further headwind in Q4, really related to a couple of factors, one of which you mentioned, which was aluminum and the pricing of aluminum which continues to be pretty strong. There is also the ongoing and as expected shift in product mix, so more to aluminum, from glass, and we'll see that in Q4. And then there's also a timing element to tariffs as to when the tariff gets accrued and goes into inventory and then when it gets released in the P&L. And that will be a bit of a headwind in Q4 as well. Operator: Next question is coming from Nadine Sarwat from Bernstein. Nadine Sarwat: Another one on beer margins, though perhaps with a longer-term perspective. So you called out a number of the factors in your prepared release and in your answer just now about the pressures that beer margins will face in Q4. So with that in mind, how should we be thinking about the 39% to 40% beer margins for fiscal '27 and '28 that you guided to back in April of last year? Is that something you still believe you can achieve? Should we be thinking of margins closer to where we were this year? Any color would be helpful. And then if I could just squeeze in one more on depletions. Nice to see that come in, I think, ahead of some expectations. Any color on exit rate or what we're seeing in December? Is there any sequential improvement or more of the same? Garth Hankinson: Thanks, Nadine. I'll take the first question and then Bill will take the second. But as it relates to FY '27 and beyond, as we said back in our Q2 earnings call, we'll provide more color on what our expectations are for FY '27 and beyond in our April earnings call. That's our normal cadence, if you will. It allows us to see how the rest of the year unfolds from a consumer perspective and from a macroeconomic perspective as well. So more to come on that. That being said, the guidance that we provided last April was given under a different set of macroeconomic conditions, and the macroeconomic environment has worsened since that time. So that will all go into our planning process and will be reflected in the guidance that we give in April. William Newlands: And, Nadine, relative to December, December came in roughly where we expected. It was fairly consistent with our expectations. For those of you who track the Circana/IRI data, you saw there was a very strong result against our business around the Christmas holiday. Noting, of course, that that's a great reflection of the strength of our overall brands and the brand health that exists for our brands. And therefore, we were quite comfortable coming out of December as the first month of our last quarter of the year. Operator: Next question is coming from Lauren Lieberman from Barclays. Lauren Lieberman: Want to talk for a second about capacity and CapEx. So in the slide deck, you reiterated the plans for 7 million additional hectoliters of capacity through fiscal '28. I think that implies sort of heavier CapEx in 4Q tied to Veracruz. I just wanted to maybe get an update on how you're thinking about the modular capacity build-out over the next couple of years, managing that against growth projections to support kind of what are really the optimal utilization levels. And particularly, when we think about the fiscal '26 volumetric pace is going to be lower than what you kind of originally thought back in April, to your point, under a very different macro backdrop. Garth Hankinson: Yes. Lauren, thanks for the call. So the approach on the modularity of the breweries is we'll continue with that approach going forward. As we've said over the course of the last couple of quarters, the way we'll manage that really is -- when we bring assets online, and we'll manage to bring -- or we'll manage through the capacity in that manner. What we've also said, though, is that when you're building capacity in a manner which we've been building capacity with long-lead items, you are making commitments to that spend. And our plan for this year is reflective of commitments that we've made on capacity expansion. But, again, we continue to monitor this and assess where the volume is expected to be. And, again, we'll bring the assets online when we can. And to the extent we can delay or defer CapEx, we will. But there's a lot of long-lead equipment that goes into a brewery, and those commitments have been made. Operator: Next question is coming from Rob Ottenstein from Evercore ISI. Robert Ottenstein: Great. Moving more to -- over to the brand side. The Pacifico brand has been an extraordinary success. It's still relatively small, but you've been working on it very diligently for 10-plus years or so. Just wondering how -- what you've learned about the brand over this time, how incremental is it, any tweaks that you see in terms of the brand positioning and the pressure -- the marketing pressure, investment pressure behind the brand for it to kind of get to what you think is its full potential, which my understanding is, is to be a very strong #3 brand in your portfolio. William Newlands: Yes, Robert. Pacifico, obviously, has been a tremendous success to date, much in the same way that Modelo initially developed in the west of the United States and then has progressively moved east to become the #1 player by dollars in the United States. Pacifico is doing a very similar approach. It's the #2 brand in the State of California today. It skews younger relative to our overall portfolio and really has resonated well with consumers. As you know, it's the #1 social -- #1 on social media in terms of share of voice, and it has gained 1.5 points in the on-premise. So you're seeing significant gains in that arena as well. So we continue to invest behind this brand. As you point out, we think it's going to be a strong #3 in our portfolio as time goes forward. And you should expect to see us continue to put significant emphasis on this as it builds its way across the country, similar to what Modelo did several years ago. Operator: Next question is coming from Dara Mohsenian from Morgan Stanley. Dara Mohsenian: So you mentioned mid-single-digit distribution growth for the beer portfolio in the quarter. Just as we look out to calendar 2026 post the spring resets, do you think it's realistic you can drive shelf space gains for your portfolio with macros where they are? Or is that less realistic just given the weaker velocity we've seen over the last year or so? And maybe also you can just touch on the beer category itself and what you're hearing from retailers as we think about shelf space for the category in the balance of 2026. William Newlands: Sure. Let's start with the distribution side. We continue to see distribution as one of our strongest opportunities going forward. Given that our portfolio gained share in 49 of the 50 states, we continue to earn additional distribution capability and distribution positions across the country. Now those will probably change some. You've seen a radical increase in distribution around Pacifico, going back to Robert's question a moment ago, as well as Victoria, which also has grown double digits for the most recent past. So we continue to see distribution as a significant opportunity going forward. Remember, Modelo itself, despite the fact that it's the #1 beer by dollars in the U.S., it still has 20% fewer PODs than the broader domestic players who we compete against. So there remains plenty of opportunity for distribution to be an important part of the future. That has been reemphasized by our Shopper-First Shelf, which has allowed retailers to recognize the opportunity to build a stronger section. And that will be a significant part of your category question, is as more people do Shopper-First Shelf, it will be better for the category and, as you would expect, on brands that are growing their share like ours are, it will be good for us as well. Relative to the beer category overall, it still remains challenged. And it's largely around the Hispanic consumer. 75% of the Hispanic consumers are very concerned about the socioeconomic environment and they're being much more careful about their spending patterns, spending much more on what you would call consumer essentials versus other categories. So I think that's going to continue to be volatile going forward. But this is where our focus remains on controlling the controllables, and that is distribution, that's price pack architecture, that's doing the right things to set ourselves up for a successful future. Operator: [Operator Instructions] Our next question is coming from Drew Levine from JPMorgan. Drew Levine: I wanted to follow up, again, on the beer margins implied for fourth quarter given the low single-digit absolute COGS increase for the year. Implies gross margins, I think, something in the 47% range. I understand that it is lower volume as, Garth, you well mentioned. But I guess maybe if you could sort of provide a little bit more context on the expected headwind from aluminum and depreciation that you mentioned, any sort of quantification there? I'm just asking because, I guess, last year in fourth quarter, volumes were down as well and, obviously, much stronger margin performance. So just on the margins, that would be great. And then another follow-up just on the depletions in the off-premise, I think were down 2.9%, ran decently ahead of where we saw both Nielsen and Circana end up in the third quarter. It's the second quarter in a row that's happened. So wondering what you're seeing in the independent channels, if it's just sort of a function of easy comparisons, or are you seeing any sort of encouraging trends in that channel? Garth Hankinson: Yes. So just to reiterate on the margins, what the headwinds were and, again, you noted that it is our low seasonal quarter. Just for clarity, again, it's 20% of our overall volume for the fiscal year. As I mentioned, depreciation, which was a benefit for us in Q3, will be an incremental headwind in Q4 because incremental assets are being placed into service. So that will be a headwind in the quarter. And then on tariff, as expected with tariffs, aluminum pricing has gone up, so the tariff has gone up. There's been an ongoing shift in our business, in our portfolio towards aluminum. That's continued through the fiscal year, right? So we'll see the impact of that in Q4. And then there is a timing element around tariffs, which is you incur the tariff when you bring it into the U.S., but then it doesn't run through your P&L until you sell it on. And so given the way tariffs have layered in through the year, there's going to be a higher tariff impact as expected in Q4. Another minor impact, headwind in Q4 is there were some expenses that we expected to incur in Q3 that had pushed into Q4. That's just timing. So a bit of a benefit in Q3 versus a headwind in Q4. William Newlands: Relative to your question related to depletions, I think a couple of things to keep in mind that you don't always see. Some of the regions have less tracked channel coverage, and those have been stronger, on-premise. A year ago, Modelo was #5 on draft, today it's #2. I already mentioned when I was answering Robert's question on Pacifico that we picked up significant share with Pacifico in the on-premise as well. So some of those areas that are not as easily tracked have gone in our favor, and that certainly has helped the depletion layout versus what some of the expectations were. Operator: Next question is coming from Gerald Pascarelli from Needham & Company. Gerald Pascarelli: Question for Bill. Just despite the continued macro pressures, your depletions have remained relatively consistent this year, just kind of down 2.5% to 3%, so not getting materially worse. Your beer business continues to outperform the category. It looks like scanner showed a little bit of an improvement in December. So just curious how you're thinking about a potential recovery, if at all, in your beer business looking out over the next year when you just consider some of the obvious tailwinds, the easier compares, the benefit of the World Cup, those types of things. Any color there would be great. William Newlands: Sure. Obviously, we're cautiously optimistic that we're on the sort of the plateau of where the business will be. But it's been really tough to judge. The volatility has been great. What -- so it's very hard to say that you've sort of hit the bottom. When you look at our omnibus study, we continue to see Hispanic consumers being particularly concerned. There seems to have been a little bit of uptick with the broader market community. And as I alluded to earlier, Christmas week was particularly strong for our business. But I think that's more reflective of when consumers are coming out and they're buying. They continue to buy our brands because of the brand health of those brands. There are some things, as you point out, next year, World Cup is a great example, where there will be things that are beer moments. And certainly, we believe our beers will help to support those beer moments. But it's very difficult to project at this point how this is all going to go. A lot of it is going to relate to what the -- how the consumer is feeling and how they're feeling about the sort of macroeconomic issues that exist today. Operator: Next question today is coming from Robert Moskow from TD Cowen. Robert Moskow: Thanks for the question. Unfortunately, it was also Gerald's question. But maybe if there's a way to think about it just quantitatively, your Hispanic consumer really started feeling the pressure in February of last year. You kind of see it in the data. And I guess what we're all kind of wrestling with is, once we lap that initial shock of restrictions on immigration policy, is it possible that it just gets a little bit less bad? So instead of mid-single-digit declines just theoretically with this cohort, since you're lapping the initial shock, it could be a little bit better than that? William Newlands: Well, we hope -- we assume that you -- we hope you're correct. That would be a lovely outcome. The thing that we consistently see, and as you know and we've said this in prior quarters, we track it by ZIP code. And with ZIP codes that have greater than 20% Hispanic representation, it still remains very challenging. That has seen some improvement in ZIP codes with less than 20% Hispanic representation, and you see a lot of volatility state by state depending on what is going on with immigration policy in particular markets. So all of those factors have been why it's been very difficult to predict, because you do have that volatility that goes on state by state, market by market. It's why we continue to talk about controlling the controllables. It's why we continue to talk about and put ourselves in a good position to win. It's why we have focused on the things that are working in our favor, things like Pacifico and Victoria, Modelo Draft, Corona Sunbrew, Corona Non-Alcoholic, all of which are working very well against our business and are positioning us not only to have near-term success, but for the long run as well. Operator: Next question is coming from Filippo Falorni from Citi. Filippo Falorni: Happy New Year. I wanted to ask on the beer pricing environment. You had 1.5% pricing in the quarter, but you have also some negative mix from package types. Can you discuss like how you're thinking that would evolve going forward? Should we still think this dynamic continues? And then maybe if you can touch on like some of the initiatives that you did with Modelo Oro and Corona Premier in terms of the price adjustments. Are you seeing a volume uptick as a result of the price adjustment there that could we see some more -- in some more other brands to try to respond to the macro environment? William Newlands: Sure. We continue to project 1% to 2%. We still think that's an appropriate level. As you know, it will vary higher or lower within that range depending on the market conditions that we face. But to your point, we are quite pleased with the initial work. As many of you know, during this past -- or this past calendar year, we adjusted Oro and Premier pricing to be more in line with the average price point the consumer was expecting for light beers. We're very pleased with what that looks like. Our trends on Oro and Premier have both improved, and we're pleased with that positioning. It also points to price pack architecture, which is also an important part of what we have done. We have added 7-ounce in a number of forms and formats in different states to, again, meet the needs of consumers who are concerned about price points because of their socioeconomic concerns and financial concerns that exist at the moment. Again, all of those things are trying to meet the consumer where they are today, and that process will continue going forward. Operator: Next question is coming from Peter Galbo from Bank of America. Peter Galbo: I maybe just wanted to ask a clarifying comment from your prepared remarks about the fourth quarter specifically. You talked about an expectation of year-over-year volume declines in the beer business to improve, I think, in the first sentence. And I just -- I wanted to clarify whether that is a shipment comment, a depletion comment, both potentially, but that we should still be expecting kind of a negative in the fourth quarter and whether it applies to both ships and depletes in beer. William Newlands: Garth will add on to what I'm about to say, but as we've made note -- we made note in our last quarter, we expect over the course of the last 2 quarters that ships and depletes will be basically equal. As you saw, there was some minor variation in this quarter. You would expect that to probably reverse itself next quarter. But over the course of the 2, third and fourth quarters, we expect depletes and ships to basically be exactly the same. Anything you want to add to that, Garth? Garth Hankinson: Bill, that's precisely right. And the comment was specific to billings, so to your point, yes, so that the second half of the year billings and depletions are largely aligned. Operator: Next question is coming from Bill Kirk from ROTH Capital Partners. William Kirk: So a different type of question. In December, President Trump signed the executive order pushing to reschedule cannabis. I guess if that happens, how would it impact how you think about your exposures to that segment? And then on the ban on intoxicating hemp and intoxicating hemp beverages, in some states, those have become kind of a real market. Do you think you'll benefit if those products go away, those intoxicating hemp beverages go away? William Newlands: Obviously, we have shares in Canopy that we still have available to us. And I think that could ultimately be interesting as that market develops. But we don't engage on a day-to-day basis in the cannabis business today. I think -- we have not seen a significant issue related to our beer business related to hemp. It has mostly been around ready-to-drink and ready-to-serve scenarios where there seems to be interaction there, and that seems to be where most of the interaction has come. But admittedly, consumers make choices around their disposable income and what -- where they choose to spend money. And therefore, as this develops, that's certainly something that we're going to be quite aware of and keep our eye on closely. Operator: Next question is coming from Michael Lavery from Piper Sandler. Michael Lavery: I was wondering if you could maybe just elaborate a little bit on how to think about World Cup. It's, as you pointed out, just a driver of occasions. But have you -- can you give a sense of maybe what you've seen in the past in terms of maybe a positive lift, or any changes to your spending approach? I realize you're not a sponsor. So do you still plan some ways to kind of spend additionally around it or just kind of benefit from the occasion momentum? How should we think about just what impact that might have both on the top line side and maybe your spending side? William Newlands: Sure. As you would expect, this is a big sporting element for the coming year. Sporting elements tend to be big beer moments. It's also a sport that overindexes in the Hispanic community. All of those things, therefore, overindex into our business. So we would expect, as the consumer engages with that event and the various games that will attest to those, that will have some incremental benefits for us. We will remain as diligent as we always are to get the right promotions and to get the right shelf presence and floor presence around that particular time. We'll also have in-game media, TV media. As you know, Modelo is the #1 share of voice and Corona is the #3 share of voice in traditional media. All of that will be done consistent with investing against sports, which has been the focus of our attention anyway. So we believe that has an -- that creates an opportunity for a strong window of time for beer generally and more specifically to us. Operator: Thank you. We've reached end of our question-and-answer session. And that does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator: Good afternoon, ladies and gentlemen. I would like to welcome everyone to the Gap Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to introduce your host, Whitney Notaro, Head of Investor Relations. Whitney Notaro: Good afternoon, everyone. Welcome to Gap Inc.'s Third Quarter Fiscal 2025 Earnings Conference Call. Before we begin, I'd like to remind you that the information made available on this conference call contains forward-looking statements that are subject to risks that could cause our actual results to be materially different. For information on factors that could cause our actual results to differ materially from any forward-looking statements, please refer to the cautionary statements contained in our latest earnings release, the risk factors described in the company's annual report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2025, quarterly reports on Form 10-Q filed with the Securities and Exchange Commission on May 30, 2025, and August 29, 2025, and other filings with the Securities and Exchange Commission, all of which are available on gapinc.com. These forward-looking statements are based on information as of today, November 20, 2025, and we assume no obligation to publicly update or revise our forward-looking statements. Our latest earnings release and the accompanying materials available on gapinc.com also include descriptions and reconciliations of financial measures not consistent with generally accepted accounting principles. All market share data referenced today will be from Circana's U.S. Apparel consumer service for the 12 months ending October 2025, unless otherwise stated. Joining me on the call today are Chief Executive Officer, Richard Dickson; and Chief Financial Officer, Katrina O'Connell. With that, I'll turn the call over to Richard. Richard Dickson: Thanks, Whitney, and good afternoon, everyone. We are very pleased to report third quarter results for Gap Inc. that exceeded our expectations across multiple measures, including net sales, gross margin and operating margin. We've done this by executing our strategic priorities with precision and consistency. The reinvigoration of our iconic brands continues to gain strength. Our playbook rooted in purpose, powered by creativity and executed with excellence is working. And it's bringing consistency to how we operate and clarity to how we win. The momentum in the business is clear from product design to storytelling, from store execution to digital engagement. The result is a company that's becoming more agile and performing with increasing confidence. On today's call, as usual, I'll provide an update on our third quarter performance and progress in the context of our 4 strategic priorities. Then Katrina will walk you through our detailed financial results and our financial outlook, after which we will open the call for questions. Let's start with financial and operational rigor. Gap Inc. comparable sales were up 5% versus last year, the highest quarterly comp in over 4 years. We were pleased to see our 3 largest brands, Old Navy, Gap and Banana Republic, posting strong positive comps in the third quarter, demonstrating the resilience of our portfolio despite a challenging quarter for Athleta. We delivered operating margin of 8.5%, which benefited from growth in AUR as customers responded well to our brand offerings. We continue to strengthen our balance sheet, ending the quarter with strong cash balances of approximately $2.5 billion. Turning to our next strategic priority, driving relevance and revenue by executing on our brand reinvigoration playbook. This playbook when applied with relentless repetition creates a powerful flywheel, which has resulted in 7 consecutive quarters of comp growth for our portfolio. Our largest brand, Old Navy, had an incredibly strong quarter, reflecting the brand's strength, consistency and continued momentum. Comparable sales were up 6% with the brand consistently gaining market share over the last 2 years. Customers responded to the compelling value proposition, resulting in healthy growth in average unit retail and notably across all income cohorts, which is encouraging despite widely reported macroeconomic pressure on the low-income consumer. Old Navy's consistent performance is being delivered by trend-right products, our strategic pursuit of category leadership and compelling storytelling. The quarter began with a robust back-to-school season, reinforcing its leadership position in kids and baby in the U.S. denim posted its highest third quarter volume in years with growth across the family. Women's and girls' showed particular strength driven by trend-right styles like barrel, wide leg and baggie fits. Active delivered impressive double-digit growth in the quarter with strength across the family. This demonstrates the strong customer response to the brand's distinctive value proposition in the active market and innovation, including new franchises like Bounce fleece. Today, Old Navy is the #5 active apparel brand in the U.S. and the #4 brand in the women's active space. As we begin to drive more growth through strategic partnerships that amplify our brand relevance, our latest Disney collaboration kicked off the holiday season with our Jingle Jammies collection, which is exceeding our expectations, driving excitement across the family and fueling strong performance in the broader sleep category. Another great example is our first designer collaboration with American Design Legend, Anna Sui. The collection brought high-fashion design to a broader audience, staying true to Old Navy's democratic and accessible brand promise. The campaign featured rising Gen Z artist, PinkPantheress and resonated across platforms. In September, we announced plans for a strategic expansion into the beauty category with a phased launch starting with Old Navy. As one of the fastest-growing, most resilient retail categories in the U.S. and customer insights that reinforce strong interest in the category, we see a clear and meaningful opportunity to grow in beauty. We recently expanded Old Navy's Beauty collection in 150 stores with select stores offering dedicated shop-in-shops and Beauty Associates. We intend to use this pilot to inform a thoughtful scaling strategy that will take us from seeding in 2026 to accelerating growth in the years that follow. Old Navy's third quarter performance reflects the strength of the team's work, which is clearly resonating. This brand continues to delight consumers and consistently deliver positive comps while reinforcing Old Navy's position as a brand that defines value, style and accessibility in American fashion. This gives us confidence as we move into Q4 and beyond. Now let's turn to Gap. Gap delivered another standout quarter, reinforcing the reliability of its execution and the compounded strength of our namesake brand. Comparable sales were up 7% on top of 3% comp last year, marking the eighth consecutive quarter of positive comps with growth in average unit retail, consideration, organic impressions and new customers, a clear signal that Gap's momentum is real, repeatable and resonating. The quarter was fueled by broad-based strength in denim, the centerpiece of our viral campaign, Better in Denim, featuring global group, Katseye. This campaign demonstrated the power of the playbook in action, featuring trend-right product, amplified by culturally relevant storytelling. With more than 8 billion impressions and 500 million views, Better in Denim culminated in a global cultural takeover and has become one of the brand's most successful campaigns to date, generating significant traffic and double-digit growth in denim. The results speak for themselves. Gap continues to accelerate, attracting a younger, highly engaged consumer, particularly Gen Z, who is discovering us while reinforcing loyalty with our core consumer. As Gap brand equity and relevance continues to build, the iconic Gap Arch logo hoodie is a great example of the brand reclaiming its place in the cultural conversation. During the quarter, we marked the 30th anniversary of the Gap hoodie with our first-ever Hoodie Day. It was a moment that energized our teams, drove connection with consumers and contributed to the notable strength in Fleece during the quarter. Our recent collaboration with Sandy Liang was another highlight, delivering strong results and continuing to position Gap as a platform for creative partnerships that drive relevance and new customer acquisition. For holiday, the brand is leaning into CashSoft, where you'll see continued innovation with extensions into new silhouettes, on-trend sets and vibrant colorways. Earlier this month, we launched our highly anticipated Give Your Gift Holiday campaign, a continuation of our effort to bridge the gap across generations through music, creativity and culture, featuring emerging artist, Sienna Spiro. Gap's execution of the playbook has been fantastic, and it's been exciting to see the brand building on their success quarter after quarter while continuing to drive distinction and relevance. It's a brand that knows who it is, where it's going and how to win, and we're looking forward to carrying that momentum into the holiday season. At Banana Republic, we continue to make steady progress. The work to strengthen its positioning, leaning into its heritage is paying off. Comparable sales were up 4% in the quarter, reflecting meaningful traction as the brand's reinvigoration takes hold. Growth was driven by continued progress in the harmonization between men's and women's. Men's elevated fashion designs featuring distinctive textures and fabrications continue to perform well. And we've seen notable improvement in women's as fit and product refinement are resonating, particularly in dresses and wovens. Building on the success of the brand's prior campaigns, the response to Banana Republic's fall campaign with David Corenswet was strong, breaking brand engagement records and fueling growth while expanding cultural reach and resonance. For the holiday season, Banana Republic is leaning into its distinctive position as the modern explorer brand. Our new campaign shot in the stunning landscape of Ireland, captures this essence well with our beautiful product featured in our travel-oriented storytelling brought to life through dynamic destination-rich content. This approach is driving stronger brand affinity and proving to be highly impactful with our customers. Overall, Banana Republic's third quarter results reflect meaningful progress and continued momentum. I'm optimistic the brand is well positioned as we head into the holiday season. Shifting to Athleta. Maggie Gauger, Brand President, has begun to make an impact in her first 90 days. She's taking quick and thoughtful action to begin to reorient the brand. This includes reorganizing the talent structure to align with her vision. The team is doing the right work, acting with speed and urgency to drive progress, but this reset will take time. Our focus is on positioning Athleta for long-term success and returning it to its rightful place as a premium aspirational brand. The brand is at the beginning of its reinvigoration journey. We aren't chasing quick fixes. We are taking a deliberate approach to position the brand for the long term. We're confident that the consistent application of our brand reinvigoration playbook anchored in purpose and heritage will guide Athleta forward. This is about returning to what made the brand great to begin with while reestablishing our clear and distinctive position in the active market. We're encouraged by the steps Maggie and the team have already taken, and we look forward to the continued impact of their leadership as Athleta's reinvigoration takes shape. As we head into the holiday season, our supply chain continues to power strategic advantages. The scale of our global network across sourcing, logistics and fulfillment gives us the flexibility and resilience to operate with confidence. Our long-standing vendor partnerships and diversified sourcing footprint are enabling us to move with speed and deliver newness at the pace of demand. We've introduced new automation and AI capabilities across our omni fulfillment network from robotic unloaders to advanced storage and retrieval systems, which have increased productivity by nearly 30% compared to just a few years ago. This enables us to meet peak demand with greater speed, agility and precision. With a fleet of about 2,500 stores globally and the largest specialty apparel e-commerce business in the U.S., we're positioned to serve our customers wherever and however they choose to shop this holiday season. Across Gap Inc., our teams are inspired and energized by the work we're doing, and you can feel it. The work we're doing together to drive the business continues to ignite real energy inside the company, creating a culture that's united, motivated and focused on execution. This is the culture that is carrying us into the holiday season, where our collective focus is clear: win with the consumer, deliver with excellence and keep building on the progress we've made together. In the fourth quarter, we remain focused on executing with excellence. Our Q3 and quarter-to-date performance positions us well for the holiday selling season and gives us the confidence to update our full year outlook, increasing net sales growth to the high end of our prior range and raising our operating margin. We look forward to finishing the year strong and creating a clear runway to the next phase of our transformation as we move into 2026, building momentum. I'll now turn the call to Katrina for a closer look at our financials. Katrina O'Connell: Thank you, Richard, and thanks, everyone, for joining us this afternoon. We delivered exceptional third quarter results, surpassing our expectations across multiple key metrics. Our strategy is working, growing brand relevance combined with operational and financial discipline drove our highest quarterly comparable sales performance in over 4 years, up 5%. We saw strong performance across the back-to-school and early holiday periods, underscoring the increasing resonance of our brands with consumers. With the playbook now in its second year, we're beginning to see a flywheel of growth take hold at Old Navy and Gap, with Banana Republic gaining traction. We exceeded our gross margin expectations with strong flow-through to our operating margin in the quarter, driven by rigor in the fundamentals. Average unit retail or AUR grew again this quarter, reflecting our compelling product offering and the disciplined execution across our teams. Our brand momentum, combined with our strategic supply chain actions, enabled a significant portion of the tariff impact on our margins to be mitigated. With the strength of our third quarter results and our quarter-to-date performance in mind, we are raising our full year 2025 gross margin and operating margin outlook with full year 2025 net sales growth now expected to be at the high end of our prior guidance range. I'll take you through the details of our outlook shortly. We are entering the final stages of fixing the fundamentals. Consistent progress on our strategic priorities has strengthened our position as we move into 2026, where we will focus on building momentum and creating new growth opportunities. Now turning to third quarter results. Net sales of $3.9 billion were up 3% year-over-year, exceeding our expectations with comparable sales up 5%. By brand, starting with Old Navy, net sales were $2.3 billion, up 5% versus last year, with comparable sales up 6%. It's exciting to see the brand winning in strategic categories like denim, active and kids and baby, supported by strong execution of culturally relevant marketing and partnerships. Turning to Gap brand. Net sales of $951 million were up 6% versus last year and comparable sales were up 7%. Relentless consistent execution of the reinvigoration playbook is fueling sustained momentum for the brand, clearly reflected in the Better in Denim campaign. Banana Republic net sales of $464 million were down 1% year-over-year with comparable sales up 4%. Our foundational work on the brand from elevated product to culturally relevant storytelling is resonating with consumers and drove the second consecutive quarter of solid performance. Athleta net sales of $257 million, decreased 11% versus last year and comparable sales were down 11%. We're focused on applying the playbook with rigor, beginning with the fundamentals as we work to reset the brand for the long term. And while we're eager for results, we are executing a phased plan that will take time. Let's continue to the balance of the P&L. Gross margin of 42.4% declined 30 basis points from last year, but exceeded our expectations. As anticipated, tariffs pressured overall margin levels. However, lower discounting resulted in increased AUR growth driven by the consumers' response to our relevant product and storytelling. Compared to last year, merchandise margins were down 70 basis points due to the estimated 190 basis point impact of tariffs. This implies roughly 120 basis points of underlying margin expansion. ROD leveraged 40 basis points in the quarter. SG&A increased to $1.3 billion, primarily due to the quarterly timing of incentive compensation and continued strategic investments. SG&A as a percentage of net sales was 33.9%, de-leveraging 50 basis points versus last year. Third quarter operating margin of 8.5% was down 80 basis points compared to last year, which includes an estimated 190 basis points of tariff impact. This implies roughly 110 basis points of underlying margin expansion. Earnings per share in the quarter were $0.62, a decrease of 14% versus last year's earnings per share of $0.72, primarily due to the impact of tariffs. Now turning to the balance sheet and cash flow. End of quarter inventory levels were up 5% year-over-year, primarily attributable to higher costs due to tariffs. Our disciplined inventory management resulted in slightly negative unit inventories, and we believe we ended the quarter with the right inventory composition. We continue to be rigorous in our approach to inventory for the balance of the year. As we shared on our second quarter call, we've tightened the way we purchase unit inventory to ensure maximum flexibility for various demand scenarios and to enable us to be more responsive to consumer demand. We expect to operate in line with our inventory principle of unit purchases positioned below sales. The last 2 years have been about fixing the fundamentals, which includes strengthening the balance sheet. We ended Q3 with cash, cash equivalents and short-term investments of $2.5 billion, an increase of 13% from last year. Net cash from operating activities was $607 million year-to-date, and our free cash flow of $280 million year-to-date demonstrates the rigor we have put into managing the business. Capital expenditures were $327 million year-to-date. With regard to returning cash to shareholders, in the third quarter, we paid $62 million to shareholders in the form of dividends, and the Board recently approved a fourth quarter dividend of $0.165 per share. Year-to-date, we have repurchased 7 million shares for approximately $152 million, achieving our goal of offsetting dilution. And while we've achieved our goal, as always, we remain opportunistic. Now turning to our outlook for fiscal 2025. I am pleased with the strength of our Q3 results and solid quarter-to-date performance, which are giving us the confidence to update our fiscal 2025 outlook. We've been operating against a dynamic backdrop for the last few years, and we're expecting the same for the fourth quarter. Our outlook assumes a relatively consistent macroeconomic environment, but acknowledges the potential for increasing uncertainties related to consumer behavior and global economic and geopolitical conditions. As a result, we continue to take a balanced view with our guidance and remain focused on controlling the controllables. Starting with full year 2025 net sales, we are increasing our outlook to the high end of our prior guidance range and now expect net sales growth of 1.7% to 2% year-over-year. Our outlook assumes ongoing strength at Old Navy, Gap and Banana Republic and a longer recovery at Athleta. Moving to gross margin. With our strong Q3 performance, we are raising our full year gross margin outlook. We now expect deleverage of about 50 basis points year-over-year, driven by an unchanged estimated annual net tariff impact of approximately 100 to 110 basis points. Excluding the impact of tariffs, this would imply underlying gross margin expansion of approximately 50 to 60 basis points versus last year. Turning to SG&A. We continue to expect SG&A to leverage slightly for the full year. As discussed on last quarter's call, we are driving continuous improvement in the cost structure of the company this year as we rigorously drive $150 million in cost savings in our core operations through efficiency and effectiveness. We remain committed to reinvesting a portion of the $150 million into future growth projects, including beauty and accessories as we pursue the long-term success of the company. A portion of these savings will also offset continued inflation. Now I'll turn to fiscal 2025 operating margin. We now expect an operating margin of about 7.2% for the full year, an increase from our prior guidance range of 6.7% to 7%. This continues to include the estimated net tariff impact of approximately 100 to 110 basis points. Excluding the impact of tariffs, this would imply meaningful underlying operating margin expansion of 80 to 90 basis points versus last year. Our income tax rate outlook for the year has increased to approximately 28% and primarily reflects the impact of changes in the amount and mix of our geographic earnings. This increase of 1 point versus our prior outlook of 27% represents an approximate $0.03 headwind to EPS. Looking to 2026, as we shared on our second quarter call, we do not expect the annualization of tariffs in 2026 to cause further operating income declines. And we now expect the majority of the mitigation to come from adjustments to our sourcing, manufacturing and assortments with the balance driven by targeted pricing. We continue to be mindful of price elasticity and remain focused on maintaining the overall value proposition for our customers. And while pricing is a lever to manage AUR, it's one of many we've been using to manage margin over time. Other levers include assortment mix, full price sell-through, promotions and inventory management. Our third quarter AUR performance and the momentum of our brands gives me confidence that our AUR growth plans are achievable. There will be a timing dynamic to the tariff impact on gross margin in 2026. We estimate a Q1 net tariff impact similar to Q4, followed by meaningful benefits from our mitigation efforts in Q2. The back half of 2026 should turn to a tailwind as our actions build, and we lap most of this year's tariff impact. In closing, our Q3 results reflect strong execution of our reinvigoration playbook, driving consistency and growth across our largest brands. Continued cost discipline is enabling reinvestment in strategic growth opportunities, while our scale and supply chain strength support ongoing tariff mitigation. When we perform with excellence, it builds confidence. Confidence fuels execution. Execution drives growth. This flywheel is the engine of our momentum. As we look to deliver this holiday season, we remain focused on operational excellence and advancing our ambition to become a high-performing company that delivers sustainable, profitable growth and long-term value for our shareholders. I'd like to thank the team for their commitment to excellence and delivering results in support of our transformation journey. With that, we'll open up the line for questions. Operator? Operator: [Operator Instructions] And our first question comes from the line of Alex Straton with Morgan Stanley. Alexandra Straton: Great. Congrats on a nice quarter. Maybe for Richard or Katrina, can you just dig in a little bit more on what drove such a strong comp acceleration at the Gap banner? And also how you think about sustainable comp level for that business over time? And then maybe for Katrina, just what surprised the upside versus your initial expectations on gross margin? Curious if tariffs played a role and how you think about steady state on that line item from here? Richard Dickson: Alex, thank you. First off, I think it's clear our strategy is working, and it is showing up in the momentum that we're seeing in our results. All 3 of our largest brands exceeding expectations, Navy up 6%, Banana Republic up 4% and Gap delivered another standout quarter with a strong comp of 7% and that's on top of 3% last year, and it represents the eighth consecutive quarter of positive comps for us. This consistency is setting new records for the brand, and it's reinforcing our confidence in its long-term growth trajectory, driven by compelling product assortments, partnerships and marketing have really resulted in growth across all income cohorts. We have seen more high-income consumers choosing Gap. And we really do believe that with the strong competitive position that we've taken between premium and value and the fact that we're bridging the generation gap, it's a really exciting time to see Gap continuing to accelerate. We have been attracting a younger, highly engaged consumer, particularly with Gen Z as they discover the brand. And it's reinforcing loyalty with our core consumer. So the performance in the quarter, which, as you know, was fueled by our broad-based strength in denim, the centerpiece of our viral campaign, Better in Denim featuring the global group Katseye, did incredibly well. I mean we generated more than 8 billion impressions. I think we had over 500 million views. It was the denim story everybody wanted to be part of. We increased our ranking in the denim category. Gap is now the #6 adult denim brand in the U.S., up from 8 last year. Collaborations are continuing to drive relevance and revenue with our latest collaboration this quarter with Sandy Liang, which was incredibly successful, again, attracting new younger customers to the brand. And it's exciting to see the brand just continuing to build on their success quarter after quarter, and we're looking forward to carrying that momentum into the holiday season and beyond. Katrina O'Connell: As it relates to -- sorry, I'm going to finish up, Alex, for you on gross margin. So for gross margin in the quarter, we did exceed our expectations in gross margin by over 100 basis points, and that was actually driven by an in-line expectation as it relates to tariffs. So tariffs of 190 basis points were as expected. But the out-performance in the quarter really came from standout performance, particularly at Old Navy and Gap and better-than-expected AURs as consumers really responded to our product and storytelling, which enabled us to have lower discounting in the quarter. Operator: And our next question comes from the line of Bob Drbul with BTIG. Robert Drbul: I was just wondering if you could expand a bit more on AUR trends, how you're managing AUR trends? And I guess just the growth plans that you've spoken about as you look forward maybe Q4, but even into '26. Richard Dickson: Thanks, Bob. We approach pricing as we always have. I mean we consider all the various inputs while maintaining our overall value proposition for consumers. And in Q3, as our brands continue to gain more relevance and the rigor that we put around inventory management, as that becomes more foundational, we are increasing our price elasticity, and we've been driving higher sell-through at full price. We did take select pricing in Q3 in select categories, denim, which saw double-digit growth and the strength of our execution is really resonating with customers, and we saw growth, as I mentioned, across all income cohorts. The sales were driven by both units and AUR. We had overall AUR improving versus last year. We saw particularly strength in Old Navy and Gap with customers that were really responding well to our style, the quality and the value, which we continue to advance. Banana Republic AURs also were strong. This is resulting in less discounting, better regular price sell-through, and it's giving us confidence that we can continue to drive AUR growth as we enter the fourth quarter. Operator: And our next question comes from the line of Matthew Boss with JPMorgan. Matthew Boss: Congrats on a really nice quarter. So Richard, could you speak to drivers of the top line inflection that you saw at Old Navy this quarter? Any change in momentum, early holiday? And relative to the consistency that you've now clearly shown at the Gap concept, I guess, how do you see Old Navy differentiated as it relates to the market share opportunity for that brand? And then, Katrina, just given actions that you've taken to the cost structure, how best to think about annual operating income dollar growth if low single-digit top line was the baseline multiyear moving forward? Richard Dickson: Matthew, thank you for the question, and thrilled to talk about Old Navy. We had an incredibly strong quarter, comps up were 6% with the brand consistently gaining market share over the last 2 years. It is the #1 specialty apparel brand in the U.S. And the performance this quarter really speaks to the brand's strength, consistency and continued momentum. Customers are responding to what Old Navy does best. We give great style at great value. We saw healthy growth across all income cohorts in AUR, it was driven by trend-right product, which, again, was amplified by compelling creative and better storytelling for our brands. We've been winning in the categories that we've been strategically pursuing with intent. And we've shared those along the way. Kids and baby, denim and active have all been driving the momentum. Active in particular, was a standout in the quarter. We delivered double-digit growth. And I believe it's underscoring the power of our value proposition and innovation. Differentiation as it relates to the market share opportunities that we see, we look at partnerships, Disney's partnership with us. We just presented Jingle Jammies, which was an incredible presentation across the family. It exceeded expectations. We just also introduced Anna Sui's collaboration with us, which was particularly meaningful as the first designer collaboration where we're bringing high fashion to a broader audience. All of this, while we're just beginning to expand the brand into Beauty, which, of course, is early days, but we see incredibly high potential opportunity for Old Navy for that category and the broader portfolio over time. So look, I'm thrilled with Old Navy's consistency in the quarter performance. And I actually am particularly excited about our holiday offering at giftable price points, and we are ready to execute with excellence. Katrina O'Connell: And then, Matt, as it relates to your other question, I would say, as you called out, we've done a lot of restructuring over the last few years. And then this year, we previewed that we're saving about $150 million in our cost structure. We are reinvesting a portion of that into future growth opportunities because we want to be able to seed this next phase, which we're saying is building momentum that we hope over time leads to accelerated growth. So balancing the savings with what we think are important investments for the long term. What I would say is this year, the operating margin that we've guided to of about 7.2% is really only modest deleverage compared to last year, and that's while absorbing 100 to 110 basis points of operating -- excuse me, of tariff impact, which does show the way we are managing the business with rigor, both through cost and margin improvements. As we look forward, we've also said that in 2026, we don't expect the annualization of tariffs to cause further operating income declines as we work hard to mitigate those costs. Once tariffs are fully reflected in the base, we do believe the consistency in our core, combined with top line benefit related to the high potential growth opportunities that we're seeding in '26 should provide sales growth that benefits operating income over time. So more to come on what that algorithm turns out to be, but we feel good about the work we've been doing, and we're certainly pleased with our results. Operator: Our next question comes from the line of Brooke Roach with Goldman Sachs. Brooke Roach: Richard, how do you feel about the store fleet today across brands and banners? Are there any investments that need to be made to fuel the momentum from a shopping experience perspective? And what does that mean regarding store fleet transformation, whether that's remodels or changes in store count as you look ahead into 2026? Richard Dickson: Brooke, thanks for that question. Stores are a really important way for customers to experience our brand. I mean they bring our product, storytelling and service to life in a way that digital just can't. With a company operating a fleet of about 2,500 stores, we are always optimizing our retail footprint. We're closing underperforming stores. We're repositioning some locations that are more relevant to our customers, and we evaluate new store openings. As you know, over the last several years, we've closed about 350 stores that were unprofitable. Last year, we closed about 56 stores across our portfolio. We expect to close approximately another 35 in fiscal '25 with the majority of those closures being specific to Banana Republic. I believe we're at a pivotal point right now where the fleet is really well positioned, and we've been testing new formats and experiences. Gap Flatiron in New York has been functioning for about a year with great learnings that we've started to expand across our Gap fleet with denim shops, new refresh shop here in San Francisco and a variety of others that are on plan. Banana Republic, specifically in SoHo and other locations that we've been refreshing with some great results and of course, Old Navy and Athleta up at [ bat. ] We continue to evaluate these tests and their performance and are getting more and more confidence in the revenue and relevance and the strong returns that they've been driving. We've begun to invest rationally and selectively in the areas that we think will drive the return that we're looking for. And we will continue to keep everybody posted as we look to the combination of repositioning our stores, refreshing must-win stores and again, looking to start to open up new stores where it makes sense strategically. Operator: And our next question comes from the line of Adrienne Yih with Barclays. Adrienne Yih-Tennant: Congratulations. Great to see the progress at the right time. Richard, my question for you is sort of a little bit higher level since you've come, there's such a focus on product and marketing, like the combination of the flywheel effect of those. How is the appointment of design and creative, specifically Zac Posen changed the complexion of creative thinking throughout the organization? And then the marketing piece of it, how has that kind of -- how does that complement kind of the product and creating that flywheel? Richard Dickson: Thank you, Adrienne, for the question. First off, let's just mention Zac. He's been an incredible addition to our leadership team. It's been almost 2 years ago now that he's joined and has brought significant impact on many creative aspects, I would say, both inside the company and beyond. Our objective collectively with Zac and by elevating the creative conversation across our brands, highlighting design and product as an incredibly important attribute to all of our brands has been working. I mean we've been culturally creating moments, curated moments where our brands and our products have taken center stage, not only to some extent on the runway, but on Main Street. And we're attracting talent as well to our portfolio that might not have considered a place like Gap Inc. or our brands prior. When we talk about marketing, which I also am pleased to talk about, we know marketing is a much more complex function today than it was in the past. And as you know, we've been working really hard at driving new narratives that put our brands back into the cultural conversation, and it's our job to be everywhere that our consumer is with the right creative messaging. I think it's obvious we're performing while we transform. We're driving digital dialogue messages with social media as the #1 platform for our consumers. Influencer content is among the most common product discovery methods amongst Gen Z and millennials, which we've been performing incredibly well with. We actually recently launched a cross-brand content creator and social media advocacy program last month, which you might have seen. We now also have a presence on TikTok as a shop and many more. And these methodologies are proving really impactful, but they also require higher quality accelerated amounts of creative. And lastly, we can't help but mention again, Katseye is a great example of that. I mean 8 billion impressions, 500 million views. This was a true cultural takeover. And I think it's another proof point in our playbook, and we believe we've got the means and the experiences and the brands to continue to be more effective and be more efficient in our spend as we've proven this methodology is working, and it will continue to propel us into the future. Operator: And our next question comes from the line of Dana Telsey with Telsey Group. Dana Telsey: Congratulations on the nice progress. Katrina, one for you, one for Richard. As you think about the tariff mitigation strategies, which seem to be effective, the pricing adjustments have seemed to become less and less. Is that the right impression? And how you're thinking about pricing going forward? And then, Richard, the acceleration in store sales is impressive. In your view of the consumer overall, how are you thinking about the consumer? Does it differ by brand, lower and higher income customer, whether it's Gen Z, millennial or baby boomer, how do you think the current feeling is in the attitudes towards merchandising? How do you think of consumer demand? Richard Dickson: Dana, thanks for the question. I think I'm going to jump in here and take consumer first, and then Katrina can follow up with tariff mitigation answers. First, I think it's really important to share, we're seeing consistency and strength in our customer behavior. As I mentioned, we're really proud that we're winning with all income cohorts. And you could see it with the strong differentiation within our portfolio. Together, we see equal growth across low, middle and high. And it's evidenced by our 2 largest brands, Old Navy and Gap. Now there is external data that points to, of course, the macro pressure on the low-income consumer, but our customers are finding our price value, our product, our styles. It's breaking through the competitive landscape, and we're winning. We're also doing this Dana, with less discounting. We've got better regular price sell-through, increased AUR, which is really indicating that our product is resonating. I think you could see it when you go into our stores, we're just telling better merchant-driven stories, and it is supported by incredibly relevant marketing. We're also excited to see that the high-income consumer is discovering our fashion, quality and value. And we think that is also being driven by the relevant narrative that we've been creating in the marketplace. So when I step back and I look at our portfolio competitively, I think our portfolio appeals to a wide range of consumers. It gives us greater flexibility in today's environment. When we look at our portfolio today versus even a few years ago, we are a much stronger portfolio of brands today. We're resonating with consumers. And it's our job on a day-to-day basis to create great product with great style and quality, exceptional value. And I think we will prevail in any marketplace if we stay consistent and true to that narrative. Over to you, Katrina, on tariffs. Katrina O'Connell: Sure. So as it relates to tariffs, we did do a slight amount of pricing in the quarter, but we really honestly, Dana, approach pricing as we always do. We look at all the various inputs really with an eye to maintaining the overall value proposition for our consumers. So we did take select pricing in select categories. I think denim is a really good example at Gap, where given the strength, we were able to take slight pricing and see double-digit growth in sales in spite of that. The strength of our execution, as Richard said, really is resonating with our consumers. And as Richard said, we saw sales come from both units and AUR in the quarter. I would say the bigger driver of the outperformance in the quarter and what we're seeing is less discounting and better regular price sell-through. And I think as Richard said earlier, that really gives us the confidence that we can keep driving AUR growth as we enter the holiday season. Operator: And our next question comes from the line of Lorraine Hutchinson with Bank of America. Lorraine Maikis: Just switching gears to Athleta for a minute. How do you feel about the level and content of the inventory there? And do you have a time line for when you think that sales could begin to stabilize? Richard Dickson: Lorraine, thank you for that question. We're not hiding from Athleta. It's a very important brand in our portfolio. We have been disappointed in the trend. But Maggie, our Brand President, has hit the ground running in her first 90 days, and she's balancing near-term priorities with, of course, the longer-term reinvigoration objectives that we have for the brand. As I mentioned, she's been building her leadership team to align with her vision, and she is truly setting the foundation for the brand's next chapter. A lot of work happening, editing the assortment, studying the consumer, evaluating our retail footprint and, of course, the overall customer experience. This is a reset year for Athleta, and our focus is going to be on positioning the brand for long-term success and returning it to a rightful place as a premium purpose-driven aspirational brand. We do believe Maggie and the team are taking the right steps, and we remain confident that Athleta will emerge as a brand that really does matter even more to women through product, trend and storytelling. We understand there's a lot of work to do, but we believe we've got the right leader in place to do it, and we look forward to continuing to update you as more news unfolds. Katrina O'Connell: And maybe what I'd add, Lorraine, on inventory is as we assessed Athleta in second quarter, given sort of the trend in the business, we did make some choices to lower inventory levels overall. And so we have aligned inventory for Athleta to this lower sales trend as we head in -- for Q3 and as we head into Q4. So we feel good about the levels and quality of inventory at Athleta, and we'll remain pretty prudent as it relates to Athleta until we start to see the product and the marketing get back to where we would expect it to be for this brand. Operator: And our next question comes from the line of Paul Lejuez with Citigroup. Paul Lejuez: Just to go back to the unit comments. Curious which brands you saw the greatest increases in units? And then I'm also curious on the inventory versus unit gap that you mentioned, what will that look like at the end of the year, the finish up fourth quarter and then into the first half of '26? Katrina O'Connell: Paul, I'm going to take the first one, but we had a lot of trouble hearing your second question. So apologies on that one. We're going to ask you to repeat it. As it relates to units, we were really pleased to see that as our brands are gaining relevance, combined with the rigor that we're putting into the business that we're seeing our elasticity improve, and we're getting higher sell-throughs at regular price. When we look at the units in the quarter, I would say units were aligned with where we see outperformance in the business, particularly at Old Navy and Gap, and we also saw AURs there as well. But I'm going to ask you to repeat again the second part because we couldn't hear you. Paul Lejuez: Sure. Sorry, Katrina. So the inventory dollars versus unit gap that you spoke of this quarter, curious what that looks like at the end of 4Q and then in the first half of next year. Katrina O'Connell: Oh, thanks. Sorry about that. So we continue to keep our units below sales as we try to keep within our principles of keeping inventory tight. We want to keep maximum flexibility so that we can respond in season to various demand scenarios. and be responsive to consumer demand. So as we think about end of quarter inventory, I would expect it to be similar to how we just ended Q3. Operator: And our next question comes from the line of Corey Tarlowe with Jefferies. Corey Tarlowe: Richard, I wanted to ask about the power of partnerships. And the reason being is I don't think that there's a retailer in the mall today that has done more partnerships in the time span that you've been at Gap to expand the aperture for the brand and to build, as you say, relevance in revenue. And I was curious about what you think strategically this means for the business ahead. And then the follow-up to this is how have the consumers responded to these improvements in the brand in the way that you've been able to say, remove promos on categories like denim at Gap? Richard Dickson: Okay. Corey, thank you for the question. First off, I think it has been a credit to the brands and teams that have followed the methodology that we shared with our playbook. And as part of the playbook and when we look at cultural relevance, collaborations help a brand drive relevance. It broadens its customer base and continues the drumbeat between its larger partnerships and releases. So it keeps topical in the context of the amount that we do and the timing that we do, do them. Now you have to really be authentic. It's not just a collaboration. It's a well-thought-out strategic partnership. To date, Gap brand, as you mentioned, we've launched over 13 collaborations. It continues to drive enormous excitement and attract new audiences to us. And they're very precise, and they need to be. They need to be win-win. And most importantly, they need to be authentic to the consumer. The collaborations that we've been doing, as I mentioned, are attracting new generations to Gap, but it's also, at the same time, reinforcing the brand to those who love us for years. This is, to some extent, a balance of art and science. The latest collaboration this quarter with Gap brand with Sandy Liang in the third quarter, it drove incredible engagement and overall basket. You asked about consumers responding in relation to it and how it affects our business. I mean more than 25% of the customers who shop these collaborations were new to Gap. And of those who shop the collaborations, 20% shop beyond the collab. So we see the attraction that these collaborations when done right, are generating for the brand. And then we -- by offering and showing other product, we're now establishing broader, bigger house files and more exciting relationships with our consumers. We just launched the Anna Sui collection with Old Navy, which is the first designer collaboration in Old Navy, incredible success, similar engagement, a really well thought out precise partnership, and we believe a sign of things to come. So again, laddering up. It's great credit to the teams across the brands for driving the playbook, executing it with excellence and really creating win-win collaborations for the consumer and our business. Operator: And our final question comes from the line of Michael Binetti with Evercore ISI. Unknown Analyst: It's [ Carson ] on for Michael. Katrina, probably a question for you. I appreciate the color on the wraparound effect of tariffs into 2026. But if we set tariffs aside, you had really nice underlying gross margin expansion in third quarter. The guidance implies pretty similar for fourth quarter. How much of that underlying expansion is from AUR versus other drivers? Because I think I've heard several times today, confidence in the AUR plan. So if that's a leading driver, is it safe to carry those impacts over into the next few quarters? Katrina O'Connell: Thanks for the question. So the way I would answer that is our margin strength in Q3 came from a combination of favorability in commodities, aided by some supply chain leverage that we got as well as strength in AUR. As we look to Q4, what you'll see is that the tariff impact to Q4 is similar to what we just experienced in Q3. And we're also still seeing the commodity benefits. But in Q4, we're trying to sort of stay balanced in our outlook. And so right now, what we have in is roughly similar promotions year-over-year so that we have room to compete in any environment. And so we'll obviously aspire to do better, but the upside that we saw in AUR from Q3 is not currently assumed in Q4. Operator: And ladies and gentlemen, that concludes our question-and-answer session. I will now turn the conference back over to Mr. Richard Dickson for closing remarks. Richard Dickson: Thank you, operator. This was an exceptional quarter, and I'm really proud of this talented team that continues to deliver quarter after quarter. As we look to finish the year strong, our team is fired up and our focus is clear: continue to execute with excellence and win with the customer this holiday. Thank you for joining us today. For those of you who celebrate wishing you a happy Thanksgiving, and we look forward to seeing you in our stores this holiday season. Thanks all. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Ken Murphy: Good morning, everyone, and a very happy New Year. Thank you for joining us today for our quarter 3 and Christmas trading update. As usual, I'm here in Welwyn with Imran, and I'll start with a brief overview of our performance before opening the line for your questions. We are delighted with the way the customers have responded to our continued investments in value, quality and service. Group like-for-like sales grew by 2.9% over the 19 weeks, including 3.7% growth in the U.K. Customer satisfaction improved, and our U.K. market share is at its highest level in more than a decade, following 32 consecutive periods of gains. We set ourselves a challenging plan for Christmas, and we delivered in line with that plan. With over 2 billion products going through our tills and more than GBP 6 billion of sales in the 4 weeks to Christmas Eve, our teams right across the group worked hard to deliver the outstanding service that customers have come to expect from Tesco. I would like to start the call today by saying a huge thank you to them for delivering a Christmas we can all be proud of. Our performance builds on last year's successful results and reflects the strength of our core food offer. In a highly competitive market and with customers looking to make their money go further, we saw particularly strong growth in fresh food with like-for-like sales up 6.6% in the U.K. Running alongside familiar festive favorites, we launched 340 new and improved own brand Christmas products, including 180 in Finest. We recognize that for many families, the cost of Christmas can be a stretch. We did everything possible to make sure our customers got the best value from us. Starting with our fresh Christmas dinner for a family of 6 for under GBP 10, and just GBP 1.59 per person, it was even better value than last year. More broadly, our rate of inflation eased through the Christmas period and continues to be materially behind the market. We also invested in making the Christmas shop even easier for customers, including hiring over 28,000 additional colleagues. And with support from AI-powered scheduling tools, we offered more than 100,000 extra online delivery slots in the week before Christmas. Through better forecasting and planning, AI also helped us to deliver best-in-class availability and to optimize deliveries across our network. Customers continue to embrace Finest with sales growth of 13% in the U.K., including a 22% increase in our Finest party food range. Highlights included Christmas center pieces such as our Finest Turkey Crowns and Chef's Collection Beef Wellington as well as our curated Finest gifting range and a long list of award-winning products. We sold around 21 million Finest pigs in blankets, along with 2.5 million bottles of Finest Prosecco. We also saw strong demand for low alcohol options, including selling almost 0.25 million bottles of Nozeco. While Turkey retained its popularity, some customers opted for other meats this Christmas with sales of beef joints up 29%, making it the most popular alternative. Online remains our fastest-growing channel with growth of 11% across the 19 weeks. It was our biggest online Christmas, including our 2 busiest days ever. In the week leading up to Christmas, we delivered on average 2 orders every second. Whoosh also performed strongly with sales up 47% and more than 0.25 million customers trying it for the first time. Both in-store and online, customers benefited from additional value through Clubcard. Alongside thousands of Clubcard prices per week across a broad range of family favorites, we offered customers more personalized rewards, including gamified experiences with Clubcard challenges. Our retail media offering continues to engage customers and brands, including the return of sponsored Christmas Gratis now in their third year. The Tesco Media team continued to make great progress, and we were delighted to be named Media Brand of the Year at the Media Week Awards. In Ireland, we built on last year's strong performance and are now in our fourth year of market share gains with fresh food continuing to lead the way. With 5 openings in the period, including 2 large stores, we now have 190 stores in Ireland. We continue to roll out Whoosh, which is now available in Dublin, Galway and Cork. Booker performed well despite challenging market conditions, with increased customer satisfaction scores in both core catering and retail. Our wine and spirits specialist, Venus, continued to win new business. And in our symbol brands, Premier opened its 5,000th store. In Central Europe, our targeted price investments contributed to growth in both food and nonfood across the period despite a backdrop of subdued consumer confidence and increased competition. Value continues to be a key priority as customers seek to make their money go further, and we're determined to do everything we can to help. Earlier this week, we launched a new commitment to Everyday Low Prices on over 3,000 branded products, alongside our existing Aldi Price Match on more than 650 lines and thousands of Clubcard prices. Our strong performance this Christmas gives us the confidence that group adjusted operating profit will now be at the upper end of the GBP 2.9 billion to GBP 3.1 billion guidance range that we issued in October. We continue to expect free cash flow within our medium-term guidance range of GBP 1.4 billion to GBP 1.8 billion. So as we move to your questions, I just want to say another big thank you to all our colleagues for everything they did to help our customers to have a brilliant Christmas. Thank you all for listening, and I'll now hand back to Sergei. Operator: [Operator Instructions] Our first question is from Rob Joyce from BNP Paribas. Robert Joyce: So the first one, Ken, you referenced the easing food inflation over Christmas. Was that the entire driver of the slowdown versus 3Q? Are we seeing any sort of broader volume slowdown in the market? And do you think the overall market stepped down over Christmas? That would be the first one. And then the second one is probably a bigger question, but clearly guiding to a broadly flat EBIT this year after strong top line performance. What do you think needs to change for you or the market for you to be able to return to profit growth? Ken Murphy: Thanks, Rob. Happy New Year. Two great questions. Look, I think definitely, the very strong trading plan we put together contributed to the drop in the kind of overall market growth. And therefore, the easing of inflation was a material factor. There was also a step down in volume, even though we outperformed the market in terms of our volume growth, and we're really pleased with that consequentially. So I would say that our performance was pitched exactly right. It was an aggressive trading plan, but it was complemented with a fantastic product innovation pipeline and really consistent execution, both online and in stores. So for us, it's been a really pleasing performance. In terms of -- you're right, the guidance is broadly flat year-on-year. I think that's an exceptional performance if you think about where we started this year and some of the competitive activity that we responded to. What I'm really pleased about is how decisively we acted and how we got on the front foot and delivered very strong market share performance consistently across the year. And what's particularly pleasing, Rob, is that we didn't stop investing in the future. So we've been making substantial investments in our store estate, substantial investments in automation to keep our savings programs going, and even more importantly, making substantial innovation, investments in technology for the future. And so we've got a very clear strategy. We believe in the long-term possibilities for this business, and we're quite confident for the future. Imran Nawaz: And maybe if I could just add maybe 2 bullets from my end as well, Rob. Two things on the ability to upgrade the outcome for this year and continue to invest to continue the momentum and continue to protect the position of strength that we have, I think, is not a bad place to be. The second thing to your sort of longer-term question, it's important to go back to the performance framework that we did set out almost 5 years, and we really stick to, which is we are very clear that we want to continue to drive up customer perception, to drive up market share, which in turn drives up profit and drives up cash. And I think you've seen us do that year in, year out. I think this year was an exceptional year with an exceptional reaction to a competitor, but I think we stuck to our guns. We invested into the proposition. We invested into price and truthfully, being able to upgrade is a nice feeling, because it demonstrated that everything we've done really worked out well. Robert Joyce: And just a quick follow-up on that inflation point. Do you think -- is the inflation then more -- the slowdown more driven by your own investment in price relative to your sort of input costs? Or are you seeing input costs falling more broadly? And does the kind of -- I'm just looking at next year and thinking people have got -- markets got Estimates U.K. growing above 3%. Does that look a bit ambitious given the Christmas exit rate? Imran Nawaz: Look, let me take first the Christmas specific question. Look, Kantar calls around an inflation of around 4% or so, slightly north of 4% over the Christmas period. As Ken just said, we made conscious choices to invest. There's no other time when you've got so many customers in your stores and you build momentum. And if you look at our market share gains, our volume market share gains were even stronger than our value market share gains over 12-year records. And I think you get -- that pays back as you then go into Jan, Feb, March and April into the next year. So I'd say to you, it was a conscious decision to invest into value, which we saw pay off in the market share. Then in terms of next year's outlook, you know as well as I do that inflation is a driver of commodities as much as it is of stickier costs on payroll. All of those things are still to be worked out, and we'll see where we land when we talk to you in April. Operator: Our next question comes from Xavier Le Mené from Bank of America. Xavier Le Mené: A quick one actually on the market share. As you said, you've got the strongest market share ever for the last 10 years. But where potentially do you see your peers? Do you still think that you've got opportunity to grow your market share? Or are you more in a position to defend what you've got right now? Ken Murphy: So Xavier, we are always thinking offensively rather than defensively. That's our mindset. And we see it less about the market share per se and more about are we doing the right things for all our stakeholders and particularly our customers. So are we getting our value right? Are we getting the quality of the proposition right from a product point of view? Are we getting our execution right? And are we innovating and thinking about the future in ways that customers' trends and needs are adapting. And that's really where we focus all our energy. And then we look to market share as a measure of how successfully are we executing against that strategy. So we don't see any limits in terms of where we can take market share, but it is not a given. It's something that we have to work very hard to achieve. Xavier Le Mené: Right. And just one follow-up on actually Rob's question. Sequentially, you said you've seen a bit of a slowdown. It sounds like it's also market driven, but do you expect the slowdown to continue heading to '26, or do you think that potentially it's more a question of consumer confidence and hopefully, U.K. consumers getting a bit better going forward? Imran Nawaz: Look, I mean, I think when I look at consumer confidence this year, I would say it's mixed. But it's been mixed throughout the entire year, right? What you saw was people that are -- there's a cohort of groups that are, frankly, in a good place and feeling comfortable with their savings and their spending, and there's a group of people looking for value. I feel we saw that reflected. When you look at Finest's performance, in a way it's a reflection of the fact that people looking for value and quality at the same time were able to hit that. So I think our Everyday Low Price campaign that we're launching, again, hits the bull's eye on that. I think addressing all of those opportunities for those customers looking for value is the right way to go forward. Fair to say that as you -- the question behind the question is, was the market overall a bit softer over Christmas? I'd say yes, on a volume basis. The reality, though, also is because we really outperformed every single month over the last 19 weeks on a volume share basis, we were not really affected by that. And I think one proof point for me is the way we exited the year was very clean on stock. Then how it plays out next year, we'll obviously talk to you again in April. But look, one of the things that we do feel good about in this business is, and I think we've demonstrated that over the last 5 years is, we are very good at adapting ourselves to whatever the environment throws at us. And it's one of the reasons why we've put value at front and center of everything we're doing. Operator: We'll now take our next question from Manjari Dhar from RBC. Manjari Dhar: Just 2 questions from me, please. My first question is on supplier-funded promotions. We've seen them picking up over recent months. Just wondering how much higher could this go? And if it does continue to drift higher, does that change your approach for the Tesco business, maybe for your private label business? And then my second question is on the digital data opportunity. I guess how much further is there to go with Clubcard personalization and AI? And what sort of things should we be expecting this year? Ken Murphy: Thanks, Manjari. So I would start off by saying that kind of supplier-funded promotional penetration or participation is actually only returning to what it was pre-COVID. So it's not like it's wildly out of kilter with historical norms. That's the first thing to say. The second thing is that actually, as you saw from our announcement this week, we have reinvested a lot of promotional funding back into everyday low pricing through the extension of our low-price campaign from 1,000 to 3,000 lines. And that really is based on an insight from customers that say they need reliable low pricing during these months where money is tight and they're watching every penny. And so that is the first signal, by the way, that we are kind of -- we are responding to customers' needs in the moment. So I'm kind of relaxed about that, if you like. I think it's a normal... Imran Nawaz: And maybe to give you a number on that, just to give you a sense to underpin Ken's point, last year's promo percentage was around 33%, and this year was 34% over that 19-week period, which gives you a sense. There was a slight creep up, but not massive. Ken Murphy: Yes. It was artificially depressed during COVID, Manjari. So it was very hard to compare apples with apples. If I go to your second question, which is a very exciting question. It's a question we're really excited about. We don't see any limits to the opportunity around data and particularly the opportunity to serve customers better through data, getting to understand their needs better, responding much more dynamically, using AI to help us be there for customers whenever they need us. And we're investing behind that, and we'll continue to do so. And I think it will be something that you'll see continuous improvement from us over the next number of years. I think there's infinite possibilities. Manjari Dhar: Great. Maybe just a quick follow-up. Should we be expecting investment levels behind that overall group CapEx to slightly step up now as a result? Ken Murphy: Well, we've always been quite clear about our kind of breakdown of CapEx being kind of a 3-part logic, which is part 1 is where we're investing in our core estate renewal and the shopping experience. Part 2 is where we're investing in automation to support our Save to Invest programs, and Phase 3, which is all about innovation, technology investment for optimizing our proposition. And probably the greatest -- we've seen step-up investments across the board actually in all 3 areas. And that's been what's been behind our progressive increase in capital. And actually, as we've gone, we've kept a very close eye on return on capital employed, and that has also been improving over time. So we're very disciplined in how we spend our money. Imran Nawaz: Yes. And also what's really nice is, in the base, we've also reflected already increases year-on-year into our tech organization, because we know that this is an area of opportunity for both on the growth side, but also on the efficiency and savings side. Operator: We'll now move to our next question from Sreedhar Mahamkali from UBS. Sreedhar Mahamkali: Maybe 3 for me, if you don't mind. First one, in terms of improving price position versus the market statement and the comment in the statement, can you talk to us if it's been the case versus all operators as you see it, especially given one of your big competitors reset and continuing investment? That's the first one. Secondly, just trying to understand the new or renewed push on everyday low prices. A couple of questions there. Is this reallocating the promotional funding more to be fully behind Everyday Low Prices versus Clubcard Prices? How do you see the offer to the consumer changing in the round as a result of what you've been executing really well on Clubcard Prices already? And second one, sticking with Everyday Low Prices, is this first signal to us that 2026 is likely to be as big a year of investment as it was in 2025? Is that how we should read this? Ken Murphy: Okay. Thank you very much, Sreedhar. I think I'd start off by saying that our price position has strengthened over the year versus the market generally. And that I think more importantly, the sophistication of our pricing investment has improved through the technology investments we've made such that we focus on the lines that matter most to customers. So we're investing in value, but we're investing wisely and quite judiciously. And I think that is what has helped us to outperform the market. On your point around Everyday Low Pricing, I think that was a response to customer insight, which said they wanted more reliable pricing on everyday essentials in these key periods in January, February. And so we made a long-term commitment to, as you say, invest principally promotional funding back into Everyday Low Pricing. And you shouldn't read it as any more than us responding to a customer insight to give customers the best possible value in these early months of the year. And I don't think it's a signal of anything other than our intent to stay on the front foot from a value for money point of view in 2026. Imran Nawaz: Yes. I think one aspect, Sreedhar, that's important is we already have Everyday Low Prices on 1,000 SKUs. And what we're doing is because it worked so well, we're giving it more visibility, more color, and it's been expanded to 3,000 of people's favorite brands in the country. So from that level, it's also a confirmation of something working really well that we want to double down on -- or triple down on, I should say. Sreedhar Mahamkali: And in the round, I guess what I'm trying to understand is Clubcard Prices have been incredibly successful for you. Is this a recognition, to Ken's point, I guess, some of that needs to be more upfront shelf prices rather than Clubcard Prices. Is that how I should see it? Imran Nawaz: I mean, I think it's a continuous conversation depending on what customers are looking for, but I'd be very comfortable to say to you that as opposed to having only exclusive deals on Clubcard prices, we want to have more, as Ken said, more longer-term price fixes as we've been doing on Low Everyday Prices now rebranded. Operator: We'll now move to our next question from Clive Black from Shore Capital Markets. Clive Black: Also, very happy New Year. Very well done, by the way. Not an easy thing to deliver. The question I have is really around volume. First of all, why do you think volume in the Christmas period was a bit slower than you and maybe the industry expected? And in particular, do you think there are features around alcohol consumption and maybe diet suppressant drugs that are starting to kick in more noticeably in that respect? And then in terms of that volume, is that a key factor why you expect working capital -- or sorry, your free cash generation to come in with the existing guidance, which might mean that working capital is a bit of a flatter benefit year-on-year? Would that make sense? Ken Murphy: Clive, Happy New Year to you too, and thank you for your comments. I'll speak to the volume comment, and then I'll pass over to Imran maybe to talk about working capital. So I'd start off by saying that what was particularly pleasing about our performance is we outperformed the market on volume. I think it's fair to say that the market overall was a little bit softer on volume, but our outperformance was particularly important. And within that, I was particularly pleased with our fresh food performance. So speaking to your point about is there a little bit less alcohol consumption, is there an impact? I think there's a general impact from people wanting to eat and live more healthily. And for sure, within that, GLP-1 will be having an impact. But our fresh food sales at plus 0.6% were particularly strong. So my feeling is that whatever way this trend evolves, we're really well set up to take advantage of it. And we've been investing very heavily in our fresh food proposition over the last couple of years, and it has been the principal driver of our business, which we feel really pleased about. There's no doubt, as you saw from some of the stats that I shared on the call earlier that you are seeing a significant rise in low and no alcohol sales, but we respond to that as well. We have the products and the range to address it. And within our food range, we have a high number of high-protein products that are really well-suited to anybody looking to pursue that kind of diet. So we feel really well set for whatever trends are coming our way. But for sure, trends are emerging and we are keeping a very close eye on them. Clive Black: Sorry Ken. Just in that respect, Ken, are you therefore seeing -- sorry, are you seeing notable step back, therefore, in areas that are more exposed to change in ambient carbohydrates and the like? Ken Murphy: No, not really. I mean, we shifted an extraordinary amount of chocolate tubs over the Christmas period. So I think -- and I was a material contributor to that personally. So no -- the short answer is no, it's been really strong. Clive Black: Sorry, Imran? Imran Nawaz: Yes. No, absolutely. Just on your second question, I mean, just to reiterate what Ken just said, I mean, we -- and how it impacts cash, I mean, obviously, we were less affected by the market slowdown because if I look at Q3 and the Christmas period, we were growing volume every single month and outperforming on market share every single month. So that gives you a sense of it not being a real driver on working capital, because ultimately, volumes are positive. And more pleasingly, I could say that we're exiting very, very cleanly. Actually, I was very happy about that. I mean, we set up a very ambitious Christmas, and we delivered in line with that. And when you exit cleanly, it just helps you get momentum also into January, which is nice. In terms of cash flow, look, we had a very, very strong first half, over GBP 1.6 billion. As you know, typically, our cash flow is skewed towards the first half. And in the second half, you've got the payments out the door from all the supply you bring in for Christmas. So that phasing will play itself out as per normal. And as you know, our guidance on cash is that consistent range we've been giving, GBP 1.4 billion to GBP 1.8 billion. I know we've delivered always to the upside on that one. And so it's never stopped us from doing a good job, and the plan is to continue to do so. But as you also know, the working capital balances at Tesco are enormous. So just to give us a bit of flex in terms of any last-minute payments or receivables or anything like that, it gives us a bit of space to do that. But obviously, cash is important, and the plan is absolutely to continue to deliver within that range. Operator: Our next question is from Monique Pollard from Citi. Monique Pollard: Two from me, if I can. The first one, obviously, good market share gain, U.K. market share gains of 31 bps over Christmas. And from what I understand from the commentary from Imran, the volume market share gains over that period are even stronger than that. What I'd like to understand from customer feedback, the surveys you do, et cetera, are you able to give us some sense of how much of that you think is due to strong price positioning? And you mentioned your price position has strengthened versus the market this year, and you were aggressive in terms of inflation over the Christmas period. So how much of that is price positioning? And how much is things like investment in availability over Christmas, which is probably particularly strong versus particularly some competitors over the period and things like the store estate, staff in stores, et cetera, over that period? And then the second question is just me trying to understand that level of price investment that you've put in, whether some of that was seasonally specific to the Christmas period. As you mentioned, you never get that volume of customers in store and therefore, important to be on the front foot on price, or whether that is sort of something we should expect to be a bit ongoing? Ken Murphy: Right. Monique, so I think the short answer to your first question is that delivering the kind of market share performance we've delivered, not only over Christmas but right across the year, is actually a composite of great value, great quality, great execution. I think you'll have seen amongst some of our competitors that even if you drive a very strong value message, if you don't have the quality and the supply chain precision and the in-store execution to go with it, it's very hard to deliver the performance. So I would say that our market share performance has been a composite performance of everybody in Tesco across all the functions and departments doing their job really well and executing against the plan. So I think that would be the answer to the first question. The second question around price investment is that clearly, Christmas is the FA Cup final for retailers. So we all lean in very heavily to a very strong trade plan over Christmas. And it's also a chance for customers to reappraise your proposition, shop [ B2B ] for the first time and really like and appreciate what they see. So we work very hard from everything from product innovation through to hiring of nearly 30,000 extra people through to the very strong trade plan that we delivered. And that is quite a specific event. It doesn't necessarily mean anything for the rest of the year per se other than the fact that we will continue to invest appropriately. And I think as you saw from our announcement earlier this week, we acted against a specific customer insight for January, February, which said we needed to provide more reliable Everyday Low Pricing on a wider range of products. And so we've traveled our Everyday Low Pricing range to 3,000. And so what you can expect from us is that we will adapt constantly to insights from customers and react, so that we're giving them the best value and that's appropriate for the moment. Imran Nawaz: Another angle, Monique, as well to keep in mind is the perspective on channels. So when you look at where the market share gain came from over the Christmas period, we got it in large stores, which is great, because that's the key estate. But at the same time, that 11% growth we saw in online also led us to continue to gain market share in our online business, which was also great to see. And given the fact that we are over 36% market share in online, that gave us an extra benefit on market share as well. Operator: We'll now take our next question from Matt Clements from Barclays. Matthew Clements: First question was, you often give a very useful insight into the health of the U.K. consumer at your update. I was wondering if you could just talk us through how sentiment and spending evolved through the period, particularly around maybe November with the budget? And how do you think we're set up on consumer health into '26, government policy, et cetera? And then the second question was around Finest, which is compounding exceptional growth now. Any views on Finest into next year? I mean, particularly around the dining-out to dining-in trend? Do you expect that to continue? What's the innovation pipeline like? Anything on that would be helpful. Ken Murphy: Great. Thanks, Matt. So I think the first thing to say on consumer sentiment is that we've definitely seen that consumer sentiment is mixed. I think we have a section of the community that is in pretty good shape from a household budget perspective. And then we have a section of the community that is really struggling to make ends meet. And I think that is playing out overall in terms of how customers are shopping. They're very value conscious. At the same time, though, there is a significant proportion of households that are in decent shape financially, and they are looking for good value for money. And that, I think, is a big factor in what's driving our Finest sales. I think there is that trend towards eating in more and eating well, and that's driving our fresh food sales. And I think the consumer has shown great resilience in a lot of uncertainty. I think the budget is just one factor in a number of factors that's driving uncertainty. But we have seen a pretty resilient consumer in terms of their spending pattern and habits. And we continue to monitor it very closely. But we, to a certain extent, as long as employment remains strong, expect that resilience to continue. And Finest really is a subset of that. I think Finest, for us, is delivering on 2 fronts. It's responding to that trend of wanting to eat restaurant quality food in your home, but it's also responding to the fact that historically, Tesco would have undertraded in that particular meal occasion or mission. And I think what you've seen for us in terms of the amount of product innovation, the bravery to go deeper into distribution, to go into more and more different categories and cuisines has given us the confidence to really fight for fair share in that meal occasion. And so we still believe there's a lot of room for growth in Finest in the coming years. Operator: We'll now take our next question from William Woods from Bernstein. William Woods: Happy New Year. When you look at your success over the last 5 years, you've had great success with things like Aldi Price Match, Clubcard Prices, Finest, et cetera, and your peers have played catch-up. What do you think are the next levers that you can pull over the next 5 years to continue to innovate, continue to lead the market and gain market share? Ken Murphy: Thanks very much, Will. I think first and foremost, we would say that our strategy of focusing on the core basics and executing them brilliantly and consistently remains a fundamental pillar and foundation stone of our strategy going forward. The second thing I would say is that the building out of our proximity to customers in terms of their food needs is equally important. So what we've done in terms of extending our grocery home shopping, slot availability, the work we've done to build Whoosh into a really market-leading from a value point of view quick commerce model. The launch of F&F online are all contributing factors to getting closer to customers and making life more convenient. And then on top of that, we're working very hard to get really close from a data point of view to our customer base. And that is really starting to deliver results for us. And that, I think, is where the greatest opportunity lies is using data and insight to really get closer and closer to customers and anticipate and serve their needs, both digitally and physically. And we see clearly Clubcard at the very heart of that. And we also see dunnhumby as a clear source of competitive advantage to help us deliver that as well. And probably I should finish by saying something that's not necessarily the sexiest thing, but is absolutely critical, which is that we have an incredibly strong Save to Invest program. Imran has led this since he's joined the business. The step-up in our savings has been extraordinary from GBP 300 million a year to nearly over GBP 0.5 billion a year. And that shouldn't be underestimated in what it has allowed us to do in terms of stepping up capital investment, stepping up our investment in value without ever compromising on the customer journey. So they'd be the key pillars of what underpin our future growth opportunity. Operator: Our next question comes from Ben Zoega from Deutsche Bank. Benjamin Yokyong-Zoega: Just a couple of questions, follow-ups from my side. Firstly, on inflation, and secondly, on supply funding. So firstly, you say you've improved your price position against the market. I just wanted to ask, is this broad-based across competitors, or were there particular competitors that you'd call out as closing that gap against? And are there any particular product areas where you focused your price investments such as fresh foods? Secondly, on supplier funding, is it fair to say that the elevated levels of supplier funding in H1 has continued into Q3 and Christmas, particularly as the market turned more promotional? And are you able to comment on the levels of brand support behind the expansion of Everyday Low Prices? Imran Nawaz: Look, I mean, in terms of inflation and strengthening price position, I mean, we take a view, and we obviously have our own pricing strategy, and we have stuck to that since over the last 5 years. And look, we take a broad view that we want to continue to strengthen versus everyone. I mean, ultimately, the ultimate judge of how strong your price really is, is the customer. And the combination of Aldi Price Match, Clubcard Prices and now Low Everyday Prices, in our view, is the right combination, and it's made us stronger and stronger, and it's working well for us. And I would say to you, it's a broad-based strengthening across most of our competitors, which is good to see. Then in terms of promo intensity and supplier funding, look, the truth is, promo funding has gone up a bit. You saw that from the brands wanting to regain volume growth, which is good for us, because it comes under the banner of Tesco and Clubcard Prices. So we like to see that. That's a good thing. You will have noticed that the Low Everyday Prices is -- or Everyday Low Prices is brand oriented, which is good. Brands like to grow, and they can see that they have grown with Tesco online and in-store, and they want to continue to grow, and we have a great partnership with them. As ever, any campaign or events we run, there are always some investments from our side, some investments from the brand side, but you wouldn't expect me to give you some commercial details on the call here in terms of how we execute these. But suffice it to say, they are customer-centric and data-led. And clearly, the idea behind them is to continue to grow and gain share. Operator: And we'll now take our last question today from Karine Elias from Barclays. Karine Elias: Most of them have been answered, but just one final one. In the release, you mentioned, obviously, the competitive environment being as competitive as ever. Just broadly speaking, I think historically, you've called it more rational. Do you feel that that's still the case? Or perhaps there was some intensity going into Christmas? Ken Murphy: So the definition of rational is always a broad one when you're dealing with 10 to 12 different competitors who are all looking to win the basket from you. But I would say that the market intensity in terms of competition, pricing, et cetera, has remained strong since February last year. It didn't really change over Christmas. But I think what, and hopefully, you will have observed is that our response has been really decisive and really quick, and we have maintained that intensity throughout the year. And that's what really helped us underpin the very strong market share performance that you saw over Christmas. Operator: Thank you. That was the last question today. With this, I'd like to hand the call back over to Ken Murphy for closing remarks. Over to you, sir. Ken Murphy: Thank you so much, everyone, who's joined the call, took the time out. I know it's an incredibly busy day with a lot of announcements from various different companies. So we really appreciate you taking the time to join us. Thank you all for the excellent questions. I wish everybody a really happy New Year and a prosperous 2026, and I'm looking forward to seeing you all in April. Thank you. Goodbye.
Operator: Good day, and thank you for standing by. Welcome to the Richardson Electronics Earnings Call for the Second Quarter Fiscal Year 2026. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand it over to your speaker, Ed Richardson, CEO. Please go ahead. Edward Richardson: Good morning, and thank you all for joining Richardson Electronics conference call for the second quarter of fiscal year 2026. We appreciate your continued support and interest in Richardson Electronics. Joining me today are Bob Ben, Chief Financial Officer; Wendy Diddell, Chief Operating Officer; Greg Peloquin, General Manager of our Power & Microwave Technologies and Green Energy Solutions Group and Jens Ruppert, General Manager of Canvys. As a reminder, this call is being recorded and will be available for playback. I would also like to remind you that we're making forward-looking statements that are based on current expectations and involve risks and uncertainties. Therefore, our actual results could be materially different. Please refer to our press release and SEC filings for an explanation of our risk factors. I'm pleased to report that Richardson Electronics has achieved 6 consecutive quarters of year-over-year growth. underscoring the progress we're making in executing our multiyear strategy. This growth reflects our continued repositioning toward higher growth end markets, and the expanding contribution from our engineered solutions. Equally important, these results are driven by the strength of our people. While investors are familiar with our senior leadership team, we've been intentionally investing across the organization to build depth, diversity and technical expertise throughout our ranks. I believe we have assembled one of the strongest and most motivated teams in the company's history, positioning Richardson Electronics for long-term sustainable value creation. Looking at our Q2 FY '26 results. Total sales were $52.3 million, up from $49.5 million in Q2 of last year driven by sales growth in our Green Energy and Canvys businesses. Operating income improved to $132,000 versus a loss of $667,000 last year. Within our GES business unit, we're very pleased with the year-over-year growth as well as sequential quarter-over-quarter growth. Both onshore wind and EV sales were up over the prior year in Green Energy segment, reflecting higher sales from existing customers as well as sales from new products and expanded customer base. Canvys revenue exceeded the prior year by 28% on improved demand from our medical OEMs. It's important to note that the sales growth was partially offset by the inclusion of our health care business in both the current year and the prior quarters. As a reminder, we sold the majority of our health care business in Q3 of FY '25. So this will impact our year-over-year comparisons through the end of Q3 this year. We also remain focused on managing expenses and improving inventory turns. Our cash position remains strong at $33.1 million providing us with flexibility to support both our ongoing operations and strategic growth opportunities. I'll now turn the call over to Bob Ben, our Chief Financial Officer; who will provide a detailed review of our second quarter results and capital positions. Following Bob's remarks, Greg and Jens will provide updates on our business units and then Wendy will follow up with the progress we are making executing again on our multiyear growth strategies. Robert Ben: Thank you, Ed, and good morning. I will review our financial results for our second quarter and first 6 months of fiscal year 2026 followed by a review of our cash position. Consolidated net sales increased 5.7% to $52.3 million compared to net sales of $49.5 million in the prior year second quarter. When excluding health care, for which the majority of assets were sold in January 2025, net sales increased by 9.0%. Please note that health care results, including prior periods are consolidated into the PMT segment beginning in fiscal 2026. This was our sixth consecutive quarterly year-over-year increase in sales. Second quarter net sales growth was led by a 39.0% increase in GES sales, driven by an increase in power management products. Canvys sales increased 28.1% and which primarily reflected higher sales in North America. Sales for PMT were 4.0% below the second quarter of fiscal 2025. Excluding health care, PMT sales were approximately flat. Consolidated gross margin for the second quarter was 30.8% of net sales compared to 31.0% during the second quarter of fiscal 2025. The slight decrease in consolidated gross margin was primarily due to lower margin in PMT and GES, partially offset by higher margin in Canvys. Operating expenses as a percentage of net sales improved to 30.5% for the second quarter of fiscal 2026 compared to 32.3% in the second quarter of fiscal 2025. Operating income improved to $0.1 million for the second quarter of fiscal 2026 from an operating loss of $0.7 million in the prior year second quarter. Net loss was $0.1 million for the second quarter of fiscal 2026 compared to $0.8 million in the second quarter of fiscal 2025. Net loss per common share diluted was $0.01 in the second quarter of fiscal 2026 compared to $0.05 in the second quarter of fiscal 2025. EBITDA for the second quarter of fiscal 2026 improved to $0.7 million versus breakeven in the prior year second quarter. Please note that EBITDA is a non-GAAP financial measure and a reconciliation of the non-GAAP item to the comparable GAAP measure is available in our second quarter fiscal year 2026 press release that was issued yesterday after the market closed. Turning to a review of the results for the first 6 months of fiscal year 2026. Net sales were $106.9 million, an increase of $3.6 million from $103.2 million in the first 6 months of fiscal year 2025, which reflected higher sales across our business segments, except for PMT. When excluding health care, consolidated net sales increased by 7.8% and PMT net sales increased by 5.2%. Gross margin was 30.9% of net sales which was a slight increase from the first 6 months of fiscal 2025. As a percentage of net sales, operating expenses for the first 6 months of the fiscal year improved to 29.8% from 31.1% for the first 6 months of the prior fiscal year. Operating income for the first 6 months of fiscal year 2026 was $1.1 million as compared to an operating loss of $0.4 million for the first 6 months of fiscal year 2025. The company reported net income of $1.8 million or $0.12 per diluted common share for the first 6 months of fiscal year 2026 versus a net loss of $0.2 million or $0.01 per diluted common share for the first 6 months of fiscal year 2025. EBITDA for the first 6 months of fiscal 2026 was $4.0 million versus $1.7 million in the prior year's first 6 months. Turning to a review of our cash position. Cash and cash equivalents at the end of the second quarter of fiscal 2026 were $33.1 million compared to $35.7 million at the end of the first quarter of fiscal 2026. Capital expenditures of $1.6 million in the second quarter of fiscal 2026 were primarily related to our manufacturing business, facilities improvements and IT systems versus $0.5 million in the second quarter of fiscal year 2025. We paid $0.9 million in the second quarter for cash dividends. In addition, based on our current financial position, our Board of Directors declared a regular quarterly cash dividend of $0.06 per common share, which will be paid in the third quarter of fiscal 2026. As of the end of the second quarter of fiscal 2026, the company had no outstanding debt on its revolving line of credit with PNC Bank. Now I will turn the call over to Greg, who will provide more details for our PMT and GES business groups. Gregory Peloquin: Thank you, Bob, and good morning, everyone. GES and PMT are key components of our multiyear growth plan. Coming out of FY '25, we had strong backlog. We launched several new products, expanded our customer base and advanced multiple development programs from beta testing to preproduction. This momentum continued into Q1 and into Q2. Building on this progress in Q2 of fiscal year 2026, GES grew to $8.3 million, a 39% increase over prior year and 14% increase over this year's first quarter. As we continue to see the amazing adoption of our Pitch Energy Modules for various wind turbine platforms with owner operators and other related power management products throughout the world. PMT sales were $35.2 million in the quarter a 4% decrease over prior year. This reflects a slight slowdown in the electronic device MRO business, offset by growth in the RF and Wireless Components business unit. Our GES strategy centered on power management applications. We've rapidly designed multiple products, secured patents and built a strong base of customers and partners. Our success is evident in our growing sales pipeline as we capitalize on numerous growth opportunities to support new power management requirements and significant energy transformation opportunities. Our Pitch Energy Modules and related wind energy products led GES quarter-over-quarter growth. We continue to gain market share by developing new products and solutions that are accepted by our customers, and the team is doing a great job expanding this program globally. We serve dozens of wind turbine owners operators including exclusive partnerships with the top 4 owner operators of GE wind turbines such as RWE, Invenergy, Enel and NextEra. We also saw growth from our new multi-brand PEM turbine platforms. We continue to grow this program internationally, expanding into Europe and Asia with new products for other turbine platforms such as Suzlon, Senvion, Nordex and SSB. We have now received orders from customers in Brazil, Australia, India, France and Italy in addition to our strong rollout in North America. We are entering the back half of FY '26 with solid momentum. We recently added key technology partners such as KEBA, Goshen and Wulong, who play critical roles in both wind power management and energy storage systems. Key initiatives include faster design to production cycles supported by a new design center in Sweetwater, Texas. Sweetwater has one of the largest concentrations of wind turbine and power management engineers in North America. Expanding our design team to accelerate and enhance design cycles prior to transitioning work to our world-class manufacturing and test group in LaFox, Illinois. This is one of our most critical strategic priorities underway. We expect to have the Sweetwater design center fully operational in Q3 of FY '26. We are also adding key people from the industry to help expedite growth. We are on schedule to complete our Illinois-based demo center in Q4 FY '26. This demo site will allow us to showcase our active BES solutions to potential customers. We are currently collaborating with numerous customers on BES systems that we can support with our current technology partners. In fact, we booked our first system at the end of December. Our GES products and technology partners support our niche product strategies as it appears federal subsidies will be harder to get under the current administration. Looking at our new ESS project and strategies, we are focused on sales in key states, and we'll continue to offer large subsidies such as Illinois, Massachusetts and California. We are also expediting our efforts to expand global market penetration of our power management products for Green Energy applications focusing on Europe and Asia. Currently, about 70% of our GES sales are in North America. Turning to Power & Microwave Technologies Group or PMT, which includes our Electron Device Group, EDG, and our legacy tube semiconductor wafer fab equipment business and the RF and Microwave Components Group, or PMG. In the quarter, we did see some sales growth, led by increased demand in our RF and Microwave Components business as we see growth in RF and wireless applications such as SATCOM and military applications, including radar and drone technology. While semi fab sales were flat in the quarter, we are encouraged by our customers' forecast indicating growth for the rest of the fiscal year. Looking ahead, we are excited about the strategic initiatives across PMT and GES, including our ESS program, global expansion of our key products and new technology partnerships. While we are navigating a higher degree of uncertainty associated with the impact of tariffs and market conditions, we are pursuing opportunities that may come from these disruptions. We are investing in infrastructure, expanding our design and field engineering teams and enhancing our in-house design and manufacturing capabilities. To support growing demand and innovation, our engineering teams continue to identify new customers and opportunities. Our global capabilities and global go-to-market strategy set us apart from our competition in power management, RF and microwave and green energy markets. We have developed a business model that combines legacy products with new technology partners and solutions allowing our growth strategy to deliver engineered solutions to a global customer base. This model differentiates us from our competition. We are working on these initiatives alongside marketing, our manufacturing design services to companies who need partners in the U.S. to manufacture, test and support products currently made in other countries. We acknowledge there are a lot of moving parts but we have successfully used our global resources, infrastructure and capabilities to mitigate the effect of these situations like this in the past. So in summary, we remain optimistic about our growing project-based business, even though it remains hard to forecast. We continue to increase our technology partners, design opportunities and engineering staff. We have a new technology partnerships that fill technology gaps. We have proven strategy of identifying opportunities in the multibillion-dollar markets we serve. As a result, we continue to feel FY '26 will be another growth year for both PMT and GES. And with that, I'll turn it over to Jens to discuss Canvys. Jens Ruppert: Thanks, Greg, and good morning, everyone. Canvys engineers, manufacturers and sells custom displays to original equipment manufacturers across global industrial and medical markets. It is our mission to deliver high-quality display solutions tailored to our customers' needs. Canvys reported revenues of $8.8 million in the second quarter of fiscal year 2026 an increase of 28.1% from $6.8 million in the same quarter of the previous year. Our gross margin as a percentage of net sales increased to 32.6% from 31.7% in the second quarter of fiscal '25, primarily due to product mix. The backlog at the end of the second quarter of fiscal 2026 remained strong at $38.0 million, providing a robust foundation for future business. During this most recent quarter, Canvys secured orders from both repeat and new medical OEM customers for a range of applications. Our primary focus remains on robotic-assisted surgery, navigation endoscopy and human machine interface HMI solutions for the control of medical devices. Furthermore, our solutions are widely utilized in various commercial and industrial applications. For instance, our products enhance passenger information systems in trains and buses and improve HMI technologies used in printing, vending, billing and packaging equipment. Our initiatives focus on increasing Canvys' visibility and market leadership by seeking new opportunities, building customer relationships and collaborating within the industry to drive growth. Looking ahead, while the business is still project focused and can therefore vary quarter by quarter, we are cautiously optimistic about improving demand in our markets. Positive indicators such as increasing request for quotes and encouraging customer feedback suggest steady growth. Our dedicated sales team continues to explore new opportunities while are focused on implementing strategic plans to ensure sustainable growth and deliver long-term value for our shareholders. I will now turn the call over to Wendy. Wendy Diddell: Thank you, Jens, and good morning, everyone. While the remainder of our health care business, including the manufacturer and repair of certain CT tubes is included in PMT, I want to continue providing key highlights as we go through this transition period over the remaining quarters of FY '26. As a reminder, we sell CT tubes exclusively to DirectMed as part of the January 2025 sale and distribution agreements. Over the last quarter, we continued to make excellent progress finishing production of our ALTA tubes. We should wrap this up by the end of third quarter of this fiscal year. We've also made good strides during the recent quarter repairing Siemens Straton Z tubes. We are preparing to launch the repaired Siemens MX series as early as the fourth quarter of this fiscal year. Given the health care transaction occurred in Q3 FY '25, Q2 and Q3 of FY '26 will continue to show unfavorable comparisons. However, the combination of completing the production of the ALTA tubes and expanding our Siemens program for DirectMed will result in an improvement to our bottom line beginning in FY '27. Switching to an overview of our multiyear strategy. We continue to focus on accelerating growth and improving efficiency. In the second quarter, we had significant growth in our Green Energy business unit, reflecting our ongoing investment in this sector and the benefit of new products generating revenue. Today, we are shipping our Pitch Energy Modules for nearly all GE manufactured turbines to an expanded customer and geographic mix. There are several additional products in development and test that should start contributing to revenue growth in calendar year 2027. We also continue to make progress developing a world-class battery energy storage design center at our LaFox facility. As we've mentioned before, the demand for battery energy storage continues to accelerate and our turnkey solutions and technology partners position us to capitalize on that growth. In the quarter, we added several projects to our pipeline, including one that closed end of December. Our made in America activities are also generating interest. We are utilizing existing customer and supplier relationships to promote our engineering and manufacturing capabilities here in the U.S. We've reached the quoting and prototype stage on several programs, primarily taking advantage of our PCB facility as well as our battery knowledge. This isn't a fast process but the upside of new programs will play a key role in fully utilizing our factory and resources. Finally, we are expecting stronger demand for our engineered solutions within the semiconductor wafer fab equipment market, well into calendar year 2026 and beyond. This growth is tied to the ongoing benefit of AI on equipment demand throughout the world. We are well positioned to benefit from growth in memory-related applications. This growth takes advantage of our existing resources and manufacturing facilities as well. We remain focused on efficiency and cash generation. The period of elevated inventory investment relating to a single critical supplier is nearing completion as that supplier prepares to exit production of powergrid tubes. We expect final inventory receipts of approximately EUR 1.5 million in the first quarter of calendar year 2026, after which inventory levels should normalize and cash conversion improve. This inventory provides product coverage through 2030. We have identified alternative supply sources with sufficient time to ensure continuity, quality and fulfillment of customer demand. Outside this area of growth, we continue to focus on controlling inventory and improving turns. We have also initiated a disciplined cost-controlled effort to explore the benefits of AI by creating an enterprise-wide AI steering committee. This effort is expected to create a road map focused on practical high ROI applications across our global operations. The goal is to drive efficiencies, improve decision-making and reduce manual workload while maintaining strong governance around security, data privacy and responsible AI use. Importantly, this initiative is designed to leverage our internal teams with clear milestones and tight scope controls, ensuring we capture meaningful benefits without significant incremental cost. Longer term, we remain focused on driving growth through a combination of organic initiatives and a disciplined approach to acquisitions. We continue to evaluate opportunities thoughtfully with an emphasis on leveraging our existing capabilities and global infrastructure to support sustainable growth. We believe our current strategic initiatives position us well to drive revenue and profitability over time while we remain patient and selective as we consider potential longer-term acquisition opportunities. I'll now turn the call back over to Ed. Edward Richardson: Thanks, Wendy. In closing, our results this quarter demonstrate the strength of our strategy and the resilience of our business model. It also reflects the talent of this management team to adjust to constantly changing market conditions. By sharpening our focus on repeatable sales, driving strong cash flow and building on our scale across power management and alternative energy solutions, we're positioning the company for long-term success. At the same time, we remain disciplined in our commitment to improving profitability. These priorities give us the confidence in our ability to deliver sustainable value for our shareholders, customers and employees as we move forward. We'll now open the call for questions. Operator: [Operator Instructions] Our first question will come from the line of Bobby Brooks from Northland. Robert Brooks: You mentioned how overall GES backlog declined, but that core backlog grew. Could you just discuss what would be considered core backlog versus noncore? Gregory Peloquin: Sure, Bobby. This is Greg. So the backlog -- so sales were up 39% and backlog was down $57,000. That's not too bad. You grow 39% your backlog only decreases $57,000. So when I talk about core backlog, we have the products that you and I have talked about, the Pitch Energy Modules and everything else. We also have a group of customers that are -- we're selling components into that are building Green Energy products. It's a much smaller portion of GES, but that's what we call the noncore and that book-to-bill was down. But if you look at the core business, which is 95% of it, the book-to-bill was 1.10 on 39% growth and of course, 15% above that. So we're very excited about the business -- core business that we talked to you about that you know about. Those are the products that are growing. Robert Brooks: Got it. That's helpful and really good to hear. And then maybe what's -- what's the right way to think about cadence of orders turning to backlog and then revenues within GES? Like are there certain product lines that can be booked and shipped inter-quarter? And that maybe was a dynamic that spurred the strong GES sales in the quarter? Gregory Peloquin: Exactly, Bobby. So as these products come out, they go from alpha beta to production, and then once that happens, you see we have new customers every quarter, new sales. And so that business is what led to the growth. And as you know, we're expanding that model, which is about 85% North America, expanding it into Europe. So we had wins in Europe that we booked and then wins in Asia that we booked. So that core business that we talk about that's growing quite heavily, and we continue to get new customers and backlog. So we're starting to understand what the annual usage is. And so we're trying to get ahead of the game and build products for stock. It's a guessing game. They do give us a forecast, but they're terrible forecast. So in Q2, we did ship a lot of product from stock. So that's a book-to-bill of 1. That's flat bookings or backlog, and that's where you saw it. So the team has done a great job working with these key customers, trying to develop their annual needs. And then when they come in for 1,000 units, just kind of out of the blue Bobby, I know a couple of those were able to ship from stock. So that's how it's working. And we're continuing to try to make sure we have inventories so we can ship from stock. But in a very positive way, we're seeing higher demand than what we're building. Operator: Our next question will come from the line of Anja Soderstrom from Sidoti. Anja Soderstrom: So I'm just curious with the GE approval list for the [ ULTRA1000 ], where do you -- and what kind of opportunity could that present? Gregory Peloquin: Say it again, Anja. For the what product? Anja Soderstrom: The [ ULTRA1000 ] for the GE approval list. Wendy Diddell: I think Anja is asking about the GE, where do we stand with GE getting approval for the -- for your ULTRA3000. Gregory Peloquin: Okay, yes. So... Anja Soderstrom: Okay. I am sorry, just mixed up. Gregory Peloquin: So Anja, we have GE approval. We're the featured product on their Internet site or their marketplace product. What -- we're not driving this. This is being driven by their customers. So NextEra and Invenergy has been pushing GE because they have a handful of sites where they're using GE services to do maintenance and service. And so all we need to do is have GE. We're going to send them some product, and they're going to try to literally blow it up. I mean it's all about what this product will do so they can improve it from a safety point of view. From a performance point of view and working in their turbines, that's already been approved, that's already done. So we've been going back and forth with an NDA. I've worked for a $30 billion big company -- for the $30 billion company before, and it just -- it takes time. So we have an agreed NDA. We signed it. We sent it back to them. We're expecting it back. But I will tell you, Anja, these people aren't waiting. In fact, we booked a large number of business that they said, you know what, will outsource this ourselves. We won't use GE services to install these Ultra3000s, which we've been buying for other sites for 3 or 4 years. So it really right now, I don't see it being a slowdown of any sort. We have more than enough business right now. It will be an upside. But I wouldn't doubt if they just say, you know what, we're not going to use your services to do our Pitch Energy Modules because these things are such a cost savings to these owner operators and they eliminate a huge problem that they have, I don't think they're going to wait for this. So this is being driven by GE's customers. We're just supporting it. But again, we finally have an agreed NDA because I'm not sending them any product without an NDA. We're going to send them products here this quarter, they'll test them, and then they'll say, okay, their service group can install these into the turbines. But it's interesting, some of these owner operators aren't waiting for them. They're just doing it themselves and installing it themselves or outsourcing it. Anja Soderstrom: Okay. That was helpful. And then what's kind of margin impact does the medical have. What kind of opportunity do you see there as you conclude that supply agreement? Wendy Diddell: Okay. So this is Wendy. Year-to-date, the overall hit to the gross margin in PMT has been almost negligible. It's about a 0% gross margin, so we're not experiencing a huge hit there. It's the addition of the SG&A. And on a year-to-date basis, while we're doing better than we anticipated with that, we still are losing money. As we mentioned in the call, we anticipate finishing up the ALTA tube production in the third quarter. And when we conclude that, and we're focusing then strictly on the repair of the Siemens tubes. We expect that to turn to a profitable bottom line contribution. So I'm estimating, we're estimating at this point that, that will begin in Q1 of FY '27, but we're going to do everything we can to pull that into Q4. Anja Soderstrom: And then you're sitting on some cash, and we expect cash flow to improve as you are finishing building up the inventory for the powergrid tubes. What do you plan to do with all the cash? Wendy Diddell: Well, I'll jump in first and then Ed and Bob can also contribute. The first thing we always remind everybody, Anja, the cash is spread out throughout the world. And I believe today, about 70% of it sits outside the United States in various legal entities. And that cash has to stay there. So while it looks like -- I mean, $33 million is a great number, and we're going to continue to focus on growing that. Please do remember that some of that is not in the United States. So we're going to continue investing in the growth initiatives primarily in the alternative or green energy solutions part of the business. We -- Greg mentioned the Sweetwater, Texas facility and improving our new product development cycle. We're looking at some additional both sales and engineering resources that support that business. So we really want to hold that money that we have in the United States for those type of investments. We are continuing to be very opportunistic and open-minded about small acquisitions. Those would be ones that would be easily bolted on. Again, focused primarily in alternative or power management and focused in areas where they bring in engineering or some type of product that is unique or exclusive to the market. So those are the areas where we're really holding our cash. Ed and Bob may want to add to that. Robert Ben: I can add to that. Anja, it's Bob Ben. Just to let you know, we do -- the cash that we have on hand that we're not necessarily using on a daily basis. We have invested in various money markets, and we're getting an average yield of about 4% right now, just under $10 million of our total cash is invested in that. And so we are doing that and that's what you see on the income statement as investment income, which is located in the other income section of our income statement. Anja Soderstrom: And then a last question in terms of the semiconductor. What do you see there? And do you still expect that to pick up in the second half of '26? Wendy Diddell: In the semi fab equipment market. Is that your question Anja? Anja Soderstrom: Yes. Wendy Diddell: Yes, absolutely. From all of our customers in that market segment, they are anticipating solid growth through the rest of calendar year 2026 and beyond. And we're starting to see some of that in our more near-term forecast. Operator: Our next question will come from the line of [ Chip Rui from Rui Asset Management ]. Unknown Analyst: I want to follow up on the semi question that was just asked. I mean it seems memory has gone from dead on arrival to the hottest thing out there. I know you've not exclusively memory on your both sides. But has there been a cadence shift with what your customers have talked about. I know last quarter, Ed said you would finally kind of work through kind of end customer inventory. Can you just give us a little bit more visibility on perhaps a cyclical recovery there? It seems you're still a little low from a revenue and earnings point of view, but historically a large contributor for the company. So kind of when you say there's a better outlook, is it inflected positively? Or are you still hoping it will inflect positively? A little more color on that would be great. Wendy Diddell: So I'll start on that, [ Chip ]. So as I mentioned, we're starting to see stronger forecast for our Q3 and Q4. Bear in mind that the forecasting is not always the best and it tends to bounce around a lot as we've been discussing really for the last couple of years. But we do see, again, across multiple customers within that channel their input to us is get ready. We are ready. We have the resources. We have the space. It's not going to cost us a lot of money in terms of realizing upside. I also want to point out that on a year-to-date basis, Q1, Q2, we're still up considerably over prior year's first 2 quarters. So we are cautiously to more than cautiously optimistic about Q3 and Q4, and we're ready. So I don't know if that answers your question, maybe you could follow up if you have anything more you want to know. Unknown Analyst: No, that's helpful. It's just -- I know it's up a little bit, but we're still -- it seems like the industry is gearing for a pretty big upcycle. And even though you're up, you're still nowhere near where you were a couple of years ago. So hopefully, it's some upside. And then I'll just make a comment on the buyback. I've never pushed you guys your buyback. I understand where your cash is globally. But everybody on the call was bullish across the board this morning from pitch energy, not only with GE to global, it seems semi is getting better. You've got new product development. It seems to me the enterprise is inflecting positively on multiple levels, yet your stock is once again down and the analysts are focused on backlog and sequential margin. I know you don't have a lot of cash, but $3 million or $4 million of that cash could be a couple of percent of your market cap. You also have an undrawn revolver, which would be in the U.S. My recommendation is carpe diem. I mean if there's a time to buy stock, it's when it's down and when people don't see the vision that you guys see. It seems to me if what you're saying comes to fruition, this is just an incredible opportunity. So I'll leave that as a comment. Wendy Diddell: Thanks, [ Chip ]. We appreciate the input. Operator: [Operator Instructions] Our next question will come as a follow-up from Bobby Brooks from Northland Capital. Robert Brooks: Could we maybe just discuss the growth initiatives that you guys launched a couple of quarters ago and kind of how those are progressing in a little bit more detail? Just curious to hear more on that. Wendy Diddell: Are you referring specifically to the made in America program or specific products under Green Energy? Robert Brooks: Just kind of broadly any growth initiatives that came -- that kind of step from the cash that you got from some of the health care business. Gregory Peloquin: I can talk a little bit about the PMG and the PMT and GES business. So as you know, Bobby, the growth initiatives were: one, to expand internationally, the product; two, implement our energy storage system program and continue to add new products. And all of those were successful in the past 2 quarters. So on the global expansion, as I think we've talked about, we now have orders and have shipped orders into Asia and Europe. We are coming out 3 new product -- I'm sorry, 2 new products in Q2 from our new Sweetwater design center that are already in beta testing with a couple of very large owner operators. So we'll introduce those and we fully expect to start receiving bookings for that. And on the ESS side, we rolled it out. We have technology partners. And in December, we booked our first order for energy storage system with the town or the city or city of Goleta, California for their water waste treatment facility. We will also be supplying the solar panels for that and the energy storage system. Through that process, it kind of confirmed that our niche approach going after utility and small -- comparatively small, very large to us, 2-megawatt type systems. That was booked in December. And we have a list of other ones that we're pursuing in quoting. These quotes are 10 to 15 pages a piece. But we're still very excited about our strategy in terms of technology partners that component business grew. Our Engineered Solutions business grew. We've added new products. And then the BES thing as we grow it, we really feel strongly, especially for the State of Illinois, once that demo center is in place and people can see it. See how it works and see we would train them and educate them on how to get all these rebates that the State of Illinois gives the best in the nation, even better than California. So those are our main initiatives, and we have traction. I'm not a patient person. It's never been one of my attributes of the few I have. But we continue to push, and we continue to every month, get some sort of success and a handful of indications that we have the right strategy, the right technology partners and a real niche that we found in these multibillion-dollar markets. Wendy Diddell: And Bobby, I would just add to that -- okay, go ahead. Robert Brooks: No, you go. You go. Wendy Diddell: I was just going to add in terms of other investment areas. When you look at our SG&A, you're going to see that's relatively flat. Our headcount is flat. What we're doing there is as we have normal turnover, we are reallocating those resources to the high-growth areas that Greg just went through. So you're not -- no one should expect a huge pop in the SG&A as a result of these investments. We've talked about the spend on the Thales inventory, and that should be ramping up. So that's one area where we've continued to spend some money. On CapEx, Bob mentioned in his script that we've made some necessary facility and IT improvements. We also added a second PC board layout facility here, which is playing in nicely with the made in America initiative that we launched a couple of quarters ago. So in general, I think what you're going to see is us moving some things around, again, rationalizing and gaining efficiency from a lot of the people and the resources that we already have. Robert Brooks: That's great to hear. And then just one clarification, Greg, in your opening remarks, you kind of mentioned some tailwinds in the PMT business and some -- and what seemed to be some headwinds in the business as well, like that occurred intra-quarter. Could you just expand or talk about that again and maybe expand on it a little bit more? Or -- and maybe I was missing the ball, too. Gregory Peloquin: Yes. I mean I don't know of any substantial tailwinds in PMT. We obviously have a good grasp on the semiconductor market. We have seen some strong revenue and bookings on the RF and wireless side. We're seeing -- and just a reminder, Bobby, at one time before we sold it, that group was up to $0.5 billion. So we know that market very well, and we have a lot of relationships, and we have probably some of the best RF and wireless suppliers in the world. And we're really seeing some traction again in the quarter from a tailwind point of view in the SATCOM and actually drone markets. And so that was a nice pickup for PMT anyway in terms of sales. It's lower-margin business. It's demand creation, but it's components are made by our technology partners. So that maybe is somewhat of a tailwind in terms of where we saw some upside in PMT and where we will see some upside going forward. Wendy, I'm at Mayo Clinic, everybody. I got -- I have to go a -- meet with my surgeon. However, the last time I was here it was 3.5 years ago with a hip replacement and a half hour after that surgery, I got a call from NextEra with a $10 million order. So I might stay here the weekend and see if I can pick something else up. All right, Wendy. Wendy Diddell: Thanks, Greg. Operator: Our next question will come from the line of Ross Taylor from ARS Investment Partners. Porter Taylor: A couple of quick questions. One, with regard to the semi-cap equipment space, have you guys built prebuilt product for that, it's something on your work in progress or your finished goods inventory line there that you've been -- because you've been preparing for this for some time. It seems that they have been a little slow getting the pull-through. Wendy Diddell: Ross, yes, we do that where we can. I think we've described the business before as being very high mix, low volume. So it's not the type -- it's not like the ULTRA PEMs or the ULTRA3000s where we can build them. It's all the same products. So we don't have the kind of inventory that maybe you envision of having thousands on the shelf ready to go. But we have good exposure and good track record in terms of what the demand is. And we are certainly doing everything we can to make sure that when those orders come in, they go out almost instantaneously. So little bit of a mixed answer there for you. Porter Taylor: Okay. And that's still should be -- historically, it's been -- think about your highest margin business. And I would assume that should you get back to more aggressive run rates, that would return. Wendy Diddell: It's a good business for us. Porter Taylor: Okay. Another quick question. Can you talk about -- give more color on the battery storage opportunities? And what kind of magnitude, what kind of time line are we looking at in that space because it's a fairly -- I mean, it seems to be a very important area we're seeing, whether it's AI data centers or quite honestly, just even factors or others given the nature of the grid. Wendy Diddell: So Greg, just dropped off, Ross, that would be an area for him to address. But what we can tell you is that his list of opportunities continues to grow. They range right now in size, magnitude anywhere between maybe $0.5 million on the small end to a couple of million or more on the large end. He is focused and the team is focused heavily in the industrial and commercial market, more of the let's look at it as kind of Tier 2, not the data AI centers per se. Those might be a little bit bigger than what we're planning to build. But it's an area where we've seen a lot of strong interest particularly in the states that Greg mentioned where the states are still providing a lot of incentives. But I don't think anybody can pick up anything and read anything without seeing the growth in energy storage requirements. So we fully plan to take advantage of that. And we'll try to bring some more color to that in the next call. Porter Taylor: Okay. And do you think -- one like philosophical, you and I've had this question, one of the things that this company has struggled with is it's historically been more of a project-based business. Do you see some of these things we're talking about here, becoming basically run rate businesses where we can kind of see a more steady annual flow through in top and bottom line? Wendy Diddell: I think you see that already. Certainly, you see that in EDG. We've talked about that. I think you're seeing it in the green energy piece with the wind. And I would expect that not only to continue to grow as we expand both the customer base and the geographic area that we cover. I think those -- I call those bread-and-butter items. I love them because to your point, they're going out on a regular cadence. Some of the train, the EV rail, the -- for example, the starter modules those will be more steady run rate. But we always are focusing on and trying to focus on products that will apply to a much broader market, not simply one customer or one program. Porter Taylor: And obviously, success there would be, I think, important. It would take away a lot of the volatility in earnings. And I will offer my comment on buyback. I think my position on it is well known. It's been voiced many times on these calls in the past. What I would say is, I can't believe that your Board doesn't think this company is worth substantially more than book value and you're currently trading at or under book with a substantial 20% of that being cash here or overseas? And so I know what I'd be saying if I sat on your Board, I'd be arguing that this company is worth a lot more than book, and you should be quite comfortable buying it back at under and even around book. So that's coming from, I think, from a long-term shareholder, but someone who really would love to see you guys start to actually become a little more proactive. Don't be so afraid of a tiny little level of debt. So I support the earlier comment that even going into your revolver to buy back $4 million or $5 million worth of stock would be, I think, greatly appreciated by the market and would be reflected in the share price. Operator: And our last question for today will come from the line of [ Brett Davidson ] as a private investor now. Unknown Attendee: I realize Greg has dropped off the line, but I'm hoping somebody can provide some level of update on the electric locomotive product lines and the manufactured diamond product lines. Wendy Diddell: All right. I'll start with that. So let's take the latter one first on the diamond. What we've seen there in that market, and I think again, everybody has read about is that, that market became very quickly saturated, oversaturated the synthetic diamond market. And as a result of that, we've seen a slowdown in the demand for those magnetrons that are used in the equipment that manufactures the diamond. When Greg referred earlier to some of the other elements of Green Energy Solution being down, that's one of them. So in that area, it's still out there. We're still selling them. It's just again, an overcapacity of equipment already on the market and certainly an overcapacity of the synthetic diamonds. All right, in terms of the EV rail market, I think Progress Rail recently put out some of its own press that they have recently shipped 2 of the large trains to Australia. So we're pleased to see that. You may recall in FY '23, we shipped a significant amount of batteries that are used in those trains. So we're going to sit back on the sidelines and see how those 2 trains perform in Australia and what that means for the future. On a more steady cadence basis, as I just referred to in my answer to Ross Taylor, is that we are now shipping on a regular run rate, the starter modules, and we expect to see some upside there. So in general, I would say that the EV rail market certainly is favoring more of a hybrid approach. This is outside of Richardson. This is the general market. More of a hybrid approach, but our starter modules, they are used in any train, whether it's diesel, electric or hybrid. So we remain optimistic about growth in that segment of the business as well. Operator: Thank you. And I'm not showing any further questions in the queue. I would now like to turn the call back over to Ed Richardson for closing remarks. Edward Richardson: Thanks, Victor. Well, thanks again for joining us today and for your questions during Q&A. We look forward to discussing our performance with you in April. And until then, please don't hesitate to call us at any time. Thank you very much. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
Operator: Thank you for joining today's conference call to discuss Tilray Brands' financial results for the second quarter fiscal year 2026 ended November 30, 2025. [Operator Instructions] Now I'll turn over the call to Ms. Berrin Noorata, Tilray Brands' Chief Corporate Affairs and Communications Officer. Thank you. You may begin. Berrin Noorata: Thank you, operator, and good afternoon, everyone. By now, you should have access to the earnings press release, which is available on the Investors section of the Tilray Brands website at tilray.com and has been filed with the SEC and SEDAR. Please note that during today's call, we will be referring to various non-GAAP financial measures that can provide useful information for investors. However, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. The earnings press release contains a reconciliation of each non-GAAP financial measure to the most comparable measure prepared in accordance with GAAP. In addition, we will be making numerous forward-looking statements during our remarks and in response to your questions. These statements are based on our current expectations and beliefs and involve known and unknown risks and uncertainties, which may prove to be incorrect. Actual results could differ materially from those described in those forward-looking statements. The text in our earnings press release includes many of the risks and uncertainties associated with such forward-looking statements. Today, we will be hearing from key members of our senior leadership team, beginning with Irwin Simon, Chairman and Chief Executive Officer who will provide opening remarks and commentary, followed by Carl Merton, Chief Financial Officer, who will review our financial results for the second quarter of fiscal year 2026. And now I'd like to turn the call over to Tilray Brands' Chairman and CEO, Irwin Simon. Irwin Simon: Thank you very much, Berrin, and good afternoon, everyone, and happy new year. Thank you so much for joining us today. We delivered a strong second quarter marked by record results and a beat against analyst expectations in the face of strong headwinds. We recorded our highest ever Q2 net revenue of $218 million, achieved an adjusted EBITDA of $8.4 million, and a reported reverse stocks with adjusted EPS loss of $0.02, all while generating an adjusted cash operating income of $6 million. More importantly, the quality of our performance continues to improve. Highlights this quarter include a 51% sequential growth in the international cannabis revenue and a meaningful year-over-year improvement in both net income and free cash flow. We also continue to strengthen our balance sheet. We ended the quarter with approximately $292 million in cash and marketable securities and reduced our debt by approximately $4 million during Q2, leading to a strong net cash position exceeding our debt by almost $30 million. In a rapidly evolving global cannabis regulatory environment, particularly in the U.S., our liquidity and balance sheet strength remains a clear strategic advantage. Today, Tilray operates more than 40 brands in more than 20 countries. We are a global leader in cannabis trusted by patients, health care professionals and regulators worldwide. We are the #1 cannabis producer in Canada by revenue, the fourth largest craft beer brewer in the United States and a market leader in branded hemp wellness products across North America, where our high-protein hemp food portfolio holds a nearly 60% market share. Our Q2 results reinforces the momentum we discussed last quarter, improving fundamentals, sharper execution and increasing leverage from our diversified global platform across cannabis, beverage and wellness. Let's turn to our cannabis business, which is strategically positioned for its next phase of growth. While global cannabis markets continue to evolve, we believe the industry remains early in its long-term development cycle. The decision by President Trump to federally reschedule cannabis in the U.S. represents one of the most consequential regulatory shifts that the industry has seen in decades. Thank you, President Trump, if you're listening today. This is a moment Tilray has been preparing for methodically for years. And guess what, we are ready to go. We believe that cannabis rescheduling for Schedule III will lead the U.S. towards a federally compliant medical cannabis brainwork consistent with our other developed international markets, Tilray is positioned to act immediately. We already have the platform, regulatory experience, operating capabilities and leadership team in place with Tilray Medical U.S. to execute responsibly and to scale. Globally, Tilray Medical is expected to generate approximately $150 million in revenue on an annual run rate. We offer over 200 medical cannabis products, serving more than 500,000 registered patients worldwide. We have participated more than 25 medical cannabis studies and clinical trials conducted in the U.S., Canada, Australia, Argentina and across Europe with leading hospitals, physicians addressing conditions such as pediatric epilepsy, cancer-related nausea, PTSD, chronic pain, anxiety, essential tremors, alcohol use disorders, glioblastomas, cannabinoid impairment and driving performance. These initiatives reinforce Tilray's reputation as a science-driven evident-based medical cannabis company and they underscore the trust placed in us by health care professionals, patients and regulators globally. We also possess one of the largest banks of cannabis genetics, which we intend to study in order to support research on the endocannabinoid system and advance medical cannabis science further. Now let's turn to Q2 cannabis performance. Global cannabis revenue increased to $68 million, our high-margin international cannabis business led the growth, increasing 36% year-over-year and 51% substantially to $20 million, marking one of our strongest international quarters to date, and we fully expect this momentum to continue as we expand our global footprint. This performance is particularly notable given ongoing permit challenges, regular transitions in Portugal and Germany and continued price compression, especially in flower. I'd like to acknowledge and thank the international team for their focused execution under these circumstances. I also want to recognize our Canadian cannabis team for their expertise, support and supply contribution. Additionally, I appreciate the cooperation of Infarmed and the Portuguese regulators to facilitating improvements to permitting approval time lines. Looking ahead, Europe, particularly Germany, the U.K. and Poland represents a significant growth opportunity for us. Execution will be driven by operational disciplines, including process improvement, automation, cross-functional coordination and increased utilization at our cultivation facilities in Portugal and Germany and utilizing our Canadian facilities. Tilray operates one of the largest cannabis footprints in Europe which we're continuing to expand and our advantage lies in scale, speed to market data-driven decisions making and experience gained from our Canadian operation. Moving on to Tilray Pharma and our distribution business. As discussed last quarter, we're expanding our pharmacy reach in Germany, utilizing Tilray's Pharma expansive pharmacy network and salespeople and expect to triple our medical cannabis distribution footprint in fiscal 2026. We remain on track to achieve these objectives. In terms of Q2 performance, revenue grew by 26% year-over-year and 15% sequentially to $85 million, making it our biggest quarter ever, while improving our gross margins. The increase in distribution revenue in the period was driven by competitive pricing, portfolio optimization and increased focus on medical device sales. Looking ahead, Tilray Pharma is laser focused on enhancing operational efficiency to support its commercial expansion into 3,000 additional pharmacies through strategic partnerships. As medical cannabis continues to expand globally, Tilray Pharma is positioned to play a significant role in our overall growth by utilizing insights gaining through integrating our medical operations Tilray Pharma aims to strengthen its business value and create new growth opportunities within both the European medical market and the U.S. International markets remain one of Tilray's most compelling long-term growth drivers as we expect market opportunities, revenue, profitability continues to grow. In Canada, our cannabis business continues to reinforce its leadership position. During Q2, our adult-use medical sales channel, net of excise tax, grew to $46 million with recreational cannabis growing 6% in the quarter. Tilray continues to hold a leading market position in dried flower, non-infused pre-rolls, beverages, oils and chocolate edibles. Our disciplined approach to product mix, margin management and premium pricing has supported our strategic reentry into the high-growth segments as vapes and infused pre-rolls with a focus on accretive margins. In Q2, we advanced our innovation pipeline with the launch of Redecan Amped Live Resin Liquid Diamond vapes, addressing consumers' demand for the full spectrum of cannabinoids strain-specific terpenes that deliver an authentic plant profile. This product combines 80% of live resin with 20% of liquid diamonds, maximizing potency while maintaining natural flavor integrity. In addition, we entered the Quebec market with vapes with a Good Supply brand, rapidly achieving that top 3 SKU positions in the province while underscoring effective execution and strong consumer update. Operationally, we hit our highest quarterly volume in 2 years with over 5.5 million units shipped in Canada in Q2. We also completed our first harvest from our restarted outdoor cannabis grow in Cayuga, Ontario, exceeding expectations on the THC content. With this extra biomass, our cannabis cultivation capacity rises to 200 metric tons annually but this boost not only allows us to provide high-quality products at reduced costs and improve our profit margin, but also helps us expand into fast-growing markets, supplying both Canadian and international customers, including those in Europe to meet increasing global demand. The positive momentum of the past two quarters reflect the trajectory of Canadian cannabis business With the right product mix, healthy margins, we're well positioned to elevate this business in the second half of 2026 and beyond. With the reschedule of cannabis in the U.S. now is the time for Canada to modernize its regulation and secure its position as a global cannabis leader, including excise tax reform, marketing flexibility, health care integration and on-premise consumption. Without modernization, Canada risks becoming an exporter of raw products while value creation, intellectual property and long-term economic growth moves elsewhere. As a global policy accelerates, the choice is clear, modernized Canada's cannabis regulation to support economic competitiveness, consumer education, sustainable growth or risk being left behind in an industry Canada helped to create. Prime Minister Carney, I hope you're listening to this call, the Canadian cannabis industry has generated a significant amount of jobs, contribute billions of dollars in tax revenues of both federal and provincial governments. However, the lack of regulatory reform is resulting in Canadian producers redirecting their investments and attention towards international markets where excise tax can be circumvented. Given the declining spirits industry in Canada, excise tax should be reduced, cannabis drinks should be permitted in liquor stores and on-premise location, medical cannabis sales in drug stores with lower excise tax burden while boosting overall tax revenues as the industry grows. Turning to our beverage business in Q2. Beverage revenue totaled $50 million. We continue to make progress executing our integration and optimization strategy. We delivered $27 million in annualized cost savings in the first half of the year and remain on track towards our $33 million target. We're making meaningful progress in improving performance. However, there is more to be done as we continue to integrate our brands, streamline operations and optimize processes. We acquired brands with the understanding that significant improvements and comprehensive turnaround would be necessary. A process that is currently underway through our integration plan, we recognize this transformation will take time. And while we have not achieved all our objectives. We are on track and encouraged by the positive momentum gained so far. We look forward to the up-and-coming spring product resets with our retail partners and the introduction of some of the new innovations in the market. These changes are anticipated to have a positive impact on revenue in the fourth quarter. Our outlook may seem bullish but conviction is essential for success, which remains our primary focus revitalizing the craft beer category, making beer fun again, bringing people together, fostering meaningful connections and generating long-term value for our shareholders. We've established brands, breweries, a major distribution system. Tilray is here to stay and not going anywhere. Tilray aims to expand its regional national and global presence through strategic partnerships with leading U.S. and international brands. We expect to share more about this in the future but we believe these partnerships validate the strength of our platform and our strategic vision. This approach also position us for future opportunities, should cannabis THC drinks become federally legal in the U.S. We're ready to produce and sell as we're currently operating a leading THC beverage operation across Canada with over 45% of the THC beverage market share. Regarding our U.S. hemp-derived THC business, we continue to offer Fizzy Jane's, Happy Flower hemp-derived THC beverages with 5-milligram and 10-milligram formats through nationwide retailer partnership. Distribution includes, nature wine liquor grocery outlets across the country. While regulatory changes may affect HDD9 products after 2026, we anticipate compliant participation under new federal laws, if it happens. We're also pursuing international growth by expanding our beverage business into new markets worldwide, we're expect to leverage our future strategic partnerships. Our strategy for beverage abroad is evolving with an emphasis on craft beer and nonalcoholic drinks, including energy beverages that meet the demands of consumers in this expanding sector where brands such as HiBall, our clean energy drink, Liquid Love, our sparkling water brand. HiBall is set to launch in the U.K. in Q4, with the expansion plans also underway for the Middle East and Africa. Beyond nonalcoholic beverages and the energy drinks, we continue to explore opportunities to build on our global craft beer segment. Tilray recently participated in the American Craft Beer Expo in Japan and gain valuable insight which the team will pursue in the future. Rounding out our beverage strategy, we're also focused on expanding our nonalcoholic beverages in the U.S. and across international markets. our recent innovations, including non-alc beers under Montauk, 10 Barrel and our non-alc ready-to-drink canned beverages and distilled spirits, including Mock One. Within the spirits category, despite market challenges in Q2, we focus on enhancing our commercial strategy, resulting in a 9.2% increase in depletions across vodka, bourbon and gin with vodka leading by double digit for the quarter. While the Broncos seasonal release sold out rapidly, our ongoing efforts to remain focused on expanding product distribution to additional states and beyond. With 5 years experience in the beverage alcohol industry, we remain confident in our future trajectory as we continue to enhance operational efficiency. Now turning to our wellness business. We generated revenue of $14.6 million, driven by a strategic focus on value-added innovation including high-protein, superseeds, better-for-you breakfast products, better-for-you snacking and the continued success of our HiBall clean energy drinks. Within our ingredient sales business, we've expanded our range of offerings in hemp protein, hemp oil, helping us further develop our business in North America and Asia. Our hemp food business remains fully insulated from proposed hemp THC regulation as these products contain zero THC and are broadly distributed across mainstream retail. In closing, we are confident in Tilray's trajectories for the second half of fiscal 2026 and beyond with a diversified, scalable platform, improving fundamentals strong liquidity, regulatory tailwinds developing globally, Tilray is well positioned to capitalize on the next phase of growth across cannabis, beverage and wellness products. Thank you to our shareholders for your continued support and confidence in Tilray's long-term strategy. I will now turn the call over to Carl to walk through our financial results in more detail. Carl, are you ready? Carl Merton: Thank you, Irwin. Before I begin, please note that we present our financials in accordance with U.S. GAAP and in U.S. dollars. Throughout our discussions, we will be referring to both GAAP and non-GAAP adjusted results and we encourage you to review the reconciliation contained within the press release of our reported results under GAAP with the corresponding non-GAAP measures. This quarter, we are reporting record second quarter net revenue and strong year-over-year improvements in profitability, and we are reaffirming our full year 2026 adjusted EBITDA guidance. Net revenue for the quarter was a record $217.5 million. Revenue growth was primarily driven by strong results in our international operations, both international cannabis and Tilray Pharma. Additionally, Canadian adult-use revenue grew year-over-year. Cannabis net revenue increased year-over-year to $67.5 million during the quarter driven by a strong 36% increase in revenue from international cannabis and a 6% increase in Canadian adult-use cannabis. The continued year-over-year growth in our international cannabis business reinforces our view that Q1 results were temporarily affected by the timing of import and export permits. As a result, Q4 2025 and Q2 of this year provide a more accurate reflection of our ongoing performance expectations for the duration of the fiscal year. With the continued growth of international cannabis, we deliberately chose to scale back supply into the Canadian wholesale market in the quarter and redeploy that supply, along with new growth into the higher-margin international cannabis markets over the remainder of the year. Beverage net revenue for the quarter was $50.1 million. Beverage revenue was impacted by category-wide headwinds in the craft beer segment and our own portfolio optimization efforts under Project 420 where SKU rationalization and margin-focused initiatives continue to impact revenue. However, we expect spring retailer product resets to help mitigate industry trends. These upcoming changes should improve brand visibility and align product mix with consumer preferences, which we expect to benefit better revenue and gross margins in the fourth fiscal quarter. Wellness net revenue was flat year-over-year at $14.6 million based on our strategic focus on value-added innovation and continued growth in HiBall and the ingredient channel. Results were offset by challenges in the club retail channel, which we are addressing through targeted initiatives. Distribution net revenue increased 26% year-over-year to $85.3 million based on our focus on competitive pricing, the prioritization of high-margin SKUs and favorable impacts from foreign exchange. We believe our distribution business will continue to complement and strengthen our international cannabis segment as we grow both in tandem. In terms of contribution, cannabis revenue accounted for 31% of revenue, beverage revenue was 23%, distribution was 39%, and wellness accounted for the final 7%. Gross profit during the quarter was $57.5 million, and gross margin for the quarter was 26%, while margins increased in cannabis, distribution and wellness. Margin construction in the beverage segment negatively impacted the gross margin for the quarter. By segment, beverage gross margin reached 31% this quarter. While this represents a temporary decrease from last year, we are confident that the ongoing implementation of Project 420 will deliver significant improvements while also actively working on additional cost savings to improve overhead utilization as well as SG&A. As these initiatives progress and sales volumes recover, we anticipate stronger overhead utilization and a return to higher margins. Importantly, we remain on track to achieve $33 million in annualized cost savings from Project 420 by the fourth quarter of 2026, positioning our beverage segment for long-term success. Cannabis gross margin increased to 39% compared to 35% last year. The increase was due to a greater proportion of sales being generated in the higher-margin international markets but was offset by increased sales in lower margin price competitive categories in the Canadian adult-use market like vapes and pre-rolls. Distribution gross margin increased to 13%, up from 12% last year, while continuing to grow top line revenue. In wellness, gross margin rose to 32% from 31% as we successfully managed input costs and enhanced operational efficiencies. Our adjusted cash operating income for the quarter was positive $6 million which excludes the noncash impacts of amortization and stock-based compensation. Net loss for the quarter was $43.5 million, a 49% improvement year-over-year compared to $85.3 million or $0.41 per share compared to $0.99 per share. It should be noted that EPS was impacted tenfold by the reverse stock split and has been reflected in both periods. Adjusted EBITDA for the quarter was $8.4 million compared to $9 million last year. Cash flow used in operations was down to $8.5 million compared to $40.7 million last year. The $32.2 million improvement in cash used in operations was almost entirely related to reductions in working capital. We ended the quarter with cash and cash equivalents and marketable securities of $291.6 million, $0.8 million in digital assets and improved from a net debt position of approximately $4 million in the prior quarter to a net cash position of almost $30 million at the end of the period. Additionally, during the quarter, we also completed our ATM program in the market. Our strong cash position provides us with the flexibility we need to execute on strategic opportunities and take advantage of the changing regulatory landscape and we intend to work to further strengthen our balance sheet throughout the remainder of the year. Finally, we remain confident in our business, our strategy, and our opportunity, and we are reaffirming our 2026 adjusted EBITDA guidance of $62 million to $72 million. We can now open the call for Q&A. Operator: [Operator Instructions] The first question comes from the line of Bill Kirk with ROTH Capital Partners. William Kirk: On the intoxicating hemp bans for November implementation, is there anything Irwin that the industry can do to try to help improve the regulatory outcome? Is there any way to kind of extend the grace period, reverse the ban, carve-out particular categories? Like what can you do or what can the industry do to get a better outcome there? Irwin Simon: Thank you, Bill. Great question. As you know, this, for us, was a growing business and there is a lot of demand for these products. And we are working with some congressmen, senators, lobbyists to either extend the deadline or to change some of the regulatory that would have a regulated amount of milligrams, whether it's 5 or 10 milligrams and to be sold on a national basis. And I'll tell you, so far, I have a really good feeling because we're talking to the different associations other than Senator McConnell and whoever backed him, there's no one out here against this and thinks this is something that should be banned. The other thing, Bill, just the other thing, I mean, there's a lot of jobs that will be lost if this happens which is something very important too. William Kirk: For sure. Carl, you had some comments about holding back supply and shifting it into international markets. Am I hearing that right that, that would mean sales that could have been in this quarter simply come later? And is there a way to quantify how much was held back? Carl Merton: So what I said was that we held back from the Canadian wholesale market at lower pricing than what we did in the prior year. And so last year, we did about $5 million. We obviously have the inventory levels that we have that are on the balance sheet that we could have -- that we can redeploy into European markets over the next 6 months of this year. Irwin Simon: So it's just redeploying better margin sales, Bill, where we can sell it into Europe and get much higher margin for it than selling it into the wholesale market where we don't get the margins and in some cases, we're even selling to a competitor. So that's what it is. Operator: Our next question comes from the line of Robert Moskow with TD Securities. Xin Ma: This is Victor Ma on for Rob Moskow. Two for me, please. First, I wanted to ask about Canadian adult-use cannabis. Growth in the quarter was about 6%. How much of that was volume growth versus price mix? Did you gain market share in the quarter? And then second, can you give a little more color on what drove the substantial increase in distribution sales? Was there any timing benefit that was realized in the quarter? Irwin Simon: So number one, absolutely, there was not price. Some of it came from new distribution, if anything. It was a strike in British Columbia that ultimately hurt us. And we did gain a little bit of share, not a lot in the quarter. So it's demand. I think there's a lot we did in different markets. A lot of our new products started to roll out. And -- so that was the big reason from our growth, having supply. And I think just the team has done a great job. This is the highest quarter in us, in selling the units 5.5 million units that we sold in the quarter. So again, if anything, throughout the rest of the prior years, we saw lots of price compression. I think the good news is we're not seeing that price compression right now. But we're seeing demand continuously growing and we're seeing all the Tilray different brands growing in the marketplace. And again, what I'm talking about is all our products, it's our flowers, our pre-rolls, our edibles, our vapes, our infused vapes and our drinks. Sorry, in regards to CC Pharma, listen, I think CC Pharma has been part of Tilray since 2019, and trying to figure out what is the right position is one of our largest business. And we have the European team and with the growth and the opportunities in Germany have realized a couple of things. Number one, they're selling into pharmacies today. We're using the CC Pharma team to sell cannabis also into the pharmacy and also to deliver. The other thing is here, we're able, from our buying power and get better margins and demand for regular medicines, and we're seeing some great growth. It's the biggest quarter we've ever had with CC Pharma and some of the most profitable quarters we've ever had. So we're looking at how we really take this business for online. We're looking at how we're going to expand this business and take this model into other countries. And again, it's how we utilize the sales organization of CC Pharma or now named Tilray Pharma and using that organization to sell more and more cannabis into the drugstores that it sells into. Operator: Our next question comes from the line of Aaron Grey with Alliance Global Partners. Aaron Grey: First one for me. You mentioned the expectation for Tilray Global Medical to approach $150 million, I believe. So just any color you could provide maybe on the timing of that expectation. And then you also mentioned some commentary briefly regarding potential regulatory changes in Germany as well as pricing pressure. So could you help to maybe quantify how big a risk you're seeing from each of those potentially for 2026? Irwin Simon: So in regards to -- listen, I think from an annualized basis, right now, we're on a run rate for that $150 million, and that is both Canada and international markets, okay? And the majority of that is coming from international markets. In regards to regulatory change, I'm not seeing and not concerned with regulatory changes in Europe and Germany. And I think if anything, we like what has ultimately come out of the German government. And in regards to demand, we see more and more demand. As far as price compression, and you heard what I said before. And this is where Canada better watch out. When you look at a lot of the Canadian LPs, there's a lot more the Canadian LPs, there's Israeli companies. There's a lot more companies selling product today into Germany. But Tilray has been in Germany since 2019, 2020 with Tilray Medical. We are the only one or one of the only ones with a grow facility there. And we work very, very closely with the doctors in Germany. You heard what I said before about having Tilray Pharma, where we are vertically integrated from our grow with our salespeople and have our own distribution piece there. So yes, a lot of product coming into Germany, which forces price compression. But what they're going to realize is the quality of product, you get what you pay for. And I think that's what important is they recognize that the Tilray Medical products stand for quality. Aaron Grey: I appreciate that. Second question for me, just turning back to the Canadian market, we had some commentary. More broadly, I just wanted -- to give some color in terms of what are your expectations for growth within the Canadian market? Looks like we finished about mid-single-digit growth for 2025. So what's your expectation now for 2026? You talked about some of the strong volumes there. But it does seem like volume growth has tempered a bit despite pricing pressure stabilizing for the Canadian market. So I wanted to hear more about your expectations for growth in the Canadian market and if a slowdown in growth also led to your decision to shift some of that product international? Irwin Simon: Well, first of all, this slowdown of growth. I had a 6% growth, and I had the highest quarter ever in selling units, okay? I think one of the things we're looking -- continuously looking at is how we grow this to more and more profitable business, and we can sell tons of wholesale product, that's considered growth, but we're not going to do that. But what we're looking continuously at is how we're coming out with added value products and premium products. And today, we have a 50% share on our drinks, which continuously is growing and the demand in that marketplace. We also have the highest share of flower in the marketplace. We sell over 80 million pre-rolls. We sort of backed away from the vape category because of the margins and we're not making money on it. So I see the categories from us, if I get mid- to high single-digit growth, I'll be very, very happy in the Canadian market. Now with that, I got to tell you, Blair is on the phone, and he can jump in here any time. I have seen some of the best lineup of new products coming out that this company has ever had. And I think that's going to help, new products are key. The other thing is, listen, the quarter and that -- British Colombia had a strike and I think if other Canadian LPs decide they want to sell product in Europe is just going to be supply. Tilray today has close to 7 million square feet of grow in Canada and has the ability to grow 270 metric tons. I think the number in the quarter as we grew close to 200 metric tons. So we have plenty of supply. And not only that is we have supply an ample product available to ship internationally which is -- we're not paying excise tax and much higher margins for us. So the opportunities are there for us. Canada is a small country, but it's a country where cannabis is legal from a recreational -- from a federal standpoint, is the only country in the world. And there's more and more users are seeing the benefit of buying cannabis by going into federally legal cannabis stores. Operator: Our next question comes from the line of Pablo Zuanic with Zuanic & Associates. Pablo Zuanic: Look, let me start with CC Pharma. Maybe you can give more color on that business. I think in the past, you said that you reached 13,000 pharmacies. Now you're talking about tripling your distribution reach. I'm trying to understand that better. And also, if the new regulations in Germany, top delivery your CC Pharma reach could be a big asset in terms of pharmacy reach? Would you be willing to also sell other people's products besides Tilray Brands through CC Pharma? Irwin Simon: So number one, as I said, we've owned CC Pharma for -- since 2019, Pablo, and it was finding the right way to operate this business. And originally, we acquired it as part of tenders for Germany. And we've been a part of the German drugstore business in Germany since then. We have now changed a lot within CC Pharma where we've ultimately modernized, we've put money into technology there. We've taken labor costs out of there. We've been able to buy medicines and -- regular medicines from some of the pharmaceutical companies at much better prices and made some big investments. And I'll tell you, that is a big -- is where they're buying medicines and making sure we're buying them at the right price and selling them at less higher margins. So we have focused on that business. But back to your point, is today, we have the ability to win to more and more pharmacies. The CC Pharma or Tilray Pharma has its own sales organization. And you don't see today cannabis -- medical cannabis sales go through CC Pharma, it goes through our medical cannabis business internationally. So there is a big focus to use that sales organization to sell more and more cannabis -- medical cannabis in Germany. And with that, with the regulations and everybody has to go direct to a pharmacy, it can't buy online, there's bigger opportunities for us because more patients have to visit the pharmacy. The second question is would I sell other company's product? Great question. We're in the business to sell and make profit. But again, why would we want to sell someone else's products that we can deliver what the needs are for patients. But again, some patients may want some other competitors' products, and it's something we should look at from a standpoint, does it make sense for us to carry some other products, I don't know. And that's not something we've looked at, but it's something we definitely should look at. Pablo Zuanic: Okay. And then just a follow-up in terms of beverages. Obviously, this quarter, you had very strong performance in cannabis but a steep decline in sales in beer and profit margins. Maybe just give more color in terms of what is it that has not worked there? You talked about positive momentum, but the numbers don't show that momentum and why put so much hope on just the spring resets? I mean is it just about that? I mean more color would help. And then just long term, a reminder about your confidence that the beer business really fits your cannabis strategy longer term or they just play together, and we should think of them as a diversified portfolio anyway. Irwin Simon: So number one, there's many, many companies out there that have diversified business portfolios. And if you look at most companies, some have food, some have personal care, some have beverages. You look at Pepsi, they have snacks, they have food, they have drinks. If you look at other companies, they have personal care, they have food. So I think it's important to be a diversified consumer packaged goods company, which we are, and we're Tilray Brands. I come back and look at -- we got in the beer business in late 2020, COVID came along where our first acquisition of SweetWater and then multiple acquisitions. It's taken us time to integrate these businesses. We went from only 1 plant to 10 plants now we're down to 8. We went from only 1 brand to 18 brands. We went from probably being the 10th or 11th largest craft brewer now down to the fourth largest craft brewer. So there's a lot that's happened over the last 4 to 5 years. And with that, there's been a lot of integrations. And these brands that we bought from ABI and from Molsons, they were not some of the best-performing brands at the time, and it took some time to turn them around. So yes, I have a lot of confidence. Listen, beer is not going away. Beverages is not going away. And just like CC Pharma, here we are from a vertically integrated business, we have manufacturing, we have brands, we have a distribution. We have an infrastructure, salespeople. And it is taking probably some more time. And the other thing is at the same time, the industry has had its decline. But I'll tell you what, as you come back and see a lot potentially will happen in regards to Delta-9 and hemp infused drinks, and who are they looking at to be the leader in that, is Tilray because of our beverage business and our cannabis business. I say this, and I'm not making projections, but if I could sell cannabis infused drinks, in the U.S. tomorrow. If I look what I have a 50% share in Canada, and I multiply that from a 10x what I would have here it's $0.5 billion business for us here. And someday, we're going to be able to sell drinks in the U.S. infused with something and whether it's CBD and cannabis, in regards to President Trump new rescheduling, in regards to drinks that will get approved by the FDA for -- whether it's for anxiety, for pain, for sleep et cetera. So the infrastructure is there for future opportunities, which is important. But to the point, we're in the beverage business today. We're in the beer business. We're in the energy drink business. We're in the water business, we're in vodka seltzers business. And I'll tell you what. The other thing is this here, there's a lot of companies talking to us involved -- to get us involved with different aspects of beverages because of what we have and how we're vertically integrated. So yes, am I totally doing the dance with our results today, coming out of there? No. But do I feel good about what we will do with this business? And what we'll do with these brands? Absolutely, and what our strategy is. Unfortunately, it just is taking a little more time. And if you go back and look at the big companies, Molsons, ABI, Constellation Brands. They weren't created within 5 years. And it's basically 5 years and we're #4 within the craft beer business. A lot of brands have gone away in the craft beer business which gives more and more opportunities. So I am really bullish on the beverage business. And if you look at the supermarkets today and you look elsewhere, Beverage is the biggest category out there. And I think, Pablo, the big thing, we are not just depending upon the resets that are happening in the next 2 months, gaining share in C-stores, gaining share on premise, gaining share in general. And that's what I'm excited about. Pablo Zuanic: That's great color. Look, if I may, I want to squeeze one more if you don't mind. In your -- and just a short answer. In your press release, you talk about U.S. federally rescheduling cannabis. But I think my understanding and most people's understanding would be that if they reschedule, it will still be a state-by-state program. It will not be federally rescheduled. But I guess your interpretation that it will be federally rescheduled. And I think that's a big distinction. Do you want to just share some color on that, but just briefly? Irwin Simon: Our plan is what I've said, if a reschedule -- what we're focused on, and I think a lot of other companies are focused on recreation, we are focused on medical cannabis. And our plan is to leverage the infrastructure and expertise and know-how that we've developed that we got a $150 million business in Tilray today. And with that, our $300 million distribution platform is something that we utilize in Europe and how do we ultimately do that here. And again, engage with the outreach of the government, with the FDA and with our -- working with hospitals, working with research, doing clinical studies. And that's what we're looking to do there in regards to our U.S. entry into Tilray U.S. not looking at it today of how we do state-by-state from a recreational standpoint. And ultimately, what are we going to do. And we have so much research in pain, anxiety, cancer-related drugs, cancer anti-vomiting drugs, PTSD and taking that science and taking those -- and taking our genetics and strains and working with hospitals and potentially strategically aligning with a pharma company to execute that within the U.S. is what we're looking to do. Operator: The last question comes from Frederico Gomes with ATB Capital Markets. Frederico Yokota Gomes: Just the first question, just going back to the rescheduling comment there with potential rescheduling in the U.S. I'm just curious, does that change the way you see potential investments in the state legal cannabis businesses like you've done in the past with MedMen. Irwin Simon: Yes. It doesn't anything with the state. But again, as I said, Tilray is committed to invest in research. Tilray is committed to invest in clinicals, Tilray is committed to working with the FDA, DEA, is coming up with approved cannabis drugs that can be used and sold for some of the conditions that I mentioned before. But it's not state-by-state where we're looking at recreational. We are totally looking at this from a total medical standpoint. Frederico Yokota Gomes: Got it. And then second question, international cannabis. Could you help us understand outside of Germany, what are the main international markets you have right now? And do you anticipate any other international markets where we could see some sort of regulatory change near term this year that could lead to growth like we saw in Germany since April 2024. Irwin Simon: So listen, whether it's Poland, there's today Italy markets. There's the U.K. markets. We're looking at oils for France and Spain. And I will tell you this here, without going into names, and countries, there's a lot of stuff happening in the Middle East in regards to working with CBD and THC from a Middle East standpoint, there are some stuff and testing going on in India in regards to hemp and hemp infused THC products. So again, and I will say this here, and that's why I thanked President Trump from a rescheduling standpoint. Rescheduling cannabis from the Schedule I to a Schedule III has opened up the eyes and the legality a lot of other countries here. And I think that's what was important, too. Once the U.S. did it, there's a lot of other companies now are saying this stuff is not taboo. It's something that's really benefit and this can be really helpful in a lot of different diseases, and it can be very helpful as a medicine. Operator: Thank you. I'd like to pass the call back over to management for any closing remarks. Irwin Simon: Thank you very much, operator, and thank you very much for everybody joining us today. As you can see, there is a lot happening at Tilray. And as a diversified consumer packaged goods company that today sells products into the recreational cannabis market in Canada, sells medical cannabis in Canada, sells drinks in Canada, sells beverages in the U.S. spirits and our hemp-infused -- our hemp foods, our wellness products and then our international products with -- our international medical products and our Tilray Pharma. So there's a lot within Tilray today, there's a lot of science, there's a lot of research, there's a lot of genetics that we're doing. And as a 5-, 6-year-old company today that's really pulling this all together, and there's no one out there today that is diversified like us. One of our strengths is our balance sheet. It's -- we're in a net cash position. So we're able to invest in research. We're able to invest in trial. We're able to invest in clinicals today. So you can't look at us today as a recreational cannabis company. You can't look at us as just a beer company. And you've got to look at us today as a consumer company that looks at products and looks at different ways to help bring consumers together, help bring people together. And that is some of the stuff we're doing. At the end of the day, as you can see what we've done this quarter in regards to our profitability for our shareholders. And again, it's been 5 years and putting this together piece by piece, and there's a lot to do. The question asked by Pablo in regards to our beverage business. Yes, there's a lot to do in the acquisitions that we've done. And one of the proofs is here, look at the acquisitions we've done on cannabis as we put these cannabis facilities and brands together took out costs, integrated the businesses, and we're seeing the performance of that today. It's no different. We've really only got into the international cannabis business over the last year or so, and that's on the run rate to be a $100 million business. So there's a lot to do within Tilray. There's a lot of great assets within Tilray, whether it's facilities, whether it's brands, whether it's distribution, whether it's know-how. And there's a lot of AI coming into Tilray today to help us implement a lot of what's happening. I appreciate those that have stayed with us as shareholders, I know there's times you're frustrated and there's times probably I'm frustrated more than you are. But I do see a good path with a lot that's happening coming together. I got to tell you, we deal with a tough regulatory environment out there. We pay some of the highest excise tax in Canada and I hope Prime Minister Carney heard me how important this industry is for the Canadian market, the jobs that created the tax dollars, and we don't want to see this run away from Canada. I commend President Trump for rescheduling. He was the first President that really took this on. Everybody else sort of ran away from it. And it's up to us now to show what this really can do. So thank you very much for getting on our call today, and happy New Year to everybody. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Greetings, and welcome to Torrid Holdings Third Quarter Fiscal 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Chinwe Abaelu, Chief Accounting Officer and Senior Vice President. Thank you. You may begin. Chinwe Abaelu: Good afternoon, everyone, and thank you for joining Torrid's call today to discuss our financial results for the third quarter of fiscal 2025, which we released this afternoon and can be found on our website at investors.torrid.com. With me on the call today are Lisa Harper, Chief Executive Officer of Torrid; and Paula Dempsey, the Chief Financial Officer. Ashlee Wheeler, our Chief Strategy and Planning Officer, is also present and will be participating in the Q&A session. Before we get started, I would like to remind you of the company's safe harbor language, which I'm sure you're familiar with. Management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements may include, but are not limited to, statements containing the words expect, believe, plan, anticipate, will, may, should, estimate and other words and terms of similar meaning. All forward-looking statements are based on current expectations and assumptions as of today, December 3, 2025. These statements are subject to risks and uncertainties that could cause actual results to differ materially. For further discussion of risks related to our business, see our filings with the SEC. With that, I'll turn it over to Lisa. Lisa Harper: Thank you, Chinwe. Hello, everyone, and thank you for joining us today. I'll review our third quarter performance and provide an update on our strategic initiatives, including the enhancement of our product assortment, our commitment to the growth of our sub-brands, the expansion of opening price point strategy and execution on our store optimization plan. Then I'll turn the call over to Paula to discuss the financials. We are clearly disappointed with our overall performance this quarter. Despite some areas of strength, it was more than offset by missteps in our overall assortment mix that we are addressing head on with decisive corrective actions, and I'll discuss that shortly. For the quarter, while sales came in at the low end of our guidance, profitability was dampened by deeper promotional activity than we had planned, impacting our adjusted EBITDA. We delivered third quarter sales of $235 million and adjusted EBITDA of $9.8 million. I want to be clear, these results largely reflected execution issues that are within our control. Let me walk you through the factors that influenced our results. This quarter delivered strong performance in several key categories with denim, non-denim, dresses and intimates meeting our expectations, all generating positive comparable growth. However, this improvement was more than offset by missteps in our tops and jackets category. Tops represented approximately half of the year-over-year sales miss this quarter. Specifically, we shifted too heavily towards fashion-forward designs at the expense of our core assortments and established franchises. While innovation is important, the shift moved us too far from the functional replenishable items. Our customer feedback has been invaluable in guiding our course correction. We are successfully attracting and reactivating consumers who embrace our elevated fashion and lifestyle offerings across our sub-brands. However, our loyal long-standing customers continue to rely on us for their core ward drove essentials and their solution-oriented products and trusted fabrics with evolutionary rather than revolutionary style updates. Our denim category exemplifies the balanced approach we're implementing going forward. In Q3, we successfully integrated fashion elements while preserving our core franchise DNA, delivering mid-single-digit growth on top of last year's double-digit performance. This demonstrates our ability to innovate within our customers' expectations, and we're applying those learnings across all categories moving forward. We are taking decisive action to address these challenges with clear time lines and measurable outcomes. First, we've strengthened our merchandising foundation by implementing enhanced guardrails in our merchandising process and building a more robust assortment planning function. I'm personally overseeing both initiatives to ensure rapid execution and accountability. Secondly, we're actively addressing near-term assortment gaps. We've initiated chase orders for our key franchises, focusing on the core fabrications and silhouettes our customers expect in both knits and woven tops. These products will begin arriving in January, positioning us to see sequential improvement in knit and woven performance by the end of Q4 with accelerating momentum into Q1 2026. Looking ahead, we've completed a comprehensive review of our spring/summer 2026 buying strategy. We're rebalancing our investments to deliver the right mix across categories, fits, fabrics and end users, ensuring we meet our customers where they are while maintaining our innovative edge. These actions reflect our commitment to operational excellence and customer centricity. We have clear visibility into the path forward and confidence in our ability to return these categories to growth. Shifting to footwear. Our strategic decision to pause the footwall category in response to tariff-driven cost pressures was sound, but we underestimated the attachment rate impact. The loss of this anchor category resulted in lower overall basket sizes and transaction frequency, leading to what we estimate as an approximate $12.5 million in lost sales this quarter, of which $10 million was contemplated. The timing amplified the impact as October represents our peak boot selling season, which historically drives some of our highest attachment rates of the year. We've taken decisive action to quickly course correct. We reintroduced a carefully curated footwear assortment in mid-November and early performance has been encouraging. We've restructured our sourcing and SKU mix to mitigate tariff exposure while maintaining the category's ability to drive attachment. Based on what we're seeing, we expect to scale footwear back to historical sale levels of approximately $40 million in 2026, but importantly, an improved profitability given our more disciplined approach to the category. This positions us to recapture both the direct footwear revenue and the attachment-driven sales we lost during the temporary pause. Now turning to our strategic initiatives. We are focused on enhancing our product offering by expanding sub-brands and strategically introducing an opening price point strategy designed to increase market share through customer acquisition and increase frequency among our loyal customers. Our sub-brand strategy is working and is on track to deliver approximately $80 million in sales this year, attracting new, reactivating lapsed and increasing spend among our high-value customers. These lifestyle concepts offer unique collections that provide newness and excitement while broadening our customer base. Importantly, sub-brands create a halo effect, driving attachment rates to core categories and supporting customer reactivation through targeted community and influencer marketing. Looking ahead to 2026, we're implementing a more strategically balanced assortment architecture. Approximately 30% of our assortment offering will be opening price points, developed in close partnership with our merchandising design and product development teams to ensure we maintain our quality standards while delivering accessible value to customers. We are excited about momentum in our intimates business with 3 new bra launches planned for 2026, our first substantive bra introduction since 2019, representing significant innovation in this important category. Bras as a category drives strong customer acquisition and loyalty and engagement, and we believe there is significant runway in this business. On the marketing front, we are committed to a balanced approach with emphasis on both mid- and upper funnel awareness and acquisition as well as lower funnel conversion and retention. This includes increased digital media investment, a robust influencer strategy and several in-person activation. In 2026, you will see even greater expansion of these community and brand-building engagement efforts. Our popular model search campaign ran from September to November this year and was done through our digital channels, supporting a broader reach. We had an incredible response again this year, so much so that we selected 5 top models, one from each age demographic ranging from 18 to 50-plus, showcasing the range and relevance of our brand and community. Additionally, we have improved the value proposition of our loyalty program and our private label credit card, which drives significant expansion in customer lifetime value. We remain committed to our store optimization strategy, and I'm pleased to report we're executing exceptionally well against our plan. As consumer preferences continue to shift toward digital channels, we're proactively rightsizing our physical footprint to deploy capital more efficiently and enhance shareholder returns. Our execution remains on track. We closed 15 stores in Q3, bringing our year-to-date total to 74 stores, and we continue to expect approximately 180 closures for the full year. Importantly, we're seeing strong retention metrics aligned with our expectations that validate our approach. Customer retention from this year's closures is running in line with our expectations, demonstrating the strength of our omnichannel ecosystem, the success of our enhanced retention strategies, including multi-touch communication plans and our ability to successfully migrate customers to nearby locations and digital channels. With 95% of customers engaged in our loyalty program, we remain well positioned to effectively migrate customers to nearby stores and digital channels. The financial benefits are substantial and will accelerate as we move through this optimization. These closures are expected to contribute significant adjusted EBITDA margin benefit in 2026, while also generating significant free cash flow improvement that will provide increased flexibility for future strategic investments. Now I'll turn the call over to Paula to discuss the financials. Paula Dempsey: Thank you, Lisa. Good afternoon, everyone, and thank you for joining us today. I'll begin with a review of our third quarter financial performance and then provide our outlook for the remainder of fiscal 2025. While sales landed at the low end of our guidance, softer demand in our digital channel required higher-than-planned promotional activity, which has pressured adjusted EBITDA. At the same time, we continue to realize meaningful benefits from our store optimization initiatives, resulting in 11.5% year-over-year reduction in SG&A. We remain committed to disciplined inventory management and ended the quarter with inventory down 6.8% compared to last year. Net sales for the third quarter were $235.2 million compared to $263.8 million in the prior year. Comparable sales declined 8.3% and our tariff-related pause in the shoe category drove approximately 400 basis points to this overall decline as we temporarily scaled back while navigating elevated import costs in the category. Gross profit was $82.2 million versus $95.2 million last year. Gross margin was 34.9% compared to 36.1% in the prior year, reflecting higher promotions and deleverage on the lower sales base. SG&A expenses continue to reflect the disciplined cost structure we're building across the enterprise. SG&A was favorable by $8.6 million, resulting in $66.3 million for the quarter compared to $74.9 million a year ago. As a percentage of net sales, SG&A leveraged 30 basis points to 28.2%. This year-over-year improvement is a direct result of our multiyear transformation to structurally reduce operating expenses. Benefits from our store optimization initiatives and our focused approach to organizational prioritization are enabling us to reduce fixed costs. These gains reflect more than store closures alone. They represent a broader shift towards a more efficient, more variable cost structure designed to flex with demand, strengthen margin resilience and enhance free cash flow. As store optimization progresses, we expect further SG&A leverage and incremental liquidity benefits in fiscal '26. Marketing investment increased by $2.7 million to $15.7 million as we leaned intentionally into customer acquisition and brand visibility during the quarter. These investments support our long-term plan to strengthen top of the funnel, improve brand relevance and drive traffic. We continue to refine our marketing mix towards higher return channels with more personalized targeting and improved attribution. The timing shift of our model search event from Q2 to Q3 also drove this increase. This event continues to deliver high engagement and long-term customer loyalty. Net loss for the quarter was $6.4 million or $0.06 per share compared to a net loss of $1.2 million or $0.01 per share last year. Adjusted EBITDA was $9.8 million, representing a 4.2% margin versus $19.6 million and a 7.4% margin a year ago. We ended the quarter with $17.2 million in cash compared to $44 million last year. As of November 1, we had $14.9 million drawn on our revolving credit facility with approximately $86.2 million of remaining availability. Inventory totaled $128.8 million, down 6.8% from last year, reflecting both lower receipts and our reduced store base. Turning to store optimization, which remains a cornerstone of our multiyear transformation. During the quarter, we closed 15 stores and remain on track to close up to 180 stores in fiscal 2025. Customer retention from these closures continue to perform consistently with historical levels. The stores we're exiting are structurally unproductive and closures are aligned with natural lease expirations, minimizing exit costs. On a Q3 year-to-date basis, we have realized approximately $18 million in lower operating expenses from closing 74 stores this year and 35 total stores in the prior year, and these savings are already reflected in our performance. As we move through Q4 and complete the planned closures for fiscal '25, we expect even greater savings in fiscal '26, which will enhance our liquidity position. This initiative is both a structural realignment, reflecting where our customers increasingly choose to shop with about 70% of demand originating online and a proactive liquidity strategy designed to protect the business, strengthen our balance sheet and enhance the resilience of our operating model. Overall, we believe store optimization will deliver substantial adjusted EBITDA margin expansion in fiscal '26. We are updating our outlook for the remainder of the year to reflect third quarter performance and current trends. We now expect full year net sales in the range of $995 million to $1.002 billion and adjusted EBITDA in the range of $59 million to $62 million for the full year. Capital expenditure is expected in the range of $13 million to $15 million. In closing, we're executing a disciplined and deliberate transformation of our retail footprint. By taking advantage of natural lease expirations to rightsize our store fleet, we're structurally improving our cost base and strengthening the long-term health of the business. The combination of lower fixed costs, enhanced digital capabilities and a more productive store base is expected to drive sustainable margin expansion and generate meaningful incremental liquidity as we move into fiscal 2026. Now we will open the call to your questions. Operator? Operator: [Operator Instructions] Our first question comes from Janine Stichter with BTIG. Janine Hoffman Stichter: Could you elaborate a bit on some of the product missteps that you talked about? What cues are you getting from the consumer to tell you that this is where the challenge is and this is what needs to be fixed? And then you talked about the promotions being higher on the digital channel. Maybe elaborate on why that is or why you think that is and what you saw in the stores during the period. Lisa Harper: Thanks, Janine. It's Lisa. The merchandising missteps were very focused on tops, as we mentioned. So tops were about half of the total revenue miss for the quarter. Shoes were about 40% and then jackets because of their seasonal importance were about 10% for the quarter. So it's pretty -- we've talked through the shoe situation, which is a pause based on the tariffs. We've reintroduced shoes and boots recently are having a great response to them. We'll continue to build that business back up and recapture that revenue as we move into 2026. But for the quarter, the biggest miss and the biggest action was really focused around the tops category. What I would say from a merchandising miss perspective was the advocation of a couple of our core fabrications and core kind of entry point solution-based products for the customer. And so we've been able to chase that product very quickly. It's longer tops, more tunics, brushed waffles, super soft knits and Sally in the woven category. So it's very focused on a few fabrications, very focused on a few end uses. And because we are able to platform that fabric, we're being -- we're back into some of those businesses in the fifth week of December and throughout January and February in terms of receipts. So we expect to see improvement in those categories as we move into early first quarter as we'll have, I think, chased the bulk of what we feel is missing in the assortment right now. So what we've done to avoid that in the future is really enhance, although we have pretty substantive guardrails to this, this was a merchandising this was obviously very disappointing and frustrating for the organization for the quarter. And so we put enhanced guardrails around the process. We've put in a robust assortment planning, multifunctional approach to the categories, particularly. And we are just increasing oversight, and I'm involved in every step of that. I would say that as an organization, they were able to effectively kind of innovate and balance product assortments in all areas except for tops. So I would say that -- I would -- all areas except for tops and jackets. The benefits of that innovation and expansion to the core product is present in denim, non-denim dresses and intimates. And so those areas were able to positive comp. As we mentioned in the prepared remarks, they weren't able to offset the detriment of the tops miss. So if you think about the total miss for the quarter, I'll restate it, it's about 50% tops, about 40% shoes and related transactions with shoes and then about 10% in jackets for the quarter. And I'll turn it over to Ashlee to answer the promotional conversation. Ashlee Wheeler: Janine, I'd say that the accelerated promotional activity was in large part correlated to the miss in the top space. So as Lisa noted, in the absence of some of those core franchises, entry price point solution-based items and a swing into more highly novel or more fashion-oriented assortment. It put a little more pressure on promotional activity, AUR, for example, in the absence of those entry price point categories. That said, I think we've done a really nice job making sure that we're coming out of the season clean. So there are no inventory issues to speak of related to some of these missteps in assortment. Janine Hoffman Stichter: Perfect. And then maybe just one more for me. The full year guidance implies, I think, a mid-teens revenue decline in Q4. Anything you can share about where you're tracking quarter-to-date versus that guidance? Lisa Harper: Obviously, we are able to incorporate current performance into that guidance. We don't anticipate a recovery, substantive recovery in either tops or shoes for the balance of this quarter. We'll start to see some improvement in tops in first quarter. We'll still be -- have a drag in shoes as we go through the fourth quarter and the first half of next year. So contemplate -- all of that is contemplated into that guidance. Operator: Our next question comes from Brooke Roach with Goldman Sachs. Brooke Roach: Lisa, for a couple of years now, the balance of fashion versus basics and opening price point versus stretched product has been something that the business has been chasing. What's changing in the processes to ensure that you have both those opening price points and balance items in your assortment and planning architectures? And other than oversight, how do we ensure that this is something that's more systematic on a go-forward basis as we look into 2026 and beyond? Lisa Harper: Thanks, Brooke. I just called you by your last, I apologize. Thanks, Brooke. So I would say that the issue -- the overall issue and opportunity in this business was -- is about innovation and remaining relevant and commercial. That is balanced against the need of the customer and the request of the customer -- the focus of the customer on price point. And so as we go into first quarter of next year, we will be in terms of opening price point, close to 30% of sales and assortment associated with those categories of businesses that service our customer in terms of core products, solution-oriented, high quality at a price that she has shown us that she reacts to and values. That is built into the architecture, the assortment architecture as we move forward. It is something that we are -- have embedded in that process. Both sides of this are important. First of all, we have to move forward and remain relevant. I think that we've been able to do that with sub-brands. We've been able to do that in the categories that I mentioned before, denim, non-denim dresses and intimates. And the miss really is in the tops area, which had advocated and exited through merchandising direction to many of the core programs. Those core programs are bought and will be -- already have been planned to receive as we get into January receipts going into 2026 sales, and it's part of the assortment architecture. So the need for the business to move forward and innovate with product was important as our customer feedback had been that -- our styling was not keeping up with their demand. We've balanced that, I think, in every area, except for the misstep in tops, where we will be going into first quarter with a much stronger opening price point strategy across the board, but primarily the highest level of opening price point will be in tops as we move forward. It's built into the assortment architecture of the business. I don't know, Ashlee, do you want to add anything? Ashlee Wheeler: Brooke, I might add, if we take a look at the categories where we executed well in the third quarter, so denim as a proxy is a place where we stayed committed to the franchises that the customer knows us for, the Bombshell franchise, for example. We stayed very committed, but we expanded upon that, gave her more innovation through leg shape, wash treatment, finish. And that system has worked very, very well. It's worked well for us in dresses where we've stayed committed to end use covering every aspect of her life and been very focused on multi-end use, it's worked well. Tops where we misstepped in the third quarter, we did not do that, and we walked away from very critical end use and solutions. We have to get back and stay focused on the same balance that we applied in denim and in dresses to our tops category, which is the largest category of the business. Brooke Roach: That's really helpful. As a follow-up, have you seen any larger or outsized shifts in engagement among any specific income demographic or age cohort of your consumer? Maybe said another way, are you seeing any changes in the demographic makeup of your businesses which customers are engaging with you the best? Lisa Harper: In terms of customer demographics or income cohorts, performance has stayed consistent across all of those. What we observed in the third quarter, very different from previous quarters is our most loyal, our most engaged customers pulled back, and we saw that come through reduced frequency and fewer purchases in the tops departments in particular. Operator: Our next question comes from Corey Tarlowe with Jefferies. Corey Tarlowe: Leslie, can we just talk a little bit about the sub-brand momentum and any updates there as that's continued to build in the assortment and how you think about this quarter's results may alter or change the approach in the sub-brand strategy? Lisa Harper: Thanks, Corey. No change in the sub-brand strategy. I think that we have a clear winner in the [indiscernible] brand and think that, that will expand. Nightfall and retro are continuing to perform very, very well. Belle Isle is more -- we've identified it more as a first half brand than a back half brand. And so we'll be adjusting kind of the sales momentum associated with Belle Isle to be probably more 60% first half, 40% back half. And then we've introduced Tru in our active business, which we're very happy with the results there. And Lovesick is still kind of, I would say, in test mode. We don't have a lot of revenue associated with that as we move into next year as we're able to refine that assortment moving forward. I think in general, very, very pleased with the sub-brand momentum and expect it to continue to grow dramatically as we go into 2026. Corey Tarlowe: Great. That's really helpful. And then just a follow-up. Can we talk about the leverage profile and how that changes with all the store closures and what the perhaps new leverage profile might be as we think about easier lapse in 2026 and what that could mean from a margin perspective? Paula Dempsey: Corey, this is Paula. So as we think about 2026 with the store closures, what's going to happen is our profile will be more flexible from an expenses standpoint. So of course, less fixed expenses, and we'll have the ability to be more dynamic from that standpoint. I think from a gross margin, the profile may be staying closely the same to where that total enterprise is today. But what you're going to see is a substantial EBITDA margin expansion in 2026 with the store closures. So currently, we are seeing the store closure optimization work really well. We have delivered over $18 million of cost reductions this year alone. We expect that number to be much greater mid 2026 when we annualize 180 stores. And so that will also strengthen our liquidity substantially for 2026. Operator: Our next question comes from Alex Straton with Morgan Stanley. Alexandra Straton: Maybe for Paula, I think you said you expect significant EBITDA margin expansion next year. I'm not sure if I heard that right. But if so, can you just elaborate more on that and what type of level is in reach? And then just on -- as a follow-up to the sales guidance for the fourth quarter, worse pressure than the third quarter is what's implied. So is that reflecting what you've seen quarter-to-date? And what areas is that are getting worse from a quarter-over-quarter perspective? Paula Dempsey: So going to Q4 guidance, we are all in for Q4 guidance. So what you're seeing is essentially accounting for what Lisa had mentioned before, the miss in tops along with shoes. There is also a seasonality impact in our business typically in Q4. So it goes along with that seasonality impact. As we moved into fiscal '26 with store closures and EBITDA margin growth, what you're going to see there is, if you recall, a lot of these stores that we're closing, actually, most of them are very highly unproductive stores. So by closing them, we're essentially giving money back to the business through reductions in many items in the P&L, right? So such as store payroll or store occupancy, et cetera, et cetera, et cetera. So we're going to see a greater amount of savings from that standpoint. And just to touch base again, we're seeing retention, customer retention, sales retention from these store closures to be well aligned with our historical rates, which is a great sign for us. So everything is going really well from that standpoint. I would say as we are on track to closing up to 180 this year. And I think that's all we have from a store optimization at this point. Operator: Our next question comes from Dana Telsey with Telsey Advisory Group. Dana Telsey: As you think about the current merchandising adjustments that are being made, what are you seeing in the competitive landscape? Do you think of this more as an internal issue that Torrid needs to fix? Or is there changes in the competitive landscape and whether it's product assortment, price point or where your customer is going? Lisa Harper: Thanks, Dana. I do think there's a seasonal aspect to it. I think, obviously, a lot of this is self-inflicted driven by really advocating core products in the knit and woven top categories. I do think seasonally, there are a lot of options that other brands have extended sizes, and it's more sweat shirt-oriented, sweater oriented that are not as fit specific. We certainly didn't see this impact in the tops business in the first half of this year. So it really did accelerate as we go into third quarter. I think we have a real opportunity to build back with the opening price point strategies that we discussed and keep fabrications that our customer really values. More tunics in the mix, more kind of figure flattering solution-oriented products in the knit category and then more kind of wear-to-work and blouse business in the woven categories. But I do think that in the third quarter, there is an ability to choose tops among a broader range of retailers because just the seasonal impact of being less fit specific and more oversized. I don't -- while we -- to that end, we didn't see the degradation in any of our bottoms businesses, which are more fit specific or our dress business, which also we were able to have great representation of end uses and fit solutions. So I feel like it's isolated, very clearly isolated. I do think it could be -- could have been -- I don't have any data to really support it, but just broadly from a mindset, it could have had a larger impact because of the seasonal nature of the products in the knit and woven categories during the time. So again, quickly move to address it. When I think Ashlee mentioned earlier about our less frequency in terms of tops purchases in the third quarter, tops really are a frequency driver for us so that they don't buy denim as often or dresses as often, but they do buy tops more often. And I think that opportunity to by tops other places might have been enhanced by that timing. I do think anything that we've seen in terms of surveying with our customers, they're still very dedicated to Torrid. They're very interested in shopping at Torrid. They're still maintaining their strong relationship and our loyalty program continues to be very highly penetrated. So we have a lot of opportunity to communicate and connect with this customer and understand exactly what's missing. And as I mentioned, the one thing that continues to come up is opening price point that I would say we did have fits and starts with over the last several years, but very deeply invested and committed to based on the analysis and of our previous OPP programs and the expansion related to that. So I think we're going to be able to recapture her tops purchase in addition to maintaining the denim and dress purchase from her as we introduce -- reintroduce these core businesses at an opening price point. Did I answer the question, Dana? Operator: This now concludes our question-and-answer session. I would like to turn the floor back over to Lisa Harper for closing comments. Lisa Harper: Thank you for joining us today. We look forward to sharing the progress on the store optimization program and the remerchandising of our tops area as we join you for the fourth quarter and fiscal '25 conference call. Thank you. Operator: Ladies and gentlemen, thank you for your participation. This concludes today's conference. Please disconnect your lines, and have a wonderful day.
Operator: Hello. Welcome everyone to the 2026 First Quarter Earnings Call for Commercial Metals Company. Joining me on today's call are Peter Matt, Commercial Metals Company's President and Chief Executive Officer, and Paul Lawrence, Senior Vice President and Chief Financial Officer. Today's materials, including the press release and supplemental slides that accompany this call, can be found on Commercial Metals Company's Investor Relations website. Today's call is being recorded. After the company's remarks, we will have a question and answer session, and we'll have a few instructions at that time. I would like to remind all participants that today's discussion will contain forward-looking statements, including with respect to economic conditions, effects of legislation and trade actions, U.S. Steel import levels, construction activity, demand for finished steel products and precast concrete products, the expected capabilities, benefits, costs, and timeline for construction of new facilities, the expected benefits of recent acquisitions, the company's operations, the company's strategic growth plan and its anticipated benefits, legal proceedings, the company's future results of operations, financial measures, and capital spending. These statements reflect the company's beliefs based on current conditions but are subject to risks and uncertainties. The company's earnings release, most recent annual report on Form 10-Ks, and other filings with the U.S. Securities and Exchange Commission contain additional information concerning factors that could cause actual results to differ materially from those projected in forward-looking statements. Except as required by law, Commercial Metals Company does not assume any obligation to update, amend, or clarify these statements. Some numbers presented will be non-GAAP financial measures, and reconciliations for such numbers can be found in the company's earnings release, supplemental slide presentation, or on the company's website. Unless stated otherwise, all references made to year or quarter end are references to the company's fiscal year or fiscal quarter. And now for opening remarks and introductions, I will turn the call over to Peter. Peter Matt: Good morning, everyone, and thank you for joining Commercial Metals Company's first quarter earnings conference call. I hope each of you had a wonderful holiday season and a Happy New Year. Commercial Metals Company had an exceptional start to our fiscal year as we built on the strategic foundation laid in fiscal 2025, continuing to meaningfully and sustainably enhance our financial profile. The first quarter was one of the best in our company's history, serving as validation that our ambitious strategy is bearing fruit. Strategic actions taken over the last twelve to eighteen months, including the launch of TAG, organizational realignment in critical areas, and the onboarding of key talent and resources to support growth areas, are directly driving bottom-line improvement. We are confident there is much more to come, particularly with the addition of Commercial Metals Company's large-scale precast platform. Our strategic focus remains on transforming Commercial Metals Company into an even stronger organization with higher, more stable margins, earnings, cash flows, and returns on capital. Now let's jump into the first quarter results. For the quarter, Commercial Metals Company reported net earnings of $1.773 billion or $1.58 per diluted share. Paul Lawrence: Excluding certain charges, which I will take you through in more detail, adjusted earnings were $206.2 million or $1.84 per diluted share. Our consolidated core EBITDA of $316.9 million grew by over 50% from a year ago and nearly 9% sequentially, reaching its highest level in two years. Our core EBITDA margin of 14.9% likewise expanded both year over year and compared to the prior quarter. As outlined on Slide five, this occurred against a good market backdrop with stable demand, limited imports, rising long steel metal margins, and attractive project opportunities within certain construction segments. Though Commercial Metals Company certainly benefited from these constructive conditions, our results were meaningfully enhanced by solid execution that allowed us to capitalize on the opportunities we are seeing across our North American footprint. Let's review some highlights, starting with our North America Steel Group. Commercial Metals Company's mill network had a strong operational performance, which was critical to supporting customers in a relatively tight domestic supply environment and maintaining high levels of customer service. CAG initiative efforts, including the scrap optimization initiatives launched in fiscal 2025, contributed nicely to metal margin expansion. With the program now rolled out across all domestic mills, we are using less scrap per ton of steel produced and utilizing lower-cost scrap blends, increasing the metal margin on each ton. Last quarter, I discussed new commercial rigor in the way Commercial Metals Company approaches opportunities within its downstream fabrication business. The positive impact of this change is only just beginning to be reflected in our financial results, but we are seeing it more significantly benefit our average price in backlog, which represents the work that will be shipped in future quarters. Encouragingly, despite enhanced selectivity in the projects we accept, the volume in Commercial Metals Company's downstream backlog increased modestly year over year and sequentially. We believe this is at least in part related to Commercial Metals Company's ability to leverage its unique and comprehensive portfolio of capabilities to win projects, particularly those that require specialized reinforcing solutions or large-scale resource deployment. A recent example has been the success we have had in the LNG space, which requires highly specialized cryogenics, the reliability of a large fabrication and logistics network, and expertise in project management, all of which we provide. Strong execution helped our Construction Solutions business, formerly known as our Emerging Businesses Group, achieve a record first quarter adjusted EBITDA. Similar to our North America Steel Group, underlying market conditions were supportive, but our efforts to capitalize on these drove results to new heights. At Tenthar specifically, we are seeing several important commercial and operational initiatives gain traction. Our team has moved to deepen relationships with key customers, improving our visibility into their upcoming product demand. We have also positioned ourselves to better address market demand across a full spectrum of GeoGrid solutions. Our highest value products are experiencing strong demand from mega projects such as LNG investments, but we are also capturing more opportunities in mid and lower-tier portions of the market. Operationally, the Tenthar team is doing an exceptional job managing costs and increasing production reliability, ensuring that we have the product available where and when needed at a cost that optimizes margins. Our Commercial Metals Company Construction Services business achieved strong results during the quarter, with revenue growth outpacing the broader market due to several impactful initiatives to acquire new customers, gain share of wallet through more productive proactive outreach, and standardized pricing and service levels across the footprint. This is just a sampling of the initiatives that we are undertaking to drive our business from good to great. Our success reflects the strategic efforts of Commercial Metals Company's leaders to push their businesses to new levels of performance. I mentioned earlier that we capitalized on the supportive environment in the quarter. Let me provide a bit more color on what we saw. In North America, we experienced healthy, stable underlying demand for our major products. This, in combination with a well-balanced supply landscape, supported volumes and margins during the quarter. Shipments of finished steel were virtually unchanged year over year and down less than a percentage point from fiscal Q4, compared to a more typical 4% to 5% seasonal sequential decline. Consistent with our guidance, metal margins increased sequentially as we were able to capitalize on the summer price announcements. Downstream bid volumes, our best gauge of the construction pipeline, remained healthy and were consistent with recent quarters, with continued strength across key market segments, including public works, data centers, institutional buildings, and energy projects. We continue to see substantial pent-up demand, particularly within non-residential markets, a view supported by historic strength in the Dodge Momentum Index or DMI, as well as recent conversations with many of our largest customers who are increasingly bullish as they experience a large inflow of project inquiries related to energy generation, reshoring, advanced manufacturing, and LNG infrastructure. The DMI leads construction activity by twelve to eighteen months and increased by approximately 50% on a year-over-year basis in November, with the Commercial segment growing by 57% and Institutional by 37%. Even excluding data centers, a hotbed of growth in North America, commercial showed solid expansion, rising 36% from a year ago. Peter Matt: We remain confident that emerging structural drivers, including investment in U.S. Infrastructure, reshoring industrial capacity, growth in energy generation and transmission, the build-out of AI infrastructure, as well as addressing a U.S. Housing shortage, will support construction activity over the long term. As noted on Slide 10 of the earnings presentation, nearly $3 trillion of corporate investments were announced across related areas in calendar 2025. Commencement of even a handful of these related mega projects could provide a meaningful demand catalyst for Commercial Metals Company in the quarters ahead. Before I move on to our other segments, I would like to briefly update you on the status of the rebar trade case filed with the International Trade Commission or ITC back in June, alleging exporters located in Algeria, Bulgaria, Egypt, and Vietnam are guilty of dumping material into the U.S. Market. In December, the Department of Commerce provided a preliminary ruling against Algeria, finding that producers based in that country are guilty of dumping and subjected them to the maximum duty sought by the domestic rebar industry, which is 127%. While this margin rate could change once the Department of Commerce finalizes its investigation on Algeria in March, we are encouraged by the preliminary results and applaud the department's defense of fair trade. Preliminary rulings are expected in March for antidumping duty investigations covering Egypt, Vietnam, and Bulgaria. Turning to our Construction Solutions Group, current conditions are similar to those just described, with steady activity across most construction segments punctuated by a few hot areas like data centers and large energy projects. Our commercial teams continue to see encouraging signals regarding future activity, including healthy quoting levels and improved velocity of quote conversion to backlog. In addition to these broad indicators of potential demand, we are seeing an increase in attractive individual opportunities that require specialized reinforcement solutions, particularly among bridge and energy projects. Conditions for our Europe Steel Group softened modestly from the fourth quarter. Demand remained resilient on solid Polish economic growth, providing an outlet for healthy shipping volumes, but average price and margin levels were negatively impacted by the import flows. A portion of the price pressure experienced during the quarter may have been related to buyers of foreign material seeking to import product ahead of the European Union's carbon border adjustment mechanism or CBAM taking effect on 01/01/2026. We view this as a temporary overhang and expect prices in our primary markets to benefit from the launch of CBAM, which should increase the cost of some imports, particularly those that have historically been most aggressively priced. The green shoots we have noted in recent earnings calls continue to mature with more emerging. Recent market developments include signals of a coming recovery in residential construction activity driven by declining mortgage interest rates and a need for new housing stock. We are also more optimistic about the prospect of CBAM benefiting long steel pricing. Paul Lawrence: With greater clarity regarding the terms and implementation now available, our team in Poland believes the program could increase the cost of some imported long products by at least $50 per ton and help support overall market price levels. Wrapping up my comments on the quarter, let me dive more deeply into TAG. This is our enterprise-wide operational and commercial excellence program aiming to drive a permanent step-change improvement to our margins, earnings, cash flows, and ROIC. Fiscal 2026 will be a pivotal year as execution further permeates the organization and as the expected level of EBITDA benefit increases meaningfully. During fiscal 2025, TAG initiatives were primarily focused on domestic mill operations and logistics. This year, we are focused on operational initiatives in every line of business across each segment and are increasing our emphasis on key commercial opportunities. We are also targeting meaningful efficiencies in our SG&A expenses while maintaining our high level of performance. We are pleased with the execution on new initiatives so far in fiscal 2026 and have maintained solid momentum on programs launched in fiscal 2025, including the scrap optimization, mill yield, alloy usage, and logistics benefits that delivered approximately $50 million of EBITDA last fiscal year. Looking at fiscal 2026 and beyond, commercial excellence is a major opportunity where we see significant upside potential through achieving better margins and fuller value realization for Commercial Metals Company's industry-leading capabilities and service levels. For the mills, this comes in a variety of forms, including enforcing grade and size extras, applying appropriate premiums to pricing on special orders, and addressing areas of margin leakage such as delayed price implementation and freight recovery. It will also mean more definitive segmentation of our customer base with clear value propositions to the different customer segments and related commercial terms to ensure that all accounts generate acceptable margins. In our downstream fabrication business, we are pursuing enhancements to our margin structure through increased price discipline, a willingness to decline work that does not reach a suitable profit threshold, and improved terms and enforcement mechanisms in contracts. At the heart of our efforts is the ability to leverage Commercial Metals Company's unique capabilities and scale to achieve better margin outcomes on complex jobs that only a few fabricators can perform. Based on progress we are making across commercial and SG&A initiatives, I am confident that we will reach or exceed our ambitious goal of exiting fiscal 2026 with an annualized run rate EBITDA benefit of $150 million. In December, subsequent to the end of the first quarter, Commercial Metals Company closed on the acquisitions of CP&P and Foley, which is transformational for us, broadening Commercial Metals Company's commercial portfolio in a way that increases our value proposition to customers, meaningfully enhancing our financial profile and extending our growth runway. Based on our initial observations over the last few weeks of owning these businesses, I am even more confident regarding their potential to strengthen Commercial Metals Company and create meaningful value for shareholders. Both CP&P and Foley are excellent cultural fits for our company and have talented teams in place at every level of their organization, including very strong leadership groups that will remain in place and are fully aligned in executing Commercial Metals Company's strategic vision and delivering meaningful synergies. Discussions with Precast leadership regarding the business outlook for fiscal 2026 have been positive. Backlogs are at good levels, featuring solid volumes and attractive average pricing, which should support healthy shipment levels as we enter the spring construction season. The outlook for underlying demand is positive for our core Mid-Atlantic and Southeastern geographies, bolstered by the expected growth in data centers, manufacturing facilities, and stormwater management systems. We look forward to providing further details on our second quarter earnings call, which will include financial results for our Precast business within Commercial Metals Company's Construction Solutions segment. Having mentioned our Construction Solutions group a few times, I would like to highlight the reasons for renaming the segment. First, we believe that the title Construction Solutions better reflects the business composition of the segment, as more than 95% of the EBITDA will be derived from providing high-margin solutions to the construction market. Additionally, the new name more closely aligns with the strategic priorities of Commercial Metals Company, in particular, the aim to profitably grow our role in early-stage construction and build a commercial portfolio that makes us the preferred partner by our customers. Before turning the call over to Paul, I would like to recognize the efforts of our world-class employees. We have asked a lot of the team as we execute our ambitious vision for the future, and I am truly inspired by all that they have accomplished so far. Their efforts have been instrumental in laying the groundwork for years of success ahead, and I look forward to maintaining that momentum. With that, I'll turn the call over to Paul. Paul Lawrence: Thank you, Peter, and good morning. And Happy New Year to everyone on the call. As noted earlier, we reported fiscal first quarter 2026 net earnings of $177.3 million or $1.58 per diluted share compared to a net loss of $175.7 million and a net loss per diluted share of $1.54 in the prior year period. During the quarter, we incurred approximately $36.7 million in pretax expenses, with $24.9 million related to the acquisitions of CP&P and Foley, $3.7 million for interest on the judgment amount associated with the previously disclosed litigation, as well as an $8.1 million unrealized loss on undesignated commodity hedges. Excluding these expenses, which amounted to $28.9 million on an after-tax basis, adjusted earnings for the quarter totaled $206.2 million or $1.84 per diluted share, compared to $86.9 million and $0.76 per diluted share, respectively, in the prior year period. As a reminder, the prior year period included an adjustment for an estimated net after-tax charge of $265 million to reflect an adverse litigation verdict accrual. During the 2026, Commercial Metals Company generated consolidated core EBITDA of $316.9 million, representing a 52% increase from $208.7 million in the prior year period. Commercial Metals Company's North American Steel Group generated adjusted EBITDA of $293.9 million for the quarter, equal to $257 per ton of finished steel shipped. Segment adjusted EBITDA increased 58% compared to the prior year period, driven primarily by higher margin over scrap cost on steel products, resulting in an EBITDA margin of 17.7% compared to 12.3% in the prior year period. Financial results also benefited from continued improved operational performance at Arizona 2, as well as contributions from our TAG efforts. As Peter mentioned, we are driving continued gains from TAG initiatives launched during fiscal 2025 and have more recently rolled out commercial initiatives to improve margin capture. The Construction Solutions Group's first quarter net sales of $198.3 million grew by 17% on a year-over-year basis. Adjusted EBITDA of $39.6 million significantly increased by 75% year over year, driven by strong results from TENSAR and Commercial Metals Company Construction Services, as well as some improvement at Commercial Metals Company Impact Metals from the depressed levels of a year ago. TENSAR achieved its best first quarter financial performance under Commercial Metals Company ownership, benefiting from solid project demand, the positive impact of the sales initiatives mentioned by Peter, and strong cost management efforts. Commercial Metals Company Construction Services likewise profited from self-help measures that drove EBITDA improvement on both a year-over-year and sequential basis. Contributions from our Performance Reinforcing Steel division remained historically strong but declined modestly from recent elevated levels. Construction Solutions Group adjusted EBITDA margin of 20% improved by 6.6 percentage points compared to the prior year period. Our Europe Steel Group reported adjusted EBITDA of $10.9 million for the 2026, down from $25.8 million in the prior year period. The decline was driven by lower CO2 credit, which amounted to $15.6 million during the 2026 compared to $44.1 million received during the year-ago period. The reduction in the CO2 credit was a result of the credit generated for calendar 2024 being separated into two tranches, one of which was received during the 2025, the remaining amount was received in the 2026. By comparison, results for last year's first quarter reflected the entirety of the 2023 annual CO2 credit. Excluding the impact of energy cost rebates, adjusted EBITDA improved on a year-over-year basis on stronger shipping volumes and higher metal margins. Shipments grew by approximately 16% from the 2025 as a result of continued Polish economic expansion and reduced import flows from Germany. Metal margins expanded by $37 per tonne, largely driven by the same factors. During the quarter, our Polish mill underwent an annual maintenance outage, which incurred approximately $10 million of costs. The team did an excellent job starting up efficiently following the planned downtime and, similar to recent quarters, continues to effectively manage costs across the organization. I will now discuss Commercial Metals Company's balance sheet liquidity position as outlined on Slide 13 of the supplemental presentation. As of November 30, cash, cash equivalents, and restricted cash totaled $3 billion. This amount included approximately $2 billion in proceeds raised through a senior notes offering in November, most of which was earmarked to fund the company's purchase of Foley products. In December, we closed both the CP&P and Foley acquisitions, and payments of approximately $2.5 billion were made. The table on the left-hand side of Slide 13 provides an illustrative view of Commercial Metals Company's cash balance, net debt, and net debt to EBITDA, assuming both transactions had closed on November 30. As you can see, net leverage stands at approximately 2.5 times using combined adjusted EBITDA for legacy Commercial Metals Company and our newly acquired precast business. This is lower than the 2.7 times pro forma figure shared at the time of the Foley acquisition, with the reduction resulting from the increased EBITDA generation of our business. We continue to be confident in our ability to return to our net leverage target of below two times within eighteen months and will prioritize delevering in the quarters ahead. This effort will be aided by strong cash flow generation from the Precast platform itself, the wind-down of capital expenditures for the construction of Steel West Virginia, and the significant cash tax savings generated by the 48 program in the One Big Beautiful Bill. Additionally, we have reduced our share repurchases during the period of leverage reduction to amounts approximating our annual share issuance under our compensation programs. Subsequent to quarter-end, Commercial Metals Company increased the capacity of our revolving credit facility from $600 million to $1 billion. This will ensure a strong liquidity position to support the execution of strategic goals going forward. Using the same adjustments to our November 30 balance sheet to give effect to the precast acquisitions, also giving effect to the upsized revolver, estimated available liquidity would have been slightly over $1.7 billion. Commercial Metals Company's effective tax rate was 3.1% in the first quarter. Peter Matt: Looking ahead, we anticipate a full-year effective tax rate between 5% and 10% for fiscal 2026. As a result of several factors, including our 48C tax credit, bonus depreciation on our West Virginia mill investment, as well as accelerated depreciation on the assets of the acquisitions of Foley and CP&P, we do not anticipate paying any significant U.S. Federal cash taxes in fiscal 2026 or for much of fiscal 2027. Turning to Commercial Metals Company's fiscal 2026 capital spending outlook, we anticipate spending approximately $625 million in total. Of this amount, approximately $300 million is associated with completing the construction of our Steel West Virginia micro mill, as well as a handful of high-return growth investments within our Construction Solutions group, and approximately $25 million in our newly acquired Precast businesses. This concludes my remarks, and I'll turn it back to Peter for additional comments on Commercial Metals Company's financial outlook. Thank you, Paul. Turning to our outlook, we expect consolidated core EBITDA in the 2026 to decline modestly from first-quarter levels due to a normal level of slowdown within our key markets. This will be partially offset by the addition of Commercial Metals Company's recently acquired Precast businesses. The company will recognize several acquisition-related expenses during the second quarter, including transaction fees, debt issuance costs, and customary purchase accounting adjustments, each of which will be excluded from core EBITDA. Segment adjusted EBITDA for our North America Steel Group is anticipated to be lower sequentially due to normal seasonal volume trends and the impact of planned maintenance outages, while steel product metal margin is expected to remain relatively stable. Financial results for the Construction Solutions Group should improve compared to the 2026, with the contribution of the Precast business more than offsetting seasonal weakness across the segment's other divisions. Europe Steel Group adjusted EBITDA is expected to be approximately breakeven, with margin growth potential later in fiscal 2026 when the carbon border adjustment mechanism takes full effect. The first quarter marked an excellent start to fiscal 2026, and Commercial Metals Company is well-positioned to deliver strong results for the remainder of the year. Solid market dynamics, benefits of our TAG program, and effective operational execution are generating momentum in Commercial Metals Company's existing businesses. This will be supplemented by $165 million to $175 million of EBITDA contributions from approximately eight and a half months of ownership of the Precast businesses in fiscal 2026. Looking out longer term, I am confident that Commercial Metals Company will continue to create value for our shareholders as we remain focused on executing against our strategic initiatives, which we expect to deliver meaningful and sustained enhancements to our margins, earnings, cash flow generation, and return on capital. I would like to conclude by thanking our customers for their trust and confidence in Commercial Metals Company and all of our employees for delivering yet another quarter of very solid safety and operational performance. Thank you. And at this time, we will open the call for questions. Operator: Thank you. We will now begin the question and answer session. The first question will come from Satish Kasinathan with Bank of America. Please go ahead. Satish Kasinathan: Yes, hi, good morning and congrats on the strong quarter and as well as the closing of CP&P and Foley acquisitions. Based on what you have seen in the past three to five weeks since the closing of these acquisitions, can you maybe talk about some of the positive or negative surprises you have seen so far? And do you see any potential for acceleration of the three-year timeline to realize the announced $30 to $40 million in synergies? Peter Matt: Yeah. Thanks, Satish. Great question. Again, with the preface of this is early days, our ownership of this business, I would say that we have been really, very pleasantly surprised with everything that we've seen. And I wouldn't say there's anything that's really come up that we weren't expecting on the negative side. And I'd say there are a number of things that are on the positive side that we've seen. And let me just give you a little story from one of my trips. I went to a CP&P off-site, and it was a gathering of probably 100 folks from CP&P and then a couple of product experts from Commercial Metals Company. And two remarks I'd make that were, I think, super gratifying as a, you know, kind of new owner of the business. First is, in the room, you could have been in a room with Commercial Metals Company folks. The cultural affinity is outstanding. And that was super helpful to see because I think it's gonna make our integration efforts go well. Second was I noted that we brought a couple of Commercial Metals Company product experts and there was a tremendous amount of discussion around, you know, kind of different opportunities that we and CP&P have together and a lot of excitement around that. So that was also super encouraging because it kind of validates the part of our investment thesis. In terms of the synergies, we are, I would say, the work we've done so far leads us to believe that we're very confident that we can get the synergies. What I would say is that it's early to speculate on the timing, and I wouldn't want to accelerate what we've said in the past. But we're very confident that the synergies are there, if not more. Operator: Okay. Thank you for that. Satish Kasinathan: Maybe my second question is on the North American metal margins, which are currently at three-year highs. Can you maybe talk about how you see those margins sustain or improve in the coming quarters given the context that we have some new supply to come into the market? Peter Matt: Yes. Maybe I'll start on this going backwards and commenting on the new supply. So there's been a lot of talk about the new supply and yes, there is new supply coming into the market. I think we've been consistent in saying that we're not overly concerned by the new supply. And that's particularly true in the current context where you've got much lower imports than we've had in previous years. So based on the level of demand as it is today, we feel comfortable that the marketplace can absorb the new supply as it comes in. And if demand gets stronger, which we believe it will, then, I think it's fair to say that there's to be plenty of demand to absorb any new supply that comes into the market. So we feel good about that. Getting to your question on margins, so in Q2, we would expect mill margins, so our steel product margins to be flattish. And that is taking into account the fact that we do expect to realize all of the November $30 price increase. But we also have seasonally stronger scrap in this period and that will offset some of that. And in our downstream, we could see, I think we think it's going to be flat to could be slightly down given the kind of the raw material path through to the fabrication business. But as we go forward, I think the shape of the margins is really going to depend on a couple of factors. One is obviously the supply-demand that emerges in the marketplace. And the second is really our TAG initiative. And I think this is an important point to make on TAG because, you know, TAG is all about growing margins in a sustainable way across our business. And we expect that some of that TAG contribution is gonna come in the form of benefiting metal margins as we go forward. So we're very excited about that. And I think as we go into the back half, there has been a merchant price increase of $50 a ton, we should see a little bit of that in the second quarter, but really most of it is going to be in the back two quarters and any other pricing actions will really set us up for a strong back half of 2026. Satish Kasinathan: Okay. Thank you. I appreciate the color. Peter Matt: Thank you. Operator: The next question will come from Katja Jankic with BMO Capital Markets. Please go ahead. Katja Jankic: Hi, and a Happy New Year to everyone. Maybe staying on the more near term, so you expect seasonally volumes to be impacted by seasonality. But can you talk a little bit about what that means? Because it seems that so far we haven't really seen a material impact from seasonality. Peter Matt: Yes. It's a great point. We did have stronger volumes than we honestly than we expected in the first quarter. But going into the second quarter, we are expecting kind of typical seasonality. And remember, in the second quarter, we've got the winter conditions, construction slows down, and typically there's been going Q1 to Q2, there's a 5% to 10% decline, and we'd expect to be in that range. But I will acknowledge that, you know, the volumes have been stronger heretofore. Katja Jankic: And then maybe on the West Virginia mill, can you update us on what the ramp-up plan there is? Peter Matt: Yeah. We're super excited about that. You start one of these projects and it seems like a long way off and now kind of we're within six months of the startup. So we've actually started some of the cold commissioning already. The hot commissioning, which is, you know, the official startup is, as Paul noted, likely to begin or will begin in June. And we feel really good about it. And just to comment on West Virginia, you know, given the market conditions, we couldn't be bringing that on at a better time. But the other thing I think that really bears note is the fact that we are bringing this project in on budget. And I have to say hats off to the whole West Virginia team for the incredible capital discipline that they've shown in this project. You know, these are big dollar expenditures. We're spending over $600 million on this project. And there is a lot of examples of projects that are kind of over budget. And thanks to the discipline that everyone's shown, we've managed to bring it in and ultimately that helps us from an ROIC perspective, which is a critical objective for us to improve. Paul Lawrence: Got you. The only thing I would add to Peter's comments is just recall from a startup perspective, this is a rebar-only mill different from Arizona 2. And so typically, based on our other rebar-only mills and the fact that this is not near the degree of new technology being introduced as we did with AZ2, we would expect to ramp the operation up over the following twelve months once we meet that hot commissioning startup. Katja Jankic: Perfect. Thank you. Peter Matt: Thank you, Katja. Operator: The next question will come from Tristan Gresser with BNP Paribas. Please go ahead. Tristan Gresser: Yes. Thank you for taking my questions. The first one is on the old EBG division. If you can talk a little bit about the outlook for fiscal Q2, also, more specifically, what kind of seasonality usually do you see on the precast business? Is it fair to assume a normalized EBITDA quarterly run rate for Precast? And add a bit of, I mean, because TENSAR has been pretty strong as well. So I would assume maybe a bit stronger on that division, but yeah, we'd love to have your thoughts on that. Peter Matt: Yes. So thank you for the question, Tristan. So EBG, typically, there is, as we've said before, there is absolutely seasonality in that business. As we noted in the prepared remarks, a substantial portion of that, most of the lion's share of that is going into the construction market. So seasonality is definitely a factor in our Q2. It is the weakest period. And I should note that TENSAR in particular with ground stabilization is kind of the most seasonal as we look at that business from year to year. So I think you can expect normal Q2 seasonality in that. Precast, so in our Precast business, we think that will largely follow the seasonality that we have in our business overall. And what I mean by that is our steel business overall. Typically, you've got in the winter months, you've got a reduction in the amount of activity that you see, and we expect that to be the case too. So this is maybe not part of your question, but I'll go to it directly to say, we expect in the second quarter the Precast business to contribute about $30 million of EBITDA roughly speaking. Which will seem lighter and that goes entirely to seasonality. And as Paul noted in his comments, the backlogs that we're seeing are very strong. They're stronger than last year. And so we feel very good about the prospects for that business going into our ownership in 2026. Tristan Gresser: Alright. No, that's very clear. Going back to your prepared remarks on scrap sorting, how much of a benefit it's been, can you give us some numbers? And what you've been doing and how has it changed today versus what you used to do in the past? In terms of using less scrap and varying the quality of the scrap, any color there would be great. Peter Matt: Yeah. I'll start and then Paul can jump in with any additional comments. But I guess what I'd start by first saying is that in the past, we talked about the scrap optimization being, I think it was a $5 million to $10 million opportunity. And that has grown substantially. And I think the key point is that we started out in a couple of mills and now we're pushing it to other mills. So we're getting the benefit across our broader footprint. And there are two points, as you said, one is in the quality of the scrap. We've done a tremendous amount of work in the quality of the scrap and we've identified places where, for example, we're using a lot more shred than we need to use. So we can cut back on the shred and that obviously kind of reduces scrap costs and so forth. We've also done a tremendous amount of work on yield, and that has helped us a lot in terms of obviously using less scrap to produce the tons and sell the tons that we want to produce and sell. Paul Lawrence: The only thing I would add, Tristan, is, you know, as we've noted, what we achieved last year was approximately $50 million from TAG. And I would say those two initiatives, just given the dollars involved, Peter outlined, probably were near half of the realization that we had last year. And as Peter said, those were on, you know, piloting the initiatives in a few locations and growing throughout '25 and '26 and an incremental number of mills to get it across the entire platform. And so we are very excited about the opportunity of those initiatives to continue to contribute well to our business. Peter Matt: One thing that's maybe worthy of an additional comment vis-a-vis TAG is, and this goes for a lot of our TAG initiatives. What we found is that on something like scrap optimization, it started out in one mill. And then you start to see these real benefits in the mill. And, of course, every mill manager wants to run their mill as well as they possibly can. So there's been this kind of compounding effect as more of the mills take it on and bring it into full bloom. So and that's, I think, a characteristic of the TAG program in general. And one of the things that we're super excited about, we see a new initiative coming in and sizable new initiatives coming in. And we got to build charters and plans around these different initiatives. But you can see how this can be really a game-changer. And as we've talked about in the past, again, the goal is long-term sustainable margin improvement over what we would be otherwise, right? So if x was our historical margin, we want to be at x plus Y. And we're working internally on some tools to help you all define that, but we believe that there is through TAG the opportunity to make our business durably better. And I think that'll be a really important contributor to value. Tristan Gresser: Alright. That's very helpful and interesting. Thank you. Operator: Thank you. The next question will come from Alex Hacking with Citi. Please go ahead. Alex Hacking: Yes. Hi, thanks. Good morning. Happy New Year, everyone. I guess the first question, you mentioned increased commercial selectivity in rebar fab and part of that was about reducing risk. Has counterparty risk been rising and is there a reason why? Thanks. Peter Matt: Why reduce, so let me just make sure I understand your question. Why were addressing that point? Sorry, the question was, has counterparty risk been rising and why has counterparty risk been rising if it has been rising? Alex Hacking: Yeah. I wouldn't say it's been rising. I would say this is a risk that we have taken historically that we are looking to reduce in the portfolio. And where it manifests itself is, Alex, in our fabrication business and some of the contracts will be asked to do longer-term jobs. And a lot of times, those longer-term jobs can be at a fixed price. And of course, our raw material inputs can change. So you can get out two years or three years and there have been some instances with this company in the past and I'm sure others where you can get upside down on a project. And what we're trying to do is to reduce that risk by making sure either through proper escalators, proper indexing, that we are being compensated for that risk. So that again, it goes back to the ROIC point that in any environment, we are generating a good return on the capital that we've put in, which is substantial on a business like this. Paul Lawrence: And I just to reiterate, and make sure it's clear, you know, counterparty risk, we have historically never had an experience of significant counterparty risk and nor do we see that really going forward with the structure of how the construction contracts are written. This is all about reducing the risk, Peter said, around margin preservation and ensuring we're getting a good margin on the job. Alex Hacking: Oh, I get it. Thanks for the clarification. I guess I misinterpreted. And then on Europe, as you mentioned, the importance of getting ahead of CBAM. How do you have any idea, like, how long it could take for prices in Europe to stop benefiting from CBAM? Thanks. Peter Matt: Yeah. So again, it took effect January 1. And our read on the situation is for certain importers, the average impact on them could be €50 a ton. And for many of them, it could be higher initially because they have to be qualified to get to the €50 a ton. And before they're qualified, there's a default rate that's even higher. So this is going to play out over the course of calendar 2026. I think it's fair to say you've probably noted in the import numbers that there was a large pre-buy of incremental tons coming into Europe that probably before CBAM, excuse me, that will probably delay the impact of the CBAM credit that we should be getting. But I do believe by the time we get to the, we'll get a little bit of it in our second quarter and in our third and fourth quarters, we should see a substantial portion. And certainly, over the course of the year, the calendar year, it will roll in. The other thing to note is that in addition to the CBAM, there is also this safeguard mechanism that was renegotiated by the EU. And the safeguard mechanism, remember, that's effectively a quota system. And in the revised safeguards, the quotas are reduced by 50% and the tariffs for being above the quotas are increased by 50%. That should come into effect in the middle of the year and that should be only additive to the situation in Europe. And just to frame it a little bit for you, if you think about our production capability in Poland, and you think about the $45 million of CO2 credits we get, that's about $30 a ton above our breakeven operational performance today. And then add €50 to that, all of a sudden, start to get to numbers where we are running at levels at or above our through-the-cycle performance. So again, this is not something that's going to happen overnight, but in addition to all the other catalysts in Poland, I think it's reason for some real optimism. Alex Hacking: Thanks and best of luck. Peter Matt: Thank you. Operator: The next question will come from Timna Tanners with Wells Fargo. Please go ahead. Timna Tanners: Yes. Hey, good morning and Happy New Year. I wanted to tailor my questions to trade. So you talked about the CBAM implications helping pricing, but I think another aspect of CBAM is that it helps domestic producers in Europe perhaps take some market share. So curious about, you know, what volume impact you might see there? And then I have a follow-up on the U.S. Trade side. Peter Matt: Yep. I think that's a fair point that you're making. And I think there are some volume opportunities. We have been running at, I would say, a relatively good rate of production recently. So I think there is some volume opportunity for us. But I wouldn't say it's huge at this point. Timna Tanners: Okay, great. Second question on the U.S. Side, I know you mentioned, of course, Algeria, Bulgaria, Egypt, Vietnam. But if you look at the latest trade data, actually, imports are coming again from Turkey and from what I think Portugal and Spain. So just any thoughts on the Turkish side and also maybe Portugal and Spain keep more production domestic in that falls off. But it does seem like the other countries before you mentioned are already shrunk in terms of importance probably because of the filing of the case even before any decision. Peter Matt: Yeah. No. It's a great point. We've definitely seen some pullback in the imports from those countries. And I'll just remind you, and others that those countries in 2005, the trade case countries imported about 500,000 tons of steel into the U.S. So if there was an outcome that's anything like what we have on the Algeria case and a preliminary ruling, I think that's going to be really helpful in terms of keeping those imports out of the country. And remember on those trade cases, these are five-year terms before the sunset review. So it's quite a durable point. I think to your question on Turkey, we have noticed that Turkey has increased their shipments. We'll have to watch that. Again, in the context of overall imports today, not overly concerned about that. But again, we'll be watching that carefully to see to make sure that it to make sure that what they're importing, they're importing as a fair trader. Timna Tanners: Got it. Yes, seems like imports could take yet another leg down. But thanks for the color and all the best. Appreciate it. Peter Matt: Thank you, Timna. Operator: The next question will come from Bill Peterson with JPMorgan. Please go ahead. Bill Peterson: Yes. Thanks, everyone. Happy New Year, and thanks for all the color on the call thus far. I wanted to ask about AZ2, how the ramp has progressed during the prior quarter and what utilization you're running at? And then how should we think about operations and utilization ahead? Peter Matt: Yeah. AZ2, we've said in the past that this has been a challenging one. And my comments will cover that a little bit. But I think the important point is we reached profitability on EBITDA in the fourth quarter and we were nicely profitable in the first quarter too. And we expect to be nicely profitable throughout the year there. In terms of utilization rates, we exited last year at about 60%. We expect to demonstrate full run rate during our fiscal year 2026. But we don't expect to be at full run rate in 2026. And that is because we still have a number of merchant specs that we've got to perfect and that's going to take some time and it'll force us to run at, you know, kind of suboptimal utilization. But we feel good about where we are. There's still some challenges there to be clear. But the team has done an incredible job. And this is where I think the Commercial Metals Company team really shines because we have drawn people and expertise from all across our network to help us with this operation. And remember, the challenge is this isn't your grandfather's steel mill, so to speak, right? This is a very innovative steel mill. It will be a workforce in our portfolio, but there's a lot of new technology to make work. And the other challenge that we've had there, Bill, is just with kind of the people not from the vantage point of the people good, the people are great, but it takes some training to learn this. And so we've done a lot of work around training, and I think that's enhancing our reliability substantially and it will continue to do so as we go through the year. So hopefully that helps you. Bill Peterson: Yes, it does. Thanks for that. And then my second question, can you speak a bit more to the pricing profile of your downstream backlog and whether new order entry continues to be priced higher? What's in the backlog? And I guess to what extent is the commercial discipline TAG initiatives you spoke of earlier playing a role? Peter Matt: Yes. Absolutely. So we do continue to see prices improve in our downstream. So we have been really for the last couple of quarters putting new orders into the backlog at higher prices. So that continues and we feel good about that progression and actually kind of starting out the year, we've had a couple of new orders that have come in a really nice place. So I think we feel good about that. And again, demand in that business remains very solid. And so there's a lot of project activity and a lot on the drawing board. So we're optimistic about where things go there. Bill Peterson: Thanks again. Peter Matt: Yes. Thank you. Operator: The next question will come from Carlos De Alba with Morgan Stanley. Please go ahead. Carlos De Alba: Yes. Thank you very much. Happy New Year, everyone. So maybe just adding to the discussion on the new commercial approach in the fabrication business. How much of your business is already in this indexed format where you are able to maybe better protect your margins? And how do you see that evolving in the coming quarters in still not a big percentage of the overall business? Peter Matt: Yes, it's not a big percentage today. And the openness to it among the customers can vary. Right? So there are some DOTs, for example, that are more inclined to it than others. So we're working from a relatively low base on that, but we do see the opportunity to increase it and to open the dialogue with customers on indexation. And indexation is just one of the strategies, right? The other obvious strategy there is just proper escalation. And when you talk about commercial excellence, one of the things that we've been, I think, showing the team's done an amazing job on being more disciplined about this is in making sure that number one, we have proper escalators in place. And then number two, that we're actually enforcing those escalators as we go through, you know, kind of go through the period. So this is a journey, but the way we think about it internally is that over time, it doesn't make sense for companies like Commercial Metals Company to take this type of risk in the way that we've been taking it. And over time, we will work towards reducing that. And that will again contribute to higher margins through the cycle, higher returns, more consistent returns, all the things that we're pointing towards. Paul Lawrence: And Carlos, I would just add, you know, what we've spoken of is really around protecting the risk from a duration perspective. There's also recognizing the value that Commercial Metals Company brings from a reliability perspective. And I think that is also critical in terms of our capabilities and ensuring we get value for the service we bring. There's a tremendous amount of risk to a construction project that comes with all the subcontractors. Having a reliable partner as Commercial Metals Company is drives a higher value recognition. And we got to make sure we capture that. Carlos De Alba: That makes sense. And then what is the EBITDA margin that your $160 million to $170 million EBITDA guidance for CSG represent? And would you say that this guidance, this EBITDA guidance is somewhat conservative given that you're just starting to take over those assets? Peter Matt: Yeah. I mean, Paul, you can comment on the margin, but I would say, look, it's early days, right? And we're doing a lot of work on integration. As I said at the very beginning, we feel kind of good about what we've seen. But there's some adjustment that has to happen as you bring a new company into our company and so maybe we're being a little bit conservative, I think it's appropriate to be cautious and again, our goal with all of you and with all of our investors is to be in a situation where we are under-promising and over-delivering and that's what we're shooting to do here. Paul Lawrence: And as far as the margins are concerned, it'll be made up of the two buckets. Our existing business typically is in the high teens, call that 18% to 20% margin. We would expect that to remain there. And the Precast business to come up, the combination of the two entities to be in the 30% to 35% range from a margin perspective. So no change. Obviously, it's just a different mix going forward than what we've had historically. Carlos De Alba: Yeah. Great. Thank you, Paul. Yeah. I misspoke. A period $165 million to $175 million EBITDA guidance is not for CSG. It's for the Precast unit. Thank you very much. Good luck. Operator: Thank you. The next question will come from Mike Harris with Goldman Sachs. Please go ahead. Mike Harris: Yes. Good morning. Thanks for squeezing me in. Just one quick question on my part. When I look at the TAG program, I think last quarter, the expectation for the expected run rate annualized EBITDA benefit at the '6 was greater than 150. And now you're saying 150. So does that change just a function of timing? Or did you adjust your initiative list? Or just being conservative? Peter Matt: No. I don't think it was greater than 150. I think we have moved towards 150 as we've gotten more clarity on the opportunities in TAG. And by the way, as we've said in many other forums, this is just the beginning. Right? So it's not like 150 is the end. As we get more fidelity around this, we will share more. What we're really doing in TAG is we're trying to build durable margin improvement. So rather than throw lots of programs in that we haven't fully vetted or we haven't done the work to make sure that they deliver and they deliver in a sustainable way, we're proceeding a little bit more slowly. But I think the outcome will be something that's more lasting. Mike Harris: Okay. Thanks a lot for that clarification. Peter Matt: Thank you. Operator: The next question will come from Phil Gibbs with KeyBanc Capital Markets. Please go ahead. Phil Gibbs: Hey, good morning. Sorry if this question was asked earlier, but what is the typical seasonality of the North American business from a volume standpoint relative to Q1? Paul Lawrence: Typically, Phil, it's in the 5% to 10% range that we expect. Obviously, it's very much weather dependent and we've seen some inclement weather on the West Coast. Certainly, nationally, it's been pretty good so far, but we were only in the early innings of the winter. So typical is 5% to 10% and that's what we're guiding towards. Phil Gibbs: Thank you. And then in terms of integrating just baseline depreciation, I'm assuming you're going to have some write-ups associated with the Precast deals. I think your baseline for D&A was like $70 million or $75 million in Q1. So what should we be anticipating for Q2? Paul Lawrence: Yes, it's a great question, Phil. And as we have owned these businesses just for a short period of time and the complexity of some of the purchase accounting, we're not in a place from a D&A perspective, well, really, amortization perspective to provide guidance. There's a lot of intangibles associated with the businesses and they all have different valuation approaches and durations. And so what we know is cash flow, the cash flow of these businesses will be certainly very attractive as we outlined at the acquisition. We were able to achieve the financing at very attractive rates in November and excited about the conclusion of the financing. But as far as the accounting, we are not yet in a position to really provide much outline in terms of what the amortization will be. Phil Gibbs: Thank you. Paul Lawrence: Thank you. Operator: At this time, there appear to be no further questions. Mr. Matt, I'll now turn the call back over to you. Peter Matt: Thank you, Nick. At Commercial Metals Company, we remain confident that our best days are ahead. The combination of structural demand trends, operational and commercial excellence initiatives to strengthen our through-the-cycle performance, and value-accretive growth opportunities create an exciting future for our company. Thank you for joining us on today's conference call. We look forward to speaking with many of you during our investor calls in the coming days and weeks. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Roivant's Second Quarter 2025 Earnings Call. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your first speaker Stephanie Lee. You may begin. Stephanie Lee Griffin: Good morning, and thanks for joining today's call to review Roivant's financial results for the second quarter ended September 30, 2025. I'm Stephanie Lee with Roivant. Presenting today, we have Matt Gline, CEO of Roivant. For those dialing in via conference call, you can find the slides being presented today as well as the press release announcing these updates on our IR website at www.investor.roivant.com. We'll also be providing the current slide numbers as we present to help you follow along. I'd like to remind you that we will be making certain forward-looking statements during today's presentation. We strongly encourage you to review the information that we filed with the SEC for more information regarding these forward-looking statements and related risks and uncertainties. And with that, I'll turn it over to Matt. Matthew Gline: Thank you, Steph, and good morning, everybody, and thank you for listening. I appreciate all you dialing in. So not at all a quiet quarter for us and that we put out both the Graves' data and obviously, the Phase III data for brepocitinib in DM. So sort of just a tremendous moment of transformation for the business, but a relatively quiet earnings call as we're looking forward to getting everybody together in December for a more fulsome telling of where we are as a business, more about the future on our Investor Day on December 11. That registration link is live on our website. So look forward to seeing you all there. Today will be more of a review of what's happened in the recent quarter, and then we'll talk much more about the future when we get together in December. So looking forward to that. I want to start out on Slide 5, just by taking a short victory lap because it's been a pretty wild year for us. Obviously, starting with and probably most notably the VALOR data for brepocitinib in DM, which hit on all 10 ranked endpoints and just a phenomenal data set that we think is going to transform the lives of DM patients. So that NDA filing remains on track planned for the first half of next year, and it will be the first novel oral therapeutic in DM, if approved. We also put out data in this quarter from the durable remission sort of portion of the Graves' disease trial for batoclimab, which sets us up for the future there in our 1402 Graves' program. That demonstrated disease-modifying potential for 1402. And then we think earlier this year, we put out some data in MG and CIDP that we can do a pretty nice job of validating the deeper is better idea for FcRn from an IgG expression perspective. We also have initiated at Immunovant this year potentially registrational trials in Graves', myasthenia gravis, CIDP, difficult-to-treat RA and Sjögren's as well as a POC trial in CLE. So some really exciting progress there with IMVT-1402, which we hope will take us to a first-in-class in many cases and best-in-class, and we hope all -- in all indications potential. We got a favorable Markman ruling this quarter for Genevant in the Pfizer case and just overall continued progress in the LNP litigation, with the jury trial and the Moderna case scheduled for March of 2026. And our capital position remains very strong with $4.4 billion of cash, cash equivalents, which will get our current pipeline to profitability and support pipeline expansion and potential additional capital return, including the $500 million that we have currently authorized. On Slide 6, and we've been showing this slide for a while, but it just -- it feels realer and realer with each passing quarter, just a late-stage pipeline that we are really excited about with 11 potentially registrational trials and indications with blockbuster potential. Obviously, the first of those dermatomyositis now behind us, but many more to come, setting us up for a slide that we've been showing since June on Slide 7, which is just a stack 36 months ahead of us between multiple registrational data sets, first DM and NIU and brepo and then the beginnings of a long list of them in 1402, lining up for a series of launches, again, first DM and brepo and then NIU and brepo and then very shortly thereafter, 1402 across multiple blockbuster indications, including Graves'. So look, as I said, a moment of real change and transformation for the business. I think we recognize that. We're excited to talk more about it when we get together in December. It's something that the team internally is excited about. It's excitement that I hear from investigators, certainly and patients and docs in the DM landscape and from investors as well. So looking forward to the next leg of our journey here. I'm going to do just a brief recap of the 2 major data sets from the quarter. So I won't spend a ton of time on either of these because we've talked about all of them in this setting before, but they bear rementioning just because of how exciting both of them are. Starting with the brepocitinib VALOR data on Page 9. Again, we've gone through this all before, but VALOR succeeded with really highly significant, robust and consistent data across the primary and all key secondary endpoints with a nice clear dose response that sets us up for 30 milligrams to be the optimal dose here. Responses were rapid, deep, broad, clinically meaningful across the board, a statistically meaningful and clinically important delta to placebo on mean TIS with deep responses occurring quickly and across a range of endpoints, including muscle and skin. And as a reminder, on Slide 10, this is a patient population with very significant unmet need, and this is a story that has been underscored over and over again as our team has been out talking to physicians in the field after this data. This is a patient population that is significantly underserved by therapeutic options. 75% of these patients are on only either steroids or ISTs and are struggling to get well controlled. And many of them are requiring high doses of oral prednisone in order to be sort of be treated appropriately and are all looking for options or many of them are looking for options. Only a relatively small percentage, only 1/4 of the market is currently on other therapies at all. And of the ones that are, some of them are on very demanding IVIg regimens, multiple days a month, spent entirely in the infusion centers and others are on a series of off-label therapies, many or most of which have failed DM programs before, but are used simply because there are no better options. So we're getting a predictably enthusiastic response from all of the physicians we've engaged with on this data already and are obviously looking forward to continuing that as we go through the registration process in the coming year. Looking at Slide 11, again, a recap from before, but this is the primary endpoint. This is mean TIS. And this is a textbook picture from my perspective of positive clinical data, statistically significant at the high dose starting at the earliest time point, nice clear separation, nice clear dose response. And one thing that bears mentioning, and we said this we put the data originally, we had originally been focused on the steroid taper as a risk mitigant in order to make sure we saw a clear benefit from the drug against the background of not really placebo, but actually actively managed background therapy. And we did that. But the other thing we were able to show is a real dose response on steroid reduction as we were able to get a significantly greater portion of patients to lower steroid doses or off steroids on high-dose brepocitinib than on placebo. And I think that actually with the doc community has been enormously resident finding. It's something that the docs are really, really focused on DM getting these patients off high-dose steroids, and we are very excited that we were able to show this in the study, including as a part of at least one of the key secondary endpoints. On Slide 12, more than a 1/3, and this is the key secondary where we were able to really hit both the TIS improvement -- or the TIS, I should say, and a minimal or no steroid burden. More than 1/3 of brepo 30 patients were able to get to both major TIS responses and minimal or no steroid burden at week 52. So that's just a really exciting finding across the board. And more than half of patients were able to achieve a TIS40, a moderate TIS response with very low dose of oral steroids at the same time. So just a phenomenal outcome there on the combination of endpoints. On Slide 12, again, without going through them all, just a statistically robust data set, I'll say, with really low p-values across every secondary we tested benefit on muscle, benefit on skin, benefit on patient-reported outcomes like the HAQ-DI questionnaire on disability, just a terrific across-the-board outcome here. In terms of what's next year, I think everyone is clear. The NDA submission, we're moving as fast as we can. The only real gating item here was drafting, and it's ongoing right now. We expect to get a file in the first half. Data readout from that proof-of-concept study in CS that we have ongoing will be next year. And the NIU study, which is enrolling very nicely, is currently anticipated to read out or say, guided to the first half '27 around the same time as potential registration of brepo and launch in DM. And then we submit the sNDA for NIU shortly thereafter with potential further indications and so on to come. So that's brepocitinib. I'm sure we'll get some questions about it. And like I said, we'll talk more about that program and what it could represent commercially on the 11th. But suffice it to say, a tremendous quarter and something we're really excited to carry forward from here. Next up, I'll just recap the Graves' disease remission data that we put out earlier this quarter as well. Starting on Slide 16, with just a reminder, this is a very large patient population with a significant unmet need. And there's been -- I think this is an important point as people are doing their work here, a shift away from ablation over time as patients don't want to go through the surgical procedure or the radioactive iodine, but really a lack of new medical therapies that's left something like 1/4 to 30% of Graves' disease patients who are relapsed, uncontrolled on or intolerant to ATDs. It's just a very high proportion of patients who are unable to get well controlled. As a reminder, on Slide 17, this is a bad disease. These patients are at much higher risk of cardiovascular events, much higher risk of preeclampsia, 4x higher risk of preeclampsia and a 7x higher risk of thyroid cancer than the general population. So these patients are really sick or at a high risk of developing severe comorbidities. They often go on to develop thyroid eye disease, about 40% of patients go on to develop these eye symptoms, some of which get optic neuropathy and other issues that can be pretty significant for vision. And then there's a bunch of other complications here. 16% are diagnosed with thyroid storm, which has -- in patients with hospitalized for Graves' disease, 16% are diagnosed with thyroid storm, which has a 20% mortality rate. So again, potentially sort of very sick patients and again, a relatively high risk of thyroid cancer, including a high risk of progressive thyroid cancer. So disease that makes people quite sick. Again, more to come on the 11th, but just wanted to highlight that fact. And then on Page 18, in addition to being a severe disease, it's a disease affecting a lot of people. And so you've got every year, call it, 65,000 newly diagnosed patients, of which 20,000 of those wind up in that sort of refractory bucket. And then there's 880,000 diagnosed U.S. patients, of which 330,000 in the prevalent population are walking around in that intolerant or unable to get well-controlled bucket. So they're just a huge patient population with a significant unmet medical need. What we showed earlier this year in the batoclimab study is a pretty interesting result. We showed real disease-modifying benefit in these patients. Of the 25 patients who came in at baseline, as a reminder, the way the study worked, patients were treated for 12 weeks of high-dose batoclimab followed by another 12 weeks of low-dose batoclimab and were then followed for another 24 weeks off drug entirely. And what we saw is after that first 12 weeks, 20 out of 25 of those patients were responders to therapy. After dropping to low dose after another 12 weeks, 18 out of 25 of those patients were responders. And truly remarkably, after being off drug for a further 6 months, 17 out of the 21 patients we were able to follow up with at week 48 were responders to therapy. So these are patients who were uncontrolled on standard of care at the beginning of the study and 17 out of the 21 of them that we were able to follow up with remain responders to therapy, having been off drug for 6 months. So a pretty remarkable disease-modifying benefit. Of the off-drug responders on page -- of the off-drug responders on Slide 20, nearly half of them were fully off ATDs and over 75% of them were on only the lowest doses of ATDs or off ATDs. So not only were we able to deliver a disease-modifying benefit for patients who are uncontrolled on ATDs before, we were able to significantly reduce or eliminate ATD need for those patients. Now this was underscored on Slide 21, not just by the sort of clinical data on T3 and T4 and so on, which is obviously what's most important to the patients. But you can also see it in the TRAb reductions on Slide 21. And as you can see, as you'd expect for FcRn therapy, these patients showed a rapid decline, both in general IgG and in TRAb levels, especially on high dose. The IgG levels came back a little bit as you'd expect during the lower dose period. And then what is maybe unique to Graves' disease or at least unusual among FcRn indications is while IgG bounces right back when you come off therapy, the only time points on this graph are week 24 and week 48. But by week 48, these patients were effectively back at baseline from IgG. The vast majority of these patients still had basically sort of reduced or no TRAbs. And that is a pretty remarkable finding around the durability of the benefit here. On Slide 22, the next period is absolutely stacked for us in 1402 with data coming in a variety of indications, D2T RA and CLE next year, the second part of the D2T RA study as well as Graves' and MG in 2027 and then Sjögren's in CIDP after. One small update just to flag for today. The TED study remains on track to conclude this year. Our last patient last visit is very close to today. But we're going to hold off reporting the top line data from that first study in all likelihood until we see the top line data for the second study in the first half of next year. The evolving competitive landscape in TED and especially in Graves' disease has led us to take a more prudent path there. And so we're going to collect that data together and report it when we have it all. Moving on to the -- briefly to just a reminder of where we are in the LNP litigation, which I know some people are following. In the Moderna case, we are in a pretrial process around the narrowing of claims and defenses and around summary judgment, which is happening now, the judge is reviewing summary judgment briefings and there's sort of a calendar on the docket that we're hoping will take us through trial in March. The trial is scheduled for March and the first international proceedings are also expected in the first half of 2026. The Pfizer case is ongoing in discovery, and there was a favorable Markman ruling issued in September that certainly sets us up nicely for what we think we need to do from there. So I'll conclude before we go to Q&A with a brief financial update. Overall, a straightforward quarter from a financial perspective, loss from continuing operations net of tax of $166 and cash, cash equivalents of $4.4 billion with no debt on the balance sheet. And obviously, a share count reflective of the significant share buybacks we've done over the last 18 months. So a strong position overall that, as I said, is expected to carry us through profitability. We've got more of our financials in here and the catalyst sort of road map on Slide 28. But again, just a really exciting 6 months or 12 months behind us and a really exciting 12 months or 36 months ahead of us. So feeling great about where the business is, feeling great about the significant transformation in our profile that we've been through in the recent months and looking forward to carrying that forward from here. Once again, as a reminder, we have an Investor Day in New York City for those that can make it in person on December 11, 2025, that registration link is live. It's in the presentation we put up as well as on our website. I hope to see many of you there to round out the year and talk about the future. So with that, I'll say thank you again for listening. Again, a relatively quiet earnings call, but not at all a quiet quarter. And I will pass it back over to the operator for Q&A. Thank you, everybody. Operator: [Operator Instructions] Our first question coming from the line of Dave Risinger with Leerink Partners. David Risinger: Congrats on all the progress, Matt, and looking forward to the event on the 11th. So my question is, could you please comment on what we should be watching next with respect to Pfizer litigation? So specifically in international markets and then in the U.S. Matthew Gline: Thanks, Dave. I appreciate the question. And obviously, it's something that a number of people are watching. It's tough as always, to comment on ongoing litigation. I have nothing to say about any potential timing of any kind of international cases. Look, it's a busier moment coming up. I think there should be a sort of scheduling process for the Pfizer case underway, and we should learn more about the exact time line, including hopefully a trial date in the near future. And I think that's probably what I would be most watching out for in terms of what's public at this point is just getting that schedule together and progressing from here. Operator: Our next question coming from the line of Brian Cheng with JPMorgan. Lut Ming Cheng: Just 2 quick ones from us. How do you feel about argenx stepping into Graves' and whether that has any impact on your strategy of 1402? And then we have a quick follow-up. Matthew Gline: Thanks, Brian. It's a great question. And look, I think you heard my comment on the timing of the intended sort of production of the batoclimab TED data. Obviously, we're acutely aware of the competitive landscape in Graves' disease. And look, I think to make a gentle comment, whatever, imitation is the finest form of flattery. I think it's great to see others recognizing the importance of Graves' as a disease. It's great to see more people working on treatment options for these patients. Obviously, in our Phase II study, we studied both high and low-dose batoclimab, and we saw a great benefit to the higher dose batoclimab in the study. And then also, we reported in the past data breaking out the patients between that 70% cutoff below and -- above and below 70% IgG reduction. And we had 3x as many patients getting off ATDs at the above 70% group than in the below 70% group. So we think we should have quite a competitive profile there. But most importantly, to be honest, it's a big patient population. There's a lot of sick people. And I think a rising tide there will lift all boats. And like I said, argenx is a formidable company with a wide following and has done a great job of execution. And I know there's at least some people out there who find it, although it might be frustrating to us validating of our strategy that they're following in our footsteps. And so we'll always take it. Thanks, Brian. Lut Ming Cheng: Great. And just one quick one. So on the Investor Day next month, just curious if you can talk about what do you want investors to get out of the Investor Day? Is this more of a broader recap of your current strategy? Or do you think that there will be some unveiling of completely new data or a new strategic direction at Roivant? Matthew Gline: Yes. Look, it wouldn't be a fun Investor Day if I revealed all of it now. But I think most importantly, this is just -- it's a moment of huge transformation for our business. I think the type of investors who are now along for the ride are different. And obviously, a lot of other things about the business are different. So I think we want to make sure we're telling that story fully that we're helping people see the course from a commercial perspective, from a patient need perspective in these indications so they can see at least the reasons why we are so excited about these indications about the certain nature of the blockbuster opportunity. There might be some other new things we're able to share by then in terms of updates or other things, but we'll see where we're at in a few weeks here or a month. But I think it will be an exciting opportunity to get together and take stock of the business and to talk a lot about the future and the opportunities in front of us. Operator: Our next question coming from the line of Samantha Semenkow with Citi. Samantha Semenkow: Just for Graves', when thinking about the remission data, is there any way to tease out the impact of starting on the high-dose batoclimab in that study? And how much that actually contributed to the remission rates you saw? I'm just wondering if there's anything that you could share that you were able to tease out from the data when you analyzed it so as we think about the competitive landscape? Matthew Gline: Yes. Look, thanks. That's a -- it's a great question. And I do think we're going to, like I said, be a little bit careful about some of what we say here because of the evolving competitive landscape, and we're going to learn more about this from the hypothyroid TED patients and so on in that study as well. But look, I think in general, remission is about TRAbs getting normal for longer. And our view is that deeper IgG reductions are going to drive towards exactly that outcome. And so both in terms of the speed of responses that we saw in the bato trial and the depth of responses that we saw in the bato trial in terms of TRAb lowering, I think that's going to be a significant driver for us. So I think we feel good put this way about our level of IgG suppression in that program at high dose. Thanks. It's a great question. Operator: Our next question coming from the line of Yaron Werber with TD Cohen. Yaron Werber: Great. Maybe a quick question. We've been getting a few questions about the ongoing preliminary -- the summary judgment against Moderna with respect to the U.S. government involvement in the EUP -- I'm sorry, EUA and whether the government ever took "control" of the vaccines for distribution and whether that made them a commercial party and whether that impacts their involvement and as a result, would potentially provide Moderna some venue to make an argument. Any thoughts about that, if you can comment at all would be great. Matthew Gline: Yes. Thanks, Yaron. And again, as usual, it's difficult to comment in depth about an ongoing litigation, and it's ultimately going to be the judge's decision on the 1498 question. I'll point out that the 2 things that are worth keeping in mind. One is the Moderna case in the U.S. Moderna sales of COVID vaccines in the U.S. in total is a bit less than half of Moderna's total global COVID vaccine sales and Moderna's total global COVID vaccine sales are a bit less than half of the total, inclusive of Pfizer. And so -- and then what Moderna has claimed in their own briefings is that we asked for about $5 billion in damages in the U.S. case, and Moderna has claimed that a little bit less than half of those damages could be subject to 1498 in Moderna's view. And so I think you're talking about a little bit less than half of a little bit less than half of a little bit less than half of the total is the issue in summary judgment on 1498. Our position is pretty clearly laid out in our motions. And frankly, Moderna's position has also laid out in their motions. Obviously, we feel like we have a strong case to make here, but it's ultimately going to be up to the judge to determine. But I just wanted to sort of scope out the magnitude of the question as well. Operator: Our next question coming from the line of Prakhar Agrawal with Cantor Fitzgerald. Prakhar Agrawal: Congrats on the progress in the quarter. Maybe firstly, on Sjögren's disease. Recently, there has been a lot of excitement around Sjögren's market opportunity, especially with the recent data from Novartis' BAFF drug, ianalumab. Maybe you can contextualize how FcRns can differentiate on ESSDAI scores or other specific endpoints? And do you think you could be first-in-class in this indication? And secondly, just quickly on Brepo and DM, do you plan to apply for FDA's National Priority Voucher for Brepo? Matthew Gline: Thank you. Those are both great questions. Look, I think on Sjögren's, we are also excited about the market opportunity. It's a large patient population with a very significant unmet need and just a lot of people kind of going through it as it were. There have been a variety of therapeutic classes that have shown some benefit. Obviously, the in-class data was positive and the J&J data, in particular, showed that lower is better. So we think we have a real shot at best-in-class. We are working to launch as close to first-in-class as possible. I don't think we're here to commit that we'll beat our competitors. We obviously got a little bit of a head start on us, but I think we're trying to be kind of within a window small enough such that it shouldn't matter who comes first, and we can differentiate based on our profile. And I'll just say, I think, first of all, I think the Novartis data was positive, but probably left room for even better as I think have all of the Sjögren's data produced to date. And I think the FcRn data to date has sort of been competitive with other classes of drugs. And so if our deeper IgG expression yields a better benefit than other FcRns, I think we should have a truly important opportunity in the space. A lot of excitement about new therapies from KOLs and from our investigators. The unmet need is significant. The overall market is a significant number of patients. So it's a great place for us to be in our view. And then sorry, you asked about the CNPV program for brepo. We haven't said. Look, this is an orphan population with high unmet need. So I think we're thinking through all of the different ways we can get through FDA and out to patients as quickly as possible and thinking about the puts and takes of them all, but stay tuned. Operator: Our next question coming from the line of Corrine Johnson with Goldman Sachs. Corinne Jenkins: Maybe following up on an earlier question about competitive intensity in Graves' disease. I think it goes beyond argenx in terms of number of companies that have announced plans there. So how are you thinking about the kind of competitive clinical landscape that's evolving? And what do you expect to inform sequencing decisions in that space over time? And then maybe separately, just on business development. Curious if you could give an update on what you're seeing on that front. Matthew Gline: Yes. Thanks, Corinne. Look, I think the first question -- and obviously, we see the competitive landscape. Similarly, there's a number of people trying different things, which is exciting. It's exciting Graves' space. It's exciting to be there. One comment about that is, I think we've watched the myasthenia gravis landscape play out, and there's a lot of competitive intensity and a lot of new mechanisms and also that FcRn has been, a, a pretty undisputed king so far; and b, that the first FcRn to launch with the quality of that data has been a tremendous head start. And we think we've built something similar in Graves' disease, which is a market obviously a multiple of the potential size of the MG market. So we feel great about our position, both from a timing perspective as well as a mechanism. It's a well-understood mechanism, FcRn. And it's pretty exquisitely well suited to treating the biology of Graves' disease. So you think about some of the other mechanisms outside of FcRns have something in common with ATDs, which is that at high doses, they will cause patients to go hypothyroid, which is a miserable thing as well. And so I think one of the great things about FcRn biology is other than maybe for a very short period of time, because what you're really doing is getting at the root cause of the disease with these autoantibodies, you're not going to like cause the thyroid to react in the other direction sort of directly. It's not like a TSHR targeted mechanism or something like that. And so I think that will be a big benefit to FcRn. The other thing that I think is maybe underappreciated in some communities about FcRns is just how safe and well tolerated they are. And I think in a Graves' patient population, that is going to be an important fact that I think will be great for FcRns as a mechanism. So I think that those will all be sort of good guides towards FcRns being important and early line therapy for these patients who can't manage it with standard of care today. In general, as I said, I think lots of activity in the space is actually going to be good for everybody. These are docs who haven't run a lot of clinical trials. These are docs who haven't had a lot of new treatment options. And I think the more voices there are out there talking about this stuff, the better we'll be able to get out to the patient population. So thanks. It's a great question. And then you asked for BD update. Look, we remain extremely well capitalized. We remain very excited about the opportunities for pipeline expansion. We are incredibly excited about the things we currently have in our pipeline. And obviously, you hear that in our voice. You see that in the way that we're talking about our data. Obviously, we're thinking about indication expansion for those programs and then always looking in the world for programs, especially programs that are of a size and scale that can move the needle against the backdrop of our existing pipeline. And I think we've got some exciting ideas. Operator: The next question coming from the line of Dennis Ding with Jefferies. Yuchen Ding: We have 2, if we may. Number one is on Pulmovant. So you guys will have Phase II PH-ILD data in the second half of next year. I guess, how confident are you about the translatability from PAH to PH-ILD? And how should we think about that update? And what's the positive delta on PVR? And secondly, on the LNP litigation, I'm curious if you've done any work on what percentage of the U.S. doses were given to actual federal government employees as we think about a middle scenario for summary judgment? Matthew Gline: Thanks, Dennis. I appreciate it. Both great questions. Thanks for the question about Pulmovant. We're obviously super excited about mosli. Look, I think -- you have correctly identified the risk that exists in the mosli data that is we don't have data in the PH-ILD patient population, and that's sort of the nature of this study. In general, PVRs have translated well. And so I think that's an important backdrop fact between these indications. And where they haven't, it's mostly been, for example, because of the VQ mismatch issues associated with vasodilation in lung disease patients. And we think the format of mosli addresses that issue. So we are, I'd say, cautiously optimistic about that translation, but obviously, I feel a lot better when that Phase IIb data is in hand. And my hope is that we see pretty significant PVR reductions and pretty significant clinical benefit in those patients. So looking forward to that data in the second half of next year. That's another area where there's quite a lot of enthusiasm for the program and for new opportunities, especially with the overall growth from the prostacyclins in PH-ILD, leaving plenty of room for additional mechanisms. The other thing I'll point out is just the 38% PVR reduction we saw in pulmonary hypertension, even if PVR reductions are for some reason a little bit lower in PH-ILD, obviously, there's still a lot of room for a very significant amount of benefit for these patients. Your second question, what percent of doses given to federal employees? I don't think our best estimates of that are in any of our motions. But I think you can imagine, as you think about the number of federal employees that it's a relatively small percentage. Yuchen Ding: Got it. And if I can sneak one more in about the LNP litigation. Maybe remind us what's the status in terms of the OUS trials. We're not that familiar with the OUS process. So I guess, can you remind us how many cases you filed, which one is the furthest along? And can you get an initial decision in 2026? Matthew Gline: Yes. So thanks. It's a great question. In the case of Moderna, we filed a number of OUS actions, including in the UPC in Europe as well as in Canada and Japan and a couple of other places. Those litigations are all ongoing. There are important hearings in 2026. And the nice thing about some of these European jurisdictions is they can move quickly. So it is possible that we would get outcomes of various kinds within 2026 in some of those jurisdictions and obviously look forward to saying more when there's more to say. Operator: Our next question coming from the line of Yasmeen Rahimi with Piper Sandler. Dominic Risso-Gill: Congrats on a great quarter. This is Dominic, on for Yasmeen Rahimi. We just had a question going into the TED data. Could you help us understand what you're thinking about with the expectations for the studies that are reading out here soon? And what do you hope to see to consider development considering the competitive landscape? Matthew Gline: Yes. Thanks. It's a great question. We're looking forward to having that data relatively shortly for sharing it next year. Look, I think the competitive bar in TED is relatively high with IGF-1Rs being pretty efficacious. That said, they certainly leave room from a safety perspective, et cetera. And so I think we're looking to see data that makes sense in the context of the competitive landscape there. The other thing that I think -- and this is part of the reason why we're focused on the sort of competition in Graves' disease, I think we'll learn a lot about hyperthyroid Graves' patients from this study as well as the possible ways in which Graves' and TED might interact with one another. And so I think we're looking forward to the data from that perspective as well. We'll obviously make a final decision on a launch in batoclimab once we've got the TED data in hand and in consultation with our partner. Thanks. It’s a great question. Thank you. Operator: Our next question coming from the line of Douglas Tsao with H.C. Wainwright. Douglas Tsao: I guess, Matt, maybe as another follow-up on Graves' and TED. As you referenced, the 2 diseases are obviously sort of very interrelated with interplay. And I guess when we think about argenx, they will potentially come to market with VYVGART being both Graves' and TED hypothetically. Obviously, you have a big head start with 1402 in Graves'. So I'm just curious how you're thinking about potentially pursuing TED with 1402 versus, as you just noted, potentially thinking about batoclimab and the sort of disadvantage of maybe sort of coming at those dual markets with 2 different molecules. Matthew Gline: Yes. Look, thanks. It's a great question. And a couple of comments about this. One is it's -- we'll be speaking in the abstract now. We're going to know a lot more about the TED data that will inform the answer to this exact question, and we will be in possession of more information than anybody else will have at this moment in time on the sort of overall treatment landscape and on what FcRns can deliver. And so I think that will set us up really nicely to think about the possible options. They're totally different call point in terms of the physicians who treat these things and there are different stages of disease. And so I think they get treated at different times in different ways. And I think being able to talk to endos who are treating Graves' patients about the benefit in forestalling TED, for example, is an important potential thing to be able to discuss when we get to it. In terms of thinking about the sort of TED versus Graves' market dynamics, I'd say let's just wait and see what the TED data looks like, and then we can talk more about it. As a reminder, the Graves' population is meaningfully bigger and it's upstream of the TED population. And so I think there's a reason that was our first focus once we got into the clinic with 1402. Great question. Douglas Tsao: Okay. Great. And Matt, if I can, on a follow-up with brepo. Obviously, incredibly impressive results in DM. I'm just curious if you have given thought just given sort of somebody alluded to sort of the competitiveness in Sjögren's, have you ever thought of that as an indication because I think there is a mechanistic rationale and obviously, an oral option would be very attractive. Matthew Gline: Yes, thanks. I appreciate the question. Look, I think the short answer is, we have thought pretty exhaustively about possible indications for brepo. We have a number that we think are exciting beyond what we've talked about. I think if you look at the indications we've chosen so far, they've been indications where we can really chart a market-defining course. And I think there are maybe more to do in that story. But the short answer is there's an embarrassment of riches in terms of the indication set available for brepo, and we feel very privileged with the data we have in hand for what we've got. As a reminder, it has worked almost everywhere it has been tested. And so I think we feel like it's a great molecule and with a lot of great places to go. Thanks for the question. Operator: Next question coming from the line of Derek Archila with Wells Fargo. Hao Shen: This is a Hao, calling in for Derek Archila from Wells Fargo. I guess we have a question on brepo. We were at AACR. So very positive feedback from all the KOLs. So question is about really the competitive landscape. I guess we've seen VYVGART having data next year and the CAR-T is also starting their pivotal trials. How do you see the kind of the treatment paradigm evolve over the years? And brepo, do you have also plan to explore in other subtypes of myositis like [ IMNM and AS ]? Matthew Gline: Yes, perfect. So look, I think on the deal on competitive landscape, similar comment to, frankly, my comment in Graves', which is that I think it's a great opportunity to be able to get out in front of it. And obviously, first and foremost, it may be the easiest. And oral is always going to have a huge place. The majority of these patients are on oral therapy now. And so I think just like the overall profile that makes us unique. I'll say the CAR-Ts, that's not, in my opinion, going to play for the same patients mostly that we are. That's obviously a much different sort of intervention. And there's still plenty of open questions about benefit there. Look, I think that's also sort of a little bit about that landscape. FcRn could be a compelling option. Obviously, IVIg is used. But I'd say, first of all, it's good to have what we think of as a multiyear head start in DM. And we think the patient population that we have access to, given the nature of our therapy is really basically the entire DM patient population, which gives us a lot of room to go. So we think, again, similar to VYVGART and MG, we think we get to define that market and be the heart of it. And so I think that's all great. We also suspect that the data we have in DM specifically may be just the best overall, and that's the biggest part of the myositis market. Obviously, argenx is studying in other subtypes of myositis as well, and some of those may be more directly appropriate for an FcRn. As to your question about other subtypes of myositis for us, I'll just say again, we thought about a whole bunch of different places to go. There's a lot of exciting places to go, and we have an embarrassment of riches in terms of where we can take the molecule from here. Operator: Our next question coming from the line of Tess Smith with Leerink Partners. Thomas Smith: Congrats on the progress. Just with respect to the TED program and the competitive landscape, could you comment on some of the data we recently saw from the IL-6 class, whether you think Sat is approvable with that data set and sort of your expectations for batoclimab relative to those results? And then secondly, is there any update you could provide from the overseas study that you're running with 1402? And any sort of timing guidance for when we might see data from additional indications from that study? Matthew Gline: Yes, thanks. Those are, look, obviously great questions. I'll say, obviously, not our place to make comments on the approvability of other mechanisms. There was a notably high placebo response in the IL-6 study, which is something we've paid attention to. But overall, no specific comments on where that program goes from here. From a competitive landscape perspective, I think the competitive intensity in TED is real, as I said earlier. And the IGF-1Rs are efficacious, although they have safety and tolerability concerns associated with them. And so I think we're sort of focused on where we could play in TED. And then as we said a minute ago, thinking about Graves', an opportunity to impact the disease much earlier in its course. And I think that's an important thing to the way that we are approaching that with 1402. On the sort of second overseas study, look, I think we, obviously, at this point, have a number of large registrational programs running in 1402 that are big global studies. We continue to like the option of small, fast POCs overseas and feeding that information into bigger studies. If and when we have anything to share from those ongoing efforts, we'll share it. But mostly, it's being used to inform either indication selection or design decisions of the bigger studies. Operator: And our next question coming from the line of Brandon Frith with Wolfe Research. Brandon Frith: This is Brandon, on for Andy. Have you provided any analogs for the DM launch? And we're curious to know what to expect for the cadence out of the gate in longer term? Matthew Gline: Yes, perfect. Look, I think DM is an area with high unmet need, but also not a lot of novel therapies recently launched. So first of all, there aren't great analogs to look at, specifically in DM. And second of all, I think the appropriate course for any public company is to guide cautiously on launch speed and to say that we're going to do everything we can to get this drug out there and to get docs excited about it. And the thing that we're most confident in is that the overall market opportunity is large, that there is high unmet patient need and that when we get to peak penetration, there's a really big and exciting opportunity. Exactly how long it takes to get there, I think we're going to see is the answer, and we're going to do everything we can to make it as successful as we can. Obviously, the real value add is the stuff to get the long-term trajectory here right. So that's probably how I think about the launch. Operator: Our next question coming from the line of Sam Slutsky with LifeSci Capital. Gaurav Maini: This is Gaurav, on for Sam from LifeSci. So just a question on Graves' here. Based on all the market research done to date, as you compare the uncontrolled Graves' disease opportunity versus what FcRns have shown in the MG market, I guess, how do you size these up? How are you thinking about the opportunity? Is it bigger, smaller, similar as we think about MG for FcRns? Matthew Gline: I mean, look, it's hard to -- the MG market has been tremendous. And so I think it's hard to call it one way or another. But obviously, there's a lot of uncontrolled Graves' patients, and it's an exciting place to be. And I think we have a real opportunity to build something big. There's just lots and lots and lots of uncontrolled patients is the answer. The other thing I'll say is we'll talk more about the commercial opportunity in Graves' disease on December 11. And I think we're excited with what we see. And I think we can make -- I think the most important thing is there are hundreds of thousands of patients for whom we could make a meaningful difference and a lot of different ways for us to get into that market and establish different toeholds in places. And so we're looking forward to all of that. We're also learning, and I want to highlight this as an important advantage that we have from being first, so much about the Graves' opportunity by being out there with these docs enrolling patients in the study, looking out at what we're finding. And I think that competitive benefit is going to set us up really well to make sure we've got the right product on the market as well. Operator: There are no further questions at this time. I will now turn the call back over to Mr. Matthew Gline for any closing remarks. Matthew Gline: Thank you. Thank you, everybody, for listening this morning. Once again, a phenomenal quarter for us in terms of the results we delivered. And super importantly, looking forward to getting together on the 11th to talk about the future and address in further detail some of the very same questions we got on today's call. So I hope to see many of you there. And I hope you all have a great end to your year apart from that. Thanks very much, and have a good day. Operator: This concludes today's conference call. Thank you for your participation, and you may now disconnect Goodbye.
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: Good morning. Thank you for standing by, and welcome to Buckle's Third Quarter Earnings Release Webcast. [Operator Instructions]. Members of Buckle's management on the call today are Dennis Nelson, President and CEO; Tom Heacock, Senior Vice President of Finance, Treasurer and CFO; Adam Akerson, Vice President of Finance and Corporate Controller; and Brady Fritz, Senior Vice President, General Counsel and Corporate Secretary. Before beginning, the company would like to reiterate its policy of not providing future sales or earnings guidance. All forward-looking statements made on the call are pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially due to risks and uncertainties described in the company's SEC filings. The company undertakes no obligation to publicly update or revise these statements, except as required by law. Additionally, the company does not authorize the reproduction or dissemination of transcripts or audio recordings of the company's quarterly conference calls without its expressed written consent. Any unauthorized reproductions or recordings of the calls should not be relied upon as the information may be inaccurate. As a reminder, today's webcast is being recorded. And I'd now like to turn the conference over to your host, Tom Heacock. Thomas Heacock: Good morning, and thanks for being with us this morning. Our November 21, 2025, press release reported that net income for the 13-week third quarter ended November 1, 2025, was $48.7 million or $0.96 per share on a diluted basis compared to net income of $44.2 million or $0.88 per share on a diluted basis for the prior year 13-week third quarter, which ended November 2, 2024. Year-to-date net income for the 39-week period ended November 1, 2025, was $128.9 million or $2.55 per share on a diluted basis, compared to net income of $118.3 million or $2.35 per share on a diluted basis for the prior year 39-week period ended November 2, 2024. Net sales for the 13-week third quarter increased 9.3% to $320.8 million compared to net sales of $293.6 million for the prior year 13-week third quarter. Comparable store sales for the quarter increased 8.3% in comparison to the same 13-week period in the prior year, and our online sales increased 13.6% to $53 million. Year-to-date net sales increased 7.2% to $898.7 million compared to net sales of $838.5 million for the prior year 39-week fiscal period. Comparable store sales for the year-to-date period increased 6.3% in comparison to the same 39-week period in the prior year, and our online sales increased 11.6% to $142.9 million. For the quarter, UPTs decreased approximately 1.5%, the average unit retail increased approximately 4% and the average transaction value increased about 2.5%. Year-to-date, UPTs decreased approximately 1%, the average unit retail increased approximately 3% and the average transaction value increased approximately 2%. Our gross margin for the quarter was 48%, a 30 basis point increase from 47.7% in the third quarter of 2024. The current quarter margin expansion was a result of 40 basis points of leverage buying, distribution and occupancy expenses, partially offset by a 10 basis point reduction in merchandise margins. Our year-to-date gross margin was 47.4%, up 50 basis points from 46.9% for the same period last year. The year-to-date increase was the result of a 20 basis point increase in merchandise margin, along with 30 basis points of leverage buying, distribution and occupancy expenses. Selling, general and administrative expenses for the quarter were 29% of net sales compared to 29.1% for the third quarter last year. And year-to-date, SG&A was 29.5% of net sales compared to 29.6% for the same period in the prior year. The third quarter decrease was due to a 35 basis point reduction related to nonrecurring digital commerce investments made a year ago, a 35 basis point decrease in store labor-related expenses and a 5 basis point decrease in certain other SG&A expense categories. These decreases were partially offset by a 50 basis point increase in incentive compensation accruals and a 15 basis point increase in G&A compensation-related expenses. Our operating margin for the quarter was 19% compared to 18.6% for the third quarter of fiscal 2024. And for the year-to-date period, our operating margin was 17.9% compared to 17.3% for the same period last year. Income tax expense as a percentage of pretax net income for both the current and prior year fiscal quarter was 24.5%, bringing third quarter net income to $48.7 million for fiscal 2025 compared to 44.2% -- $44.2 million for fiscal 2024. Income tax expense as a percentage of pretax net income for both the current and prior year, year-to-date periods was also 24.5% bringing year-to-date net income to $128.9 million for fiscal 2025 compared to $118.3 million in fiscal 2024. Our press release also included a balance sheet as of November 1, 2025, which included the following: Inventory of $165.8 million, which was up 11% from the same time a year ago and $371.3 million of total cash and investments. We ended the quarter with $162.3 million in fixed assets net of accumulated depreciation. Our capital expenditures for the quarter were $11.1 million and depreciation expense was $6.2 million. For the year-to-date period, capital expenditures were $34.5 million and depreciation expense was $18.2 million. Year-to-date capital spending is broken down as follows: $30.4 million for new store construction, store remodels and technology upgrades and $4.1 million for capital spending at the corporate headquarters and distribution center. During the quarter, we opened 2 new stores and completed 6 full store remodels, 3 of which were relocations in new outdoor shopping centers. Additionally, post quarter end and during November, we have opened 2 new stores and completed 2 store relocation projects in advance of the holiday selling season, which brings our year-to-date count through today to 6 new stores, 17 full remodels and 3 store closures. For the remainder of the year, we anticipate completing 4 additional full remodeling projects. Buckle ended the quarter with 442 retail stores in 42 states compared to 445 stores in 42 states as of the end of the third quarter last year. And now I'll turn it over to Adam Akerson, Vice President of Finance. Adam Akerson: Thanks, Tom, and good morning. Our women's business continued its acceleration in year-over-year growth rate during the quarter, with merchandise sales increasing about 19%, which was on top of 3% same week growth a year ago. For the quarter, our women's business represented approximately 51% of sales, which compares to 47% last year. This growth continued to be led by the performance of our denim category with women's denim increasing approximately 17.5% and average denim price points increasing from $81.15 in the third quarter of fiscal 2024 to $86.95 in the third quarter of fiscal '25. This AUR increase continues to be primarily the result of strong growth in our Buckle Black Label, which has outperformed the total denim business, along with strong growth of other higher price point national brands. Complementing our strong women's denim selection, our team continued delivering compelling trends and fashions for our guests, for the quarter, we achieved growth across all women's merchandise categories with the most notable growth in knits and sweaters, casual and fashion bottoms and accessories. In total, average women's price points increased about 6% from $49.95 to $53.05. On the men's side, we were pleased to see growth for the second consecutive quarter with men's merchandise sales up about 1% against the prior year, representing approximately 49% of total sales compared to 53% in the prior year. This growth was also led by our men's denim category, which was up about 1% for the quarter. Average denim price points increased from $88.10 in the third quarter of fiscal '24 to $88.15 in the third quarter of fiscal '25. In other categories, we saw nice performance in both our short and long sleeve tees business in a variety of lifestyles as well as strong selling of our vests, jackets and accessories. For the quarter, overall average men's price points increased approximately 2.5% from $54.30 to $55.70. On a combined basis, accessory sales for the quarter increased approximately 7.5% against the prior year, while footwear sales were essentially flat. These 2 categories accounted for approximately 10% and 4.5%, respectively, of third quarter net sales, which compares to 10% and 5% for each in the third quarter of fiscal '24. For the quarter, average accessory price points were up approximately 3.5% and average footwear price points were up 4.5%. Also on a combined basis, our kids business continued its strong growth trend, increasing approximately 22% year-over-year. This continues to be a category where our teams are excited to keep building the business and selection for our guests. For the quarter, denim accounted for approximately 46% of sales and tops accounted for approximately 29%, which compares to 46% and 29.5% for each in the third quarter of fiscal '24. As previously mentioned, with strong selling and trends in many of our brand styles, our private label business decreased as a percentage of our total mix for the quarter. For the quarter, private label represented 47.5% of sales versus 48.5% for the third quarter of fiscal 2024. And with that, we welcome your questions. Operator: [Operator Instructions]. Our first question comes from Mauricio. Mauricio Serna Vega: This is Mauricio Serna from UBS Research. First, maybe could you speak on a high level what you're seeing on the health of the U.S. consumer coming into the holiday season. There's been some talks about maybe some pressure on the lower income consumer. So I was interested in hearing from your side, what have you been seeing? And then also, could you speak about the denim business? I think you talked about the momentum in women's being up 17%. What do you -- how do you -- how are you thinking about the sustainability of this growth? And maybe could you talk about what you saw in men's denim demand over the quarter? Dennis Nelson: Thank you for the question. On the consumer, we haven't seen a big change in our stores. I mean the team and guests seem excited about our product response. There's probably a slight caution in some as our units per sale are off very slightly. But overall, we feel good about it. And if the guest is excited about the product and the quality we have, it's been going pretty well. The ladies denim business continues to be excellent. There's still a lot of variety of styles and fits. We've added some of our branded sources to the mix, which has added some higher price points, have been good for the business. And our fashion brands and our private brands continue to sell well. So we're optimistic about the gal's denim business throughout the rest of the year. On the men's denim, our private label brands are consistent and doing well, having good sell-throughs. We haven't seen as much from other brands adding to the private brands mix, but feel our denim business is solid in men's as well. Operator: There are no further questions in queue. [Operator Instructions]. Okay. It looks like we have another question from Mauricio. Mauricio Serna Vega: Great. Just on the other thing that I wanted to ask was the merchandise margin. It was down 10 basis points. Maybe could you elaborate on what were the puts and takes behind the merchandise margin trend in this quarter? Thomas Heacock: Thank you, Mauricio. This is Tom. Yes, merchandise margins were down 10 basis points for Q3 and up 10 basis points for Q2. So I think if you look year-to-date with everything going on with tariffs, we feel really strong about where we're at from a merchandise margin perspective. And we've been operating at a high level of merchandise margins for a long time and have continued to improve that. So both Q1 and Q2 were all-time highs merchandise margins and we were off just a little bit in Q3. So I feel really good about where we're at. The biggest drivers are really -- Adam called out the decrease slightly in private label business with some of the brands performing really well, especially in women's denim. That's the biggest driver probably of the shift this year and especially Q2 compared to Q3 and then a slight increase in costs with tariffs and other flow-throughs. Operator: There are no further questions in queue. [Operator Instructions]. Okay. It looks like there are no further questions. I will now turn the call back over to Buckle for any closing remarks. Thomas Heacock: Thank you for your participation today. It will be a quick call, but I wish everyone a wonderful weekend and a wonderful holiday season. So thank you for joining us today.
Operator: Good morning. My name is Jeannie, and I will be your conference operator today. I would like to welcome everyone to the TD SYNNEX Fourth Quarter and Full Year Fiscal 2025 Earnings Call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to remove your question, press 1 again. We request that you limit yourself to one question to allow time for other participants to ask their questions. Thank you. At this time, for opening remarks, I would like to pass the call over to Nate Friedel, Head of Investor Relations at TD SYNNEX. Nate, you may begin. Thank you. Good morning, everyone, and thank you for joining us for today's call. Nate Friedel: With me today is Patrick Zammit, our CEO, and David Jordan, our CFO. Before we continue, let me remind you that today's discussion contains forward-looking statements within the meaning of the federal securities laws, including predictions, estimates, projections, or other statements about future events, including statements about our strategy, demand, plans and positioning, growth, cash flow, capital allocation, stockholder return, as well as our financial expectations for future fiscal periods. Actual results may differ materially from those mentioned in these forward-looking statements as a result of risks and uncertainties discussed in today's earnings release, in the Form 8-Ks we filed today, in the risk factors section of our Form 10-K, and our other reports and filings with the SEC. We do not intend to update any forward-looking statements. Also, during this call, we will reference certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP results are included in our earnings press release and the related Form 8-K, available on our Investor Relations website, ir.tdsynex.com. This conference call is the property of TD SYNNEX and may not be recorded or rebroadcast without our permission. I will now turn the call over to Patrick. Patrick? Patrick Zammit: Thank you, Nate. Good morning, everyone, thank you for joining us today. We are pleased to report another set of record results that complete an outstanding year for our organization. Over the full year, our business excluding HIVE increased its gross billings in the high single digits year over year, while improving both its gross margin and operating margin profile. Additionally, Hive grew its gross billings double digits, and well above our expectations, and has made further progress expanding its set of offerings and diversifying its customer base. Turning to the fourth quarter, our non-GAAP gross billings of $24.3 billion represented an increase of 15% year over year, or 13% in constant currency, and non-GAAP diluted earnings per share of $3.83 represented an increase of 24% year over year. Both of these established new records for our company, demonstrating the value of our diversified business model, the successful execution of our long-term strategy. Within TD SYNNEX, excluding HIVE, our momentum continued with gross billings increasing 10% year over year, and gross profit and operating income each also increasing by double digits. Hive experienced another strong quarter, with gross billings increasing by more than 50% year over year, and ODM Centimeters gross billings increasing 39% year over year, driven by sustained broad-based demand in cloud data center infrastructure from our hyperscaler customers. HIVE's operating income also grew meaningfully year over year, and continues to become a larger portion of our overall mix. Our results reflect its strength across all regions and key technologies. North America continued to grow steadily supported by demand across each of our key customer segments, prioritization of increased security requirements, and ongoing shifts towards complex, multi-cloud architectures. Europe grew faster than we anticipated, as customers prioritized infrastructure software, PC device upgrades, modernization of aging infrastructure, despite the slower macroeconomic backdrop. We've seen over the last few quarters, Asia Pacific and Japan remain a key growth engine, driven by rapid cloud expansion, PC device upgrades, accelerating AI development, and strong demand from fast digitizing economies across the region. Lastly, our growth story in Latin America remains encouraging, delivering double-digit top-line momentum with strong engagement across our and customer base. Our performance is a direct outcome of executing on the strategy we outlined at investor day. As we enter 2026, we are sharpening execution around four focus areas that will define what we want to be known for. We will start with omnichannel engagement. Through disciplined investments in our partner-first digital portal, we've built a frictionless interface that meets customers wherever they transact, and simplifies the experience end to end. By pairing seamless digital engagement with our personalized relationship-driven support, our highly skilled teams help customers navigate complexity, and move beyond transactions, earning the role of trusted adviser and forging long-term partnerships. We enhanced our partner-first digital bridge functionality in Q4, with a new AI assistant that enables customers to transact in a self-service mode 24 by 7 in their working environment. This enhancement transforms how our customer sales teams access and act on information to support their end customers in real time. Our customers have already tested that the new capability has saved employees in sales and product procurement operations multiple hours per day. The industry is also recognizing our strength in this area. During the quarter, we were awarded UK iCloud Marketplace of the Year by CRN. We received this honor due to the differentiated quality of our platform, along with our leadership in customer enablement, and technical training. Helping our customers navigate what has been a transformative year in this space and ultimately accelerating growth throughout our cloud portfolio. The next strategic pillar is specialized go-to-market. Our collection of specialist approach combines deep technical expertise with a deep understanding of our customers' go-to-market strategy and needs. This dual competency accelerates technology adoption, and positions us as a growth catalyst for vendors and customers. It's a differentiated capability that strengthens stickiness and expands our wallet share in high-growth segments. Our Q4 accomplishments within this pillar include winning a global security RFP, that will enable us to expand our portfolio in existing geographies with large enterprise customers, is a segment that has not historically purchased through TD SYNNEX. We have chosen due to our global presence and deep security specialization as well as for our ability to unlock substantial cost savings for the vendor while still improving customer experience. Expect these customers will increasingly leverage our broader product and service portfolio over time, enabling them to consolidate spend, and capture additional growth in the market. Our emphasis on specialization has been recognized by our vendors as well. In Q4, Cisco named TD SYNNEX as distributor of the year globally, as well as regionally in The Americas and EMEA. These awards reflect how our specialization deep alignment with Cisco, and innovation across markets consistently deliver real business outcomes for our customers. Our next pillar is focused on delivering best-in-class enablement. We accelerate time to market by equipping our customers with advanced training certification programs, enablement tools, and precise resources and expertise tailored by technology, and customer segments. This approach reduces ramp-up time strengthens customer capabilities, and drives faster adoption of high-value solutions. Which ultimately improves productivity and expands our share of wallet. During Q4, we announced AI game plan, a new customer-led workshop experience designed to help their sales teams translate AI opportunities into real-world business outcomes for their end customers. Are just at the beginning, and we continue turning our vast data lake and algorithms into industry-leading scalable digital services that enhance experiences lower costs, and unlock new revenue and efficiency opportunities for our existing customers. These strategies work in concert to support and substantiate our final strategic pillar, expanding our brand visibility. Our brand promise making IT personal, describes our role as an indispensable partner in the technology channel. We aim to be visible, personal, and influential at every stage of the customer journey. Reinforcing trust and driving loyalty. This sustained presence amplifies our market relevance and underpins long-term growth. By bringing our strategy to life every day, across these four pillars, we are continuing to strengthen our competitive position as the strategic business partner that our partners can rely on to create more opportunities that deliver sustainable long-term growth. Moving to HIVE. We continue to experience sizable growth benefiting from broad-based demand for cloud data center infrastructure, across our hyperscaler customers. And we believe that we are very well positioned to continue to get more opportunities that showcase our ability to support a wide breadth of programs for our customers. Our customers are turning to us for, among other things, our production flexibility, favorable US footprint, ability to co-develop complex solutions, and secure supply chain. These differentiators position us to continue to be a trusted partner in the assembly and deployment of complete rack-level systems across all market environments, through time. Looking ahead, I am bullish on the long-term value proposition of HIVE and IT distribution. We believe the untapped market opportunities in front of us in both businesses remain substantial as we aim to service a greater portion of the overall IT market through time. Now I will pass it to David to go over the financial performance and outlook in more detail. David? David Jordan: Thanks, Patrick, and good morning, everyone. We're pleased to report a strong close to our fiscal year with fourth quarter results that exceeded the midpoint of our guidance across all key metrics. Gross billings increased 15% year over year reflecting broad-based strength across both distribution and highs. Our gross operating margins expanded year over year driven by a combination of operational efficiencies favorable mix, and disciplined margin management. Non-GAAP earnings per share increased 24% year over year delivering meaningful value for shareholders and underscoring the strength and value of our business model. Moving into the details. Our endpoint solutions portfolio increased gross billings 12% year over year due to continued demand for PCs driven by the ongoing Windows 11 refresh and sustained demand for premium devices. Which has continued to be a tailwind. Globally, PCs have now increased double digits for four consecutive quarters, and we expect continued momentum heading into the initial months of 2026. Our advanced solutions portfolio increased gross billings by 17% year over year and 8% year over year when excluding the impact of HIVE. Driven by meaningful growth in cloud, security, software, and other strategic technologies. Hive, which is reported within the advanced solutions portfolio, increased more than 50% year over year primarily due to strength in programs associated with server and networking rack builds. In the quarter, there was approximately 29% reduction from gross billings to net revenue, which was in line with expectations. Our net treatment as a percentage of billings continues to remain elevated versus the prior year, primarily driven by a higher mix of software within distribution and increases in certain hive programs. As a result, net revenue was $17.4 billion up 10% year over year and above the high end of our guidance range. Gross profit increased 15% year over year to $1.2 billion. Gross margin as a percentage of gross billings was 5%. Which was flat year over year. Non-GAAP SG and A expense was $698 million or 3% of gross billings, Our cost to gross profit percentage, which we define as the ratio of non-GAAP SG and A expense to gross profit was 58% in Q4. An improvement of approximately 100 basis points year over year, demonstrating our progress toward managing costs as a percentage of gross profit down over time. Non-GAAP operating income increased 18% year over year to $497 million Non-GAAP operating margin as a percentage of gross billings was 2.04%, representing a five basis point improvement year over year. Interest expense and finance charges was $88 million, an increase of $1 million year over year. Our non-GAAP effective tax rate was approximately 24% compared to 21% in the prior year. Total non-GAAP net income was $313 million and non-GAAP diluted earnings per share was $3.83. An increase of 24% year over year and another all-time high. For TD SYNNEX. Free cash flow was $1.4 billion driven by strong earnings growth and meaningful improvements in our cash conversion cycle quarter over quarter. This also brings our annual free cash flow to $1.4 billion which was well ahead of our expectations. FY '25 marks the third consecutive year that we have generated annual free cash flow of over $1 billion demonstrating our commitment to sustainable cash generation. Within the quarter, we returned $209 million to shareholders with $173 million in share repurchases and $36 million in dividend payments. In total, we returned $742 million to shareholders this fiscal year bringing our cumulative return to shareholders over the last three years to over $2.2 billion This is approximately 61% of our free cash flow during that same time period within the medium-term range of 50% to 75% outlined at our Investor Day. Underscoring our belief in the strength of our business and the commitment to creating long-term shareholder value. As of November 30, we have $1.2 billion remaining on our share repurchase authorization. Net working capital was $2.9 billion down approximately $300 million from the prior year. Our gross cash days were twelve days, a two-day improvement from the prior year which I'll talk more about shortly. We ended the quarter with $2.4 billion in cash and cash equivalents and debt of $4.6 billion Our gross leverage ratio was 2.4 times and our net leverage ratio was 1.1 times. You'll note that our cash position was elevated at year-end. This is the result of two primary factors. First, we successfully completed a new debt issuance during the quarter which will be used to pay off $700 million of debt that matures in August 2026. Additionally, as you'll see in our working capital, our teams across both distribution and Hive did an outstanding job driving cash flow and made meaningful improvements toward optimizing the return on capital for both businesses. At the same time, it's important to remember that the balance sheet is a snapshot at a single point in time. At year-end, we had a few large receipts come in just before period end that would have normally fallen into the next quarter. We estimate Q4 benefited a few $100 million, which will normalize in FY 2026. Going forward, we continue to be laser-focused on generating sustainable free cash flow and improving our return on invested capital. For the current quarter, our Board of Directors has approved a cash dividend of $0.48 per common share. Will be payable on 01/30/2026. To shareholders of record as of the close of business on 01/16/2026. Moving on to our outlook. For the '6, we expect non-GAAP gross billings in the range of $22.7 billion to $23.7 billion representing an increase of approximately 12% at the midpoint. Our outlook is based on a euro to dollar exchange rate of 1.16. Net revenue in the range of $15.1 billion to $15.9 billion which translates to an anticipated gross to net adjustment of 33%. Non-GAAP net income in the range of 243 to $283 million non-GAAP diluted earnings per share in the range of $3 to $3.5 per diluted share based on a weighted average shares outstanding of approximately 80.1 million. We are anticipating a cash outflow in Q1 in part due to typical seasonality of the business and due to the timing impact that benefited Q4, which we described earlier. We expect that our cumulative free cash flow over fiscal '25 and fiscal '26 will be in line with our medium-term framework, of 95% non-GAAP net income to free cash flow conversion. While we are not providing full-year guidance today, our long-term outlook remains consistent with the multiyear compounded annual growth rates that we outlined at our Investor Day earlier this year. We'll remain focused on delivering against that financial framework we've shared with you which includes stable growth, margin expansion over time, consistent cash generation, and deploying capital where it maximizes long-term value creation within our capital allocation framework. To close, we're proud of what we've achieved this year, strong financial performance, disciplined execution, and continued progress against our strategy. We're entering fiscal twenty-six with solid momentum, a healthy balance sheet, and a clear set of priorities that support durable growth. We'll remain focused on operational excellence and delivering long-term value to shareholders. With that, we'll open up the call for questions. Operator? Operator: Press star, then the number one on your telephone keypad. We request that you limit yourself to one question to allow time for other participants to ask their questions. If there is remaining time, you are welcome to re-queue with additional questions. Your first question comes from the line of Keith Housum with Northcoast Research. Please go ahead. Keith Housum: Good morning, gentlemen, and thanks for the opportunity here. Obviously, outstanding growth in Europe and Asia Pacific, especially Asia Pacific and Japan there. As we think about that growth here that's happening, guess, you talk about perhaps how much of it is market growth versus your ability to take market share and then second, how sustainable are some of these growth rates that we're seeing going forward? Patrick Zammit: Okay. Thanks, and good morning. So in FPGA, we for sure, we've experienced very nice, high double-digit growth. As you know, our share in the region is relatively low. So we are investing significantly in the region to gain share and grow of a market. So when you look at, the results, for sure, we gained significant share. We're also positioned in countries, especially India, where, as you know, the growth of the market is significantly above the average of the region. And the team is focused on product segments, vendors, and customer segments which should make the growth sustainable for the long run. So very, very pleased, very proud of the team. And very confident for the future. The only thing I would add is that it's not only the growth in sales. We're also experiencing an over-proportional growth in operating income in the region as the team is investing, but also keeping a good cost discipline. David Jordan: Great. And how about for Europe? Because Europe, obviously, was better than we would expect. You can say the macro conditions you have there. Patrick Zammit: So just, so we got some market data. Europe, the European market grew let's say, mid, mid-single digit, slightly better even than North America. But for sure, we had, our outstanding performance. We continue to gain significant share in the region. Have a strategy which is very well executed. Again, we are going after technologies, vendors, and customer segments. Where we can enjoy higher growth in the market. And that's what you are seeing in the results. David Jordan: Great. Thank you. I'll get back in queue. Nate Friedel: Good luck. Keith Housum: Bye. Your next question comes from the line of Ruplu Bhattacharya with Bank of America. Please go ahead. Ruplu Bhattacharya: Hi. Thanks for taking my questions. Patrick, you reported strong 15% growth in billings for 4Q and are guiding 12% billings growth for 1Q. How are you handicapping any end market demand destruction from higher component costs like DRAM and NAND And one for David, can you just update us on the CapEx spend for year as well as any investments planned for HIVE for 2026? Thank you. Patrick Zammit: Yes. So good morning. Thanks a lot for the question. So again, the guidance for Q1 reflects what we see from the regions, from the BUs, I can confirm that the memory price have increased dramatically, and what we are seeing already is an increase in ASP on a series of product families, especially PCs, servers, storage, So the ASP increase is on one hand, the tailwind in the short term. What would be interesting to see is what will be the impact on the volume going forward But again, specifically for Q1, the guidance reflects the result of the bottom-up exercise with the regions and the forecast is done by technology by country. So David Jordan: And, Ruplu, the only thing I would add is when you think about total CapEx, for TD SYNNEX, we're probably planning for a similar level of CapEx in '26 relative to '25. And that would include the investments needed to support Hive's continued growth. Ruplu Bhattacharya: Can I just clarify, have you actually seen any demand destruction from higher component cost and is that factored into your guidance? Patrick Zammit: So specifically, I haven't seen it. And, again, what is reflected in the guidance is the outcome of our bottom-up exercise. Ruplu Bhattacharya: Okay. Thank you for the details. Operator: Your next question comes from the line of Eric Woodring with Morgan Stanley. Please go ahead. Eric Woodring: Hey, guys. Good morning. Thank you very much for taking my question. And Patrick, I'm going to stay on the same line questioning there as Ruplu, which is just, can you maybe ask it a different way? Can you maybe help us understand what you're seeing in terms of any potential pull forward in either the November or the January just with customers wanting to get ahead of future pricing increases for any of those kind of memory exposed products you just mentioned, PC servers, storage, smartphones, and just how you might think more broadly. I know you're not guiding to fiscal twenty-six, but just how you think that this dynamic could have an impact on either revenue or profit seasonality for the year? Thanks so much. Patrick Zammit: Okay. So let me start with the broad forwards. So it's difficult to assess, but very pretty confident that we haven't had any I would say, material brought forward in the last quarter. Now, again, what's going so the Q1 guidance reflects the what the countries are seeing in the read in their region, and, again, for PC servers, and storage, If I look at the overall year, so the tailwind for us is clearly the increase. As you know, I mean, when, the vendors increase, their prices, we usually pass it through to the market. So no concerns, on the margin quality. On the demand, tailwind related to the ASP increase, And then what's going to be interesting to watch is what will be the impact on the volume. And, as you know, the elasticity will be different by product category. And probably the category which is going to be the most sensitive is PCs, But we have a very, very low position on consumer PCs. We primarily focus on commercial PC So I'm relatively confident that here, the elasticity should be, relatively low So I continue to be relatively optimistic about the prospects of the PC market. Let's not forget that the refresh is not over. There is I mean, it started a little bit later than expected, so we should continue to benefit from it. In the next quarter. And then when you look at storage and server, I think here, again, the elasticity related to the price increase should be relatively low. So again, on the demand, I think the demand is going to be driven by other considerations, the need for customers to, embrace AI, upgrade their servers. I mean, there's a server refresh happening as we speak, and it's not over. Again, I think on the demand, relatively, I should say, cautiously optimistic. And then the ASP increase should, should help. Operator: Your next question comes from the line of David Voigt with UBS. Please go ahead. David Voigt: Great. Thanks, guys. Maybe 1.5 for David. So David, you mentioned in your prepared remarks free cash flow cumulatively for 2025 and 2026 is going to be consistent with the long-term framework. Of 95% of net income. Given kind of the mix of business going into fiscal twenty twenty-six, it sounds like netted down is going to be a bigger portion of that based on the guide at least for Q1. Can you talk through kind of the mix of the revenue that drives that netted down effect? And then what sounds like a decline in free cash flow, even million of payments in Q4 that was pulled forward in '20 versus '25. David Jordan: Sure. So good morning, David. When we in our prepared remarks, we said we expect cumulative free cash flow across '25 and '26 to be within the 95% Got it. Historically, our business consumes cash in the first half and generates cash in the second half. What you saw in Q4 is we had a really, really strong cash flow quarter. And so some of that will normalize as we go into Q1. So we still feel really good about generating cash for the full year, but we do expect an outflow in Q1 that will ultimately, be recouped as we work through the balance of the year. And it's not it's not as much mix driven per se as it's just the additional cash that we generated in Q1 that will be Normalized or sorry, that we generated in Q4 that will be normalized in Q1. Operator: Your next question comes from the line of Adam Tindle with Raymond James. Please go ahead. Adam Tindle: Okay, thanks. Good morning. I wanna just acknowledge, Patrick, the strong return on capital, primarily great working capital management. But if I looked at the margin side of things, it does look like some of that is being a little bit suppressed, and you talk about investments in Hive. I wanted to ask about that. This has been an ongoing theme. I wonder if you could maybe just recap some of the prior investment decisions that you made in Hive and the outcomes that lead you to invest further, in Hive including, you know, any potential further new customers, for example. And for David, as we kind of, you know, look at this in the model, if you could maybe help us quantify or break out the investments in Hive. Is it you know, gonna increase throughout the year? Are we sort of at the right run rate? You know, what does this look like, you know, throughout, fiscal twenty-six? Thanks. David Jordan: So maybe I can start, and Patrick, chime in. So in the prepared remarks, we talked about HIVE grew meaningfully both billings and profit. And so I wouldn't impute that there's a margin issue. In terms of investments in we continue to invest in HIVE. So Patrick talked about we've invested in leadership. We've invested in the engineering team. We've invested in some additional capabilities within the site. We have enough capacity to support our current demand. And we'll continue to make investments to ensure Hive can truly be an end-to-end go-to player for tier one hyperscalers and others. And so we feel very good about how the business is performing, the investments we've made, and the prospects going forward. Operator: Your next question comes from the line of David Paige with RBC Capital Markets. Please go ahead. David Paige: Congrats on some really nice results here. Just a quick follow-up on Hive. The 50% growth. Is that come evenly split between ODM and Centimeters or both the customers? Or maybe just a little bit more details around the growth there? Thank you. Patrick Zammit: Yes. So good morning. So we had so as you know, we have our ODM Centimeters business. That one, grew very nicely. In line, if not slightly better than the pace of the market. And then we had a very strong, also quarter with, let's call it, supply chain, cut by division. As you know, this is a more lumpy opportunistic business. It's a service we render, so it highly dependent on what the customers are asking for. And in Q4, we had a very strong quarter. And, better than expected. So that's how I would summarize the sales growth for the quarter for Hive. Thank you. Operator: Your next question comes from the line of Joseph Cardoso with JPMorgan. Please go ahead. Joseph Cardoso: Maybe another follow-up on the Hive business. I just wanted to touch on, like, the progress that you're making with Hive relative to capturing additional share with your existing large customers there and perhaps what you're seeing from a portfolio or kind of the products that you're shipping there towards mix moving more towards AI servers networking racks, storage racks, and the opportunity to onboard potentially a new large customer beyond the two that you have today. Thank you. Patrick Zammit: Yes. Good morning. So again, I mean, we mentioned it at, in the prior calls. We continue to invest to expand the capabilities and capacity of Hive. And so we are very active in bidding on new programs, with our existing customers and potential new customers. I would say that, thanks to the investments we've made, especially in engineering, and some of the differentiators of HIVE in the market. Mean, we are seeing, we are making very good progress on, on winning some new programs and potentially new customers. I would say that, those programs take some time to ramp. So, again, when you look back at the our Q1 guidance, it reflects what we have as forecast for the next quarter. But going forward, yes, I would say we continue to make good progress and are confident about the prospects. Operator: Your next question comes from the line of Austin Baker with Loop Capital. Please go ahead. Austin Baker: Hey, guys. Thanks for taking the question. Just really quick, I guess, would love to understand how margins you view margins for Hive kind of going forward. Are they improving, normalizing as volume scales? And then lastly, how do you feel about the visibility for high programs today versus maybe this time last year? David Jordan: So I can take that one. We feel pretty good about the overall margin profile of TD SYNNEX. When you think about what we laid out at Investor Day was a couple of things. We want to grow operating profit faster than billings, and so we're constantly looking for ways both within Hive and within our distribution business to focus where we can make additional margin. And so, again, we feel very good about that business. Patrick? Patrick Zammit: Yeah. I would just add that, when I look at the pipeline and I compare it to where we were last year, I think we are in very healthy position. And, again, that's what is reflected in, in our Q1 guidance. Operator: Your next question comes from the line of Vincent Colicchio with Barrington Research. Please go ahead. Vincent Colicchio: Yeah, Patrick. Another good quarter on PCs. Just could you give us an update on your thinking in terms of what inning we're in here? Patrick Zammit: Yeah. So good morning. Thanks a lot. Yes. So as far as the game Q4, for PCs, broad-based, primarily driven, from commercial, So going forward, as I mentioned, I think that the refresh is not over. So, that tailwind should continue again in 2026. And we have also the weight of AIPCs who have a slightly higher ASP that should continue to be so there's still a lot of potential for upgrading the PCs and make them AI compatible in the market. So that should be a tailwind. We talked about the memory price increase impacting the ASP of the PCs, that should be gained a tailwind. And then you have the uncertainty related to the price on the demand. But, again, the fact that we are primarily focused on the commercial PCs, I mean, I think we are in a slightly better position than we would have a high weight of consumer PCs. So I would say for next year, I'm continuing to be confident about the prospects of the PC market. again, back to the guidance for Q1, I mean, the various assumptions have been taken into account. And are reflected in the guidance. Vincent Colicchio: And did AIPCs perform incrementally better this quarter? Patrick Zammit: to nicely increase. Yeah. It continues to the weight of AIPC continues So that's a positive. Vincent Colicchio: Thank you. Operator: Your next question comes from the line of David Voigt with UBS. Please go ahead. David Voigt: Hey guys, I just wanted to ask a follow-up, David. On the netted down impact, it looks like there's a big tick up in Q1. That's what I was trying to understand also. Is it mix driven? That's gonna be a bigger headwind to your revenue conversion, kind of can you talk about what's going on there from a netted down effect in the guide? David Jordan: Yep. And sorry. I missed that part of your question. That's my fault. No worries. So all good. Gross to net gross to net increased in Q4, and we've got an increase in to Q1. There's a couple of dynamics. One, strategic technologies continues to become a bigger portion of our business. A lot of that business is software, which, as you know, is netted. Additionally, within Hive, there are a number of programs that are also net. And as the mix changes, that does influence that metric. And so if you think about how we set Q1, that's probably an assumption of kind of the run rate gross to net that we expect for FY '26. Hopefully, that helps. David Voigt: And that would suggest that software and Hive continues to grow as a portion the overall billings pie. That a reasonable takeaway? David Jordan: Exactly right. You're right. David Voigt: Great. Thank you. Operator: There are no further questions at this time. I will now turn the call back over to Patrick for closing remarks. Patrick Zammit: So thank you, everyone, for joining us. I want to close by emphasizing that we'll remain committed to profitable growth and free cash flow generation. Our strategy is designed to ensure that every step forward strengthens our business and supports greater long-term value creation. With our reach, our people, our unique capabilities, and our momentum, we are confident in our ability to continue to succeed. Thank you, and have a great day. Operator: That concludes today's conference call. You may now disconnect. Have a nice day.
Operator: Greetings. Welcome to Helen of Troy Limited Third Quarter Fiscal 2026 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Ann Racunis, Director of External Communications. Thank you. You may begin. Ann Racunis: Thank you, operator, and good morning, everyone. Welcome to Helen of Troy's Third Quarter Fiscal 2026 Earnings Conference Call. The agenda for the call this morning is as follows: I will begin with a brief discussion of forward-looking statements. Scott Azel, our CEO, will then share his thoughts and areas of focus. And Brian Grass, our CFO, will provide an overview of our financial performance in the third quarter and our expectations for the full year fiscal 2026. Following our prepared remarks, we will open up the call for Q&A. This conference call may contain certain forward-looking statements that are based on management's current expectations with respect to future events or financial performance. Generally, the words anticipates, believes, expects, and other similar words are words identifying forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties that could cause anticipated results to differ materially from the actual results. This conference call may also include information that may be considered non-GAAP financial information. These non-GAAP measures are not an alternative to GAAP financial information and may be calculated differently than the non-GAAP financial information disclosed by other parties. The company cautions listeners not to place undue reliance on forward-looking statements or non-GAAP information. Before I turn the call over to Scott, I would like to inform all interested parties that a copy of today's earnings release can be found on the Investor Relations section of the site by scrolling to the bottom of the homepage. The earnings release contains tables that reconcile non-GAAP financial measures to their corresponding GAAP-based measures. I will now turn the conference call over to Scott. Scott Azel: Thank you, Ann. Good morning, and happy New Year, everyone. I appreciate you joining our call. We delivered third quarter results in line with our outlook, reflecting disciplined execution by our global associates who have driven progress towards stabilizing the business despite a challenging external environment. While I'm encouraged by our Q3 progress, we remain fully focused on sharpening our priorities and executing as we fix the fundamentals and improve our performance trends. Recent trends reinforce our view that consumers are being selective. We continue to see a bifurcated economy. Robust spending from high-income households while lower middle-income consumers face significant inflation in essentials like rent, food, and insurance, making them increasingly cautious with discretionary purchases. Regardless, we need to win, and I know what's required. We will invest in our brands. We'll invest in innovation. And we'll invest in talent to restore this business to growth. And some of the initial steps we're taking to restore our business are reflected in the revised outlook for Q4 and the balance of the fiscal year, which Brian will outline shortly. First, I'm energized by the product innovation underway and the upcoming launches in fiscal 2027. We're investing in strengthening brand loyalty through storytelling, to deepen our connection with the consumer and advancing our commercial execution capabilities. These initiatives reflect our commitment to consumer engagement, growth, and delivering value for our stakeholders. Over the past four months, I visited offices around the globe, spoke with hundreds of associates and customers, conducted a comprehensive review of operations, technology capability, financial performance, and external benchmarks. These experiences have given us a fresh perspective, challenging the team to think more critically about long-term value drivers. My biggest takeaway, enthusiasm for our brands is strong. Partners, associates, and customers all want us to win. These conversations reinforce my commitment to improving how we operate, sharpen our priorities, and amplify our focus on consumers. Building on organizational changes put in place last summer, we've made strides to prepare for success. In October, I outlined four priorities: reenergize our brands and our people, adapting our structure to put the consumer at the center, strengthen the portfolio for predictable growth, improve asset efficiency while maintaining shareholder-friendly policies. This is informing our direction as we complete our FY '27 annual planning process and will inform our go-forward strategy. FY 2027 will be the first big step towards our future. More to come in the coming months. As a brand company, we win and lose with the consumer. And growth is our scoreboard. We will make bold choices, embrace new thinking, and learn from past decisions while minimizing disruption. Our growth priorities are clear. Staying true to our north star of the consumer, invest in brand building and editing and amplifying our focus, and execute with excellence. By fully leveraging the talent and skill sets that already exist. By keeping the consumer at the center, we sharpen priorities and move from slow and complex to fast and agile. Teams are untangling complexity to enable faster decision-making closer to the consumer as we speak. A growth priority is product innovation. I'm inspired by the passion, commitment, and expertise of our teams. I believe we can drive new product development by better understanding our consumers, allocating resources, and accelerating time to markets. Brands of our size can't do everything, but we must be focused and sharp as we drive separation from our competition. Each business will have a distinct strategy centered on two to three priorities. Making these tough choices will bring greater clarity to our brands, for employees, consumers, and investors. As we reposition the business, we plan to direct resources in a disciplined and targeted manner towards the most impactful opportunities and innovative ideas, allowing them to incubate and take hold. This will both strengthen our portfolio and drive momentum of those products and brands that have the best opportunities for growth. Not just for this quarter or next fiscal year, but for the long term as well. To fund these investments and decisions, and position us for long-term sustainable growth, we plan to stay focused on maximizing operational and balance sheet efficiency. A key ingredient of our success will also be the power of our organization to fully leverage talent and skill sets that already exist in the building. We recently welcomed back a key member of my leadership team to reignite the power of one. This is the plumbing that enables the work to be done more effectively at Helen of Troy. It's a common language of systems and processes and people. We must balance short-term performance and long-term aspiration. This work starts with my global leadership team and will be cascaded throughout the organization. We will continue to emphasize working capital efficiency and balance sheet health and productivity. A good example is the recently announced amendment to our credit agreement, which extends the leverage ratio holiday and updates the interest coverage ratio definition. These changes give us greater flexibility to navigate the evolving trade and external landscape. We look forward to sharing our fiscal 2027 outlook in April and plan to outline our long-term growth strategy in 2026. And now I'd like to briefly touch on quarterly business segment performance. Overall, net sales outperformed our expectations. Home and outdoor and beauty and wellness sales declined 6.7% and 0.5% respectively, while international sales fell 8.1%. Olive and June continues to outperform our profitability expectations delivering nearly $38 million in sales. While I am not satisfied with these overall results, I'm encouraged by some of the highlights across our portfolio. These give me confidence we can learn and replicate across our portfolio and execute. Our ability to grow and capture market share is a product of leadership choices and operational excellence. We plan to be more intentional on our agenda and sharpen our execution. Highlights include, we grew Osprey, Oxo, and Olive in June. We exceeded Olive in June internal expectations. We increased organic B2C revenue by 21%. And we delivered $29 million of free cash flow despite $58 million in tariff drag. Across our portfolio, we're delivering exciting innovation. In the home and outdoor segment, we launched Osprey and Hydro Flask cooler collaboration, combining Osprey's legendary carry technology with Hydro Flask leak-proof insulation for ultimate performance. Osprey also introduced a mountain-bound series of winter luggage, crafted with nanotube fabric for rugged, highly water-resistant protection for ski and snowboard gear. Hydro Flask delighted families with the Eric Carle collaboration, featuring the iconic Very Hungry Caterpillar in our insulated kids' bottle. OXO expanded its top baby-led weaning suite and added new tot and coffee SKUs at our top partners. This month marks the debut of OXO's Trident series cookware, which provides superior heat distribution and high-performance cooking without the hassle of cleanup. In beauty and wellness, Olive and June continued to introduce trend-right collections tied to holidays and events, including the Be Bold collection, Halloween designs, and festive holiday stickers. After quarter-end, Olive and June launched a playful collaboration with Peachy Babies, combining nails and slime for the most satisfying collab yet, along with products for kids and tweens, which is seeing strong early success at top retailers. For cold and flu season, Honeywell introduced two fresh new style Allergen Plus HEPA certified air purifiers, a three-in-one for large rooms and a tabletop for smaller spaces. These innovations, along with many more coming to market, give me increasing confidence we're focused on the right things to improve our business. I believe we can win for our consumer through innovation and marketplace execution. This allows us to return to revenue leadership, strong margins, and robust cash flow. But we know it won't be a straight line. We're making tough choices to invest in our future. We build our platform for growth and improve our financial profile through better operating leverage while we create greater competitive advantage across the portfolio. With that, I'm gonna turn it over to Brian to walk through the financial results and outlook. Brian Grass: Thank you, Scott. Good morning, everyone, and happy New Year. Today, we reported third-quarter net sales and adjusted EPS results in line with our expectations. I would like to thank our associates for their hard work in achieving our financial objectives for the quarter in what continues to be a challenging environment. Operationally, we made headway on improving our go-to-market effectiveness, leaning in on innovation for more product-driven growth, focusing on the fundamentals, and putting our brands back at the center, fully leveraging their unique strengths. Scott mentioned several new innovations in the market, and I'm excited by new launches planned for the coming year. There is renewed energy across our organization, reinforced by the culture work Scott mentioned. Our third-quarter results reflect progress towards simplifying operations, sharpening priorities, and increasing agility. But we know much more improvement is needed, and we continue to take decisive steps to position Helen of Troy for sustainable growth. On tariffs, we advanced mitigation strategies, including supplier diversification, SKU prioritization, cost reductions, and price increases. The majority of our price adjustments are now in place, but we are still navigating some parts of the market where we achieve less than full pricing realization due to stop shipments we believe are necessary to support consistent adoption of price increases by our retail partners, primarily impacting the beauty and wellness segment. We expect some residual impact from stop shipments to carry into the fourth quarter, which I will touch on later in my remarks. Year-to-date, gross unmitigated tariffs had a $31.3 million impact on gross profit, with the full-year impact expected to be in the range of $50 million to $55 million. We now expect less than a $30 million tariff impact on operating income for the full year, net of mitigation actions, up from our prior expectation of approximately $20 million, primarily driven by delayed timing of pricing realization. We remain on track to reduce our cost of goods sold subject to China tariffs to between 25% to 30% by 2026. Our diversification and dual sourcing strategies are reducing long-term supply chain risk, helping to insulate us from further policy changes or other geopolitical impacts. Turning to our results, consolidated net sales decreased 3.4%, favorable to our outlook range and a sequential improvement compared to the first and second quarters of the year. Organic net sales declined 10.8%, approximately 3.3 percentage points or $17.3 million of the organic revenue decline was driven by tariff-related revenue disruption, which includes the pause or cancellation of direct import orders from China, changing dynamics within the China market, and the impact of stop shipments referred to earlier. Home and outdoor net sales declined 6.7%. We saw strong demand for travel, technical, and lifestyle packs, strong holiday orders from brick-and-mortar retailers in the home category, and incremental revenue from tariff-related price increases, offset by softness in insulated beverageware, lower online sales in the home category, and lower overall closeout channel sales. Beauty and wellness net sales decreased 0.5%. Organic beauty and wellness sales declined 13.9%, approximately 4.5 percentage points or $12.9 million, driven by tariff-related disruption. In beauty, hair appliances and prestige liquids were impacted by soft consumer demand, competitive pressures, the cancellation of direct import orders, and lower closeout channel sales. Wellness was unfavorably impacted by lower international sales due to evolving dynamics in the China market, pricing-related stop shipments referred to earlier, and a below-average illness season. These headwinds were partially offset by a strong contribution from Olive and June of $37.7 million. Consolidated gross profit margin decreased 200 basis points to 46.9%, primarily due to the net unfavorable impact of higher tariffs and a less favorable inventory obsolescence impact year over year. These factors were partially offset by the favorable impact of Olive in June and lower commodity and product costs exclusive of tariffs. SG&A ratio increased 160 basis points, primarily due to the acquisition of Olive in June, higher outbound freight, higher annual incentive compensation expense compared to the same period last year, and unfavorable operating leverage. Lower gross profit margin and a higher SG&A ratio resulted in a consolidated adjusted operating margin decrease of 370 basis points to 12.9%, consisting of a decrease of 650 basis points for home and outdoor and 120 basis points for beauty and wellness. The declines were driven primarily by the net unfavorable impact of tariffs, higher incentive compensation expense, and unfavorable operating leverage, partially offset by margin accretion from Olive and June in the beauty and wellness segment. We incurred higher interest expense due to higher average borrowings driven by the Olive and June acquisition, higher inventory carrying costs due to tariffs, and higher CapEx spend as we make supplier transitions out of China. Higher interest expense was partially offset by lower adjusted income tax expense, resulting in adjusted EPS of $1.71. Inventory ended at $505 million, which includes $35 million in incremental tariff-related costs year over year and incremental inventory from the Olive and June acquisition, compared to $451 million at the same time last year. Debt closed at $892 million with $325 million in revolver availability. Our net leverage ratio was 3.77 times, compared to 3.54 times at the end of the second quarter. The increase in our leverage was due to lower trailing twelve-month EBITDA, driven primarily by higher tariff costs. The unfavorable cash flow and balance sheet impacts of tariffs on our outstanding debt balance. Year-to-date free cash flow was $29 million, which includes $58 million of incremental cash outflows for tariff payments and the cost of supplier transitions out of China. Now I'd like to turn to our annual outlook. We've tightened our range on the top line to $1.758 billion to $1.773 billion, with home and outdoor net sales of $812 to $819 million, compared to our previous expectation of $800 to $819 million. Beauty and wellness net sales of $946 to $954 million, compared to our previous expectation of $939 to $961 million. We lowered our adjusted EPS expectations to a range of $3.25 to $3.75, driven by less than full pricing realization, consumer trade-down behavior, and less favorable mix, higher trade and promotion expense, and the preservation of investments in our people and brands to build revenue momentum and more favorable operating leverage going forward. We expect the full-year GAAP SG&A ratio in the range of 38% to 40%. Expect a full-year adjusted effective tax rate in the range of 13.4% to 14.7%. Inventory is expected to be $475 million to $490 million at year-end, which includes an estimated $39 million of incremental costs from tariffs. Our outlook includes the ongoing impact from changing dynamics in the China market, lapping of tariff-related order pull-forward in 2025, and residual stop shipments to support consistent tariff pricing adoption. We expect modest improvements in direct import orders and select programs shifting to warehouse replenishment. Overall, we expect retailers to continue to closely manage inventories. Despite a recent uptick in flu incidents, overall incidents for the full season and upper respiratory illness in particular, are tracking well below both last year and the trailing three-season average. The retailer inventories look to be sufficiently stocked during the remainder of the fourth quarter to supply demand should illness continue to increase. Given the challenging operating environment, we expect margin pressure to persist through the fourth quarter, reflecting consumer trade-down, a more promotional environment, a delay in achieving full pricing realization, and cautious retail behavior. While we remain focused on cost control, we are preserving key strategic investments in support of our people, new product innovation, stronger brand loyalty, and better commercial execution. As we transition back to growth mode, we expect to have a bias towards revenue improvement over cost reduction in order to recapture our operating leverage. Before I conclude my remarks, I want to direct your attention to the investor presentation posted to our website, which contains additional information and perspective on our third-quarter results and our outlook for the remainder of the year. And with that, I'll turn it back to the operator for Q&A. Operator: Thank you. We will now conduct a question and answer session. If you would like to ask a question, you may press 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit to one question and one follow-up question and requeue for additional questions. Our first question is from Rupesh Parikh with Oppenheimer and Company. Please proceed. Rupesh Parikh: Thanks for taking my question. So I guess just going back to some of the top-line trends and the performance of your brands, it's helpful color in terms of the brands that are actually growing. But just curious, as you look at some of the declining categories, where there's beverageware, hair appliances, etcetera, where you are with, you know, in the progress and turning around these brands? Scott Azel: Good morning, Rupesh. Yeah. Thank you. Good question. First, yeah, we are very encouraged by our results on the brink green sheet brands like Osprey, Olive and June, OXO, Braun, and Pure. They continue to meet and exceed our internal expectations. We have work to do in the area that you identified, and we are focused on that. Everything from innovation on bringing new products to markets that are in the kitchen or kinda in the lab as we speak. Making sure we've got the right commercial triangle in place, which is a combination of marketing, operations, and commercial excellence. And then making sure that we're providing the right resources to the right opportunities that are gonna create the right value. So, that's our methodical approach. We feel very confident in the work that we're doing. As we said in kind of our pre-recorded remarks, our performance will not be a straight line. Some of our brands will move at a much faster rate. The ones that you identified, we're working on aggressively. Rupesh Parikh: Great. And then I guess my follow-up question just to help frame, you know, where we are right now. So as, you know, as you look at your earnings guidance this year, is there any way to say whether you believe that maybe that's the bottom in earnings power? I don't know if there's any insight at this point or is it helping us frame how to think about next year and whether we can take this year's guidance as maybe a baseline to build upon? Scott Azel: Yeah. What I'd say is this, and I'm definitely gonna let Brian opine on it, maybe more specifics. The bottom line is this company's done probably a pretty good job of trying to get its cost structure in place the last several years. But our focus right now needs to be around growth, and that means we gotta invest in innovation, brand building, and marketplace excellence in terms of how we execute. And that's what you're gonna see we're investing in in quarter four. As well as we talk about our long-range plan, which you'll see the first big steps in FY 2027. It will be about growing the top line responsibly but growing the top line and making sure our brands are winning. As well as managing against our earnings power. Brian, anything to add? Brian Grass: Just a little bit to say. We're shifting our focus to revenue improvement versus cost reduction. And we think the benefit of operating leverage is gonna be greater than any benefit we can get from trying to just purely cut costs. You know, that takes a little bit more time, but that's a much more effective and sustainable strategy, and it's gonna be better for the long-term health of the business. So we're making a bit of a pivot. Hopefully, you can hear that. And our focus is gonna be on revenue improvements and revenue growth first and then, you know, growth and profitability will come after that. Rupesh Parikh: Great. Thank you for all the color. I'll pass it on. Our next question is from Bob Labick with CJS Securities. Please proceed. Bob Labick: Good morning, and happy New Year. Thanks for taking our questions. Scott Azel: Hey, Bob. Hey. Bob Labick: So, you know, one of the focuses one of the key things you're focused on is the, you know, return to consumer-centric innovation and, you know, obviously, you've had that in the past. Maybe, you know, was it deemphasized? Why was it deemphasized as kind of part of the question. Then the next thing is how long does that take? And so, like, you know, when should we see, you know, that reemphasis translate into the top line? Because as you said, your scorecard's gonna be returned to revenue growth. And the shift back to consumer-centric. How does that play out? What are you actually doing more specifically now than you didn't do last year, and how long does it take to flow through? Scott Azel: Bob, this is Scott. Good question. I can only give you a headline on the past because I wasn't here. But, you know, the bottom line, you know, I've seen companies go through different transitions. Some they think that they can that brands are in a better place than they are or they can misread the market I don't know. But I know this going forward that if I've traveled the globe, and I spent time with teammates and I've analyzed our brands, that, you know, we have a 30% to 40% of our portfolio that has innovation and opportunity to grow faster, going to invest in them as we speak, and you'll see the benefits of that in quarter four as well as in FY 2027. Have a number of our brands in our portfolio that have been underinvested in, have not been organizationally set up for success, have for whatever reason missed the mark on the consumer, that we're working on the renovation steps as we speak. To get them in a position to bend the curve. Bend the curve means to stabilize the business, as we go into FY '27 and grow further in FY '28 and beyond. But the net is we would expect that you're gonna see an improvement in our business quarter four on as we go forward as we come through and talk about our FY '27 plan. But the key is, as Brian said and what I said earlier, is there is a bias towards healthy brands and growing and winning in our categories first. And also then delivering value as we do that. Bob Labick: Okay. Great. And then, you talked about a bunch of, you know, I guess, new releases and I'm looking at the investor presentation right now. Can you maybe focus us on a few of the major releases or milestones of, you know, of key brands that should, you know, be more meaningful than not. So, you know, things for us to judge on success next year and not trying to, you know, pin you to a quarter for return to growth, but just really what are the kind of, you know, big releases that you think should move the needle and we can watch in 2026, calendar '26? Scott Azel: Yep. Bob, as you know, I can't speak on, you know, a specific future, innovation that's not out in the public domain. But what I can say is brands like Osprey, Olive and June, Braun, OXO, just like the performance we've had in the most recent quarter, we expect that to continue. And as we funnel resources to these brands that I believe do a lot more now, you're gonna see a lot more acceleration against them. I don't know if I'm really getting to your question of, like, a very specific launch. That's happening in the future, but that's our focus. I don't know, Brian. Yeah. I can add a little in without getting too specific. Brian Grass: I mean, we have things teed up in Hydro Flask that allows us to play, as you and I have talked about, Bob, kind of in, you know, the areas where we wanna reach the consumer, but we believe it's right for Hydro Flask to play in. And it's not all areas, but we have a strategy there. We're excited about that. We have some category adjacency plans. It's Hydro Flask too that we're excited about, and those will be coming out soon. You know, in the brands that Scott didn't mention where, you know, we've got more green shoots, we've got exciting innovation going on there, and that includes Pure. That includes Vicks, and that includes Honeywell. So, you know, the point I'd like to make is innovation wasn't lost in all of our businesses and all of our brands. We had brands that were doing that well, Osprey, OXO. And Olive and June, some of the others, but it was a little bit lost in some of these other brands that we're talking about. And we have strong plans and strong innovation in the road map that is already in the process of being developed. And so it's not like we're starting today on those development plans. They're well underway, and they'll be coming out soon. And it's, you know, it's the accumulation of all of them. There's not, like, one big launch that really does it. It's really making sure that all your businesses have it and have a strong pipeline so that there's no gaps. Just had a little bit too much of gaps in the past. Bob Labick: Okay. Got it. Thank you very much. Operator: Our next question is from Peter Grom with UBS. Please proceed. Peter Grom: Thank you. Good morning, everyone. So two questions for me, and I'll just start with this. But I guess I was just hoping to get some perspective on what you're seeing from a category standpoint. I think there's a lot of cross currents that are driving the top-line trends that we are seeing in your results. If you strip out all of the noise, do you have a view on kind of where underlying demand in your categories is trending today? And then I guess just looking ahead, there seems to be some optimism on the U.S. consumer, tax refunds, etcetera. So just kind of curious do you think that some of these things could drive some sequential improvement in category demand following what's been, you know, very challenging few years here. Scott Azel: Well, I'll take the first stab, Peter. First of all, absolutely. When I step back, from the standpoint that, even in the most challenging times, brands that have tight brand propositions, relevant innovation, and connect with the consumer, meeting them where they are, have a way to continue to win. And like brands like Osprey, Olive and June, OXO, Braun, Pure, in our portfolio. You know, they will do well or when the consumers are in a better place. The other brands in our portfolio that have not performed over where they need to be, they have nothing but upside opportunity to bend the curve through better innovation, more focused storytelling, and an organization set up that enables them to be close to the consumer and execute with excellence. Which today we're not doing and we will do better. You'll see that a little bit in our outlook on Q4 of why we're not pulling down our revenue. But you're also gonna see that as you look at FY 2027, what we expect going forward in terms of improving our performance from a top-line standpoint on a broader range of brands beyond the ones we have today. Brian Grass: I'd just add, Peter, that I think, you know, the question you're asking is a good one, but it's hard to answer. Like, in the moment, there's a lot of things in the market related to higher pricing, price increases, and things like that. And, you know, the consumer has been resilient up until this point. I think the key is how will they respond to kind of this next phase of inflation and pricing in the market, and we'll have to wait and see. But we have plenty of category growth in some of our categories. We have some that are decreasing, but we also have plenty of them that are increasing. And so we're gonna lean into that. Peter Grom: No. That's super helpful. And then I guess just a follow-up on just kind of the 4Q outlook and just kind of the big divergence on the bottom line versus the prior outlook? Because Scott, to your point, the sales are kind of in line with your prior outlook. So can you maybe speak to the moving pieces where things are playing out differently than what you would have expected? And I guess this is maybe asking Rupesh's question differently. Know we'll get 27 guidance enabled. But I guess, would you say there's a 4Q dynamic is more one-time in nature? Or are there things investors should be extrapolating, you know, from this leisure exit rate out to next year? Scott Azel: I'll take the first part and let Brian opine on it. First of all, as you look at Q4, I think of it like kind of a wedge. This is the beginning. We want to invest in our brands for growth. I want the word growth to be a part of what we're about, and it's responsible growth. And what we're doing is we believe that we can grow the top line if we make the investment against new product innovation, better storytelling, getting our organization with the consumer at the center, we can bend the performance. And you're gonna see a little bit of that in Q4, and you'll see a lot more of that big steps forward as we go into FY 2027. But, you know, as far as outlook long term, of course, we're not ready to publish that. I don't know if Brian can share any more color or texture to that. Brian Grass: I can give you some good perspective on Q4 and then, you know, give you some dimensionality of how to feel about going forward from that. And I just say to tag on to what Scott was saying, you know, our conclusion is more of the same. It's gonna get us where we wanna go. We've been trying to cut our way to better performance over the last two to three years, and it's not sustainable. And we're at a point where it's gonna be very difficult to continue to do that. We're shifting our focus to revenue improvement versus cost reduction. To get better operating leverage. That's gonna take more time. And I think in the short term, you're gonna see more pressure on the bottom line as we look to lift the top line. And then once the top line is lifting, it makes solving the bottom line much easier and much more healthy. With respect to the fourth quarter in particular, there's a slide on Page 14 in the investor presentation, which will give you an illustration. The main driver in the change is really unfavorable pricing realization. So in the third quarter is when our pricing was really implemented. And compared to our original expectations, we did not achieve we've got basically leakage versus what our original expectations were both in realization of the price increase margin that we wanted to gain and stop shipments that we're in the process of implementing to enforce uniform pricing adoption. And we think that's crucial in getting price increases to stick. They have to be uniformly adopted. Otherwise, it doesn't work. And the other thing I'll note is that pricing leakage drops straight to the bottom line. It has so it has an outsized impact on the bottom line versus the revenue impact. And so be aware of that. We also built in the expectation of higher consumer trade-down because we are seeing that. And a less favorable mix. We and I mentioned some of this in my remarks. We also assume higher promotion expense and margin compression as we look to tighten up our balance sheet. And really get our inventory levels in the right place. And we expect that to occur in the fourth quarter. And then the last point I'd make or last two points, while we believe overall retail inventory is healthy, there were a couple areas where we had inventory that was higher than we would have liked. And so we built in the assumption that that's gonna rebalance in the fourth quarter. And then the last point is we're preserving key investments in our people, innovation, and brands. And actually want to reinstate some of what we cut in the first three quarters of the year. And so we're gonna make those choices for the fourth quarter so that we can get to this revenue improvement, you know, and better operating leverage as we go forward. So that's a little bit of and I would say, look. There's gotta be some continuation of investment back into growth as we go to fiscal 2027, but we're not prepared to give you anything specific with respect to fiscal 2027 at this time. Peter Grom: Okay. That's helpful. And lastly, maybe just quickly, you know, a lot of focus on this call around the top line getting these brands back to healthy levels of growth. And so, Scott, I'd kinda be curious as you've kinda dug in and started to study this business more over the last several months. Is portfolio optimization part of that exercise? Or do you kind of see the same opportunity across the entire brand portfolio? Scott Azel: Yeah, Bob. Great question. You know, I'd say this. We're always, you know, as we do our strategic review let me back up. You know, I've been here four months. I focused on four areas that I think about the last four months. And one of which has been job one, which is kind of what how do we get their aspiration looking out for the future? And then what are our big steps in FY '27? As a part of that process, which we kicked off in the last thirty days, which you'll see more of it in the coming months, is looking at our portfolio, but fundamentally, as I talked about earlier, we have 30% to 40% of our brands that have, you know, upside opportunity given investment and given the right focus. And we're gonna kinda step down on them, step down in a good way, push them forward, then we have a number of our brands that we have to evaluate what is the right model going forward. How do we invest, what's the right operating model. There's so much opportunity there. And then, like, any company, we're always gonna be evaluating our portfolio over the next, you know, as we look at our strategic plan, on what brands are best fit and which ones don't. But at this point, I don't have any specific answer on that. Bob Labick: Great. Thank you so much for all the color. I'll pass it on. Our next question is from Susan Anderson with Canaccord Genuity. Please proceed. Susan Anderson: Hi, good morning. Thanks for taking my question. Maybe just a follow-up on the innovation front. I guess, I was curious are there certain areas such as, you know, maybe the most underperforming areas that you're gonna touch first, or is this something where you're just kinda gonna touch all areas of the portfolio? And then in beauty, I guess, you know, that industry obviously has seen growth the entire time. So just kinda curious what you think kinda went wrong there and what you need to do to kinda turn Drybar around whole on the liquid side and fixture side. And then I'm not sure if I heard, but did you say how Pearl Smith performed in the quarter? Thanks. Scott Azel: Yeah. First of all, yep, Susan, thank you. From an innovation standpoint, we can't run at every innovation equally. So if we just cannot do that, we've gotta be really smart about it. And we have several brands that I would say today, can do a lot more, can grow a lot faster with the right level of support. And we're gonna make sure as we go in FY '27 that they get what they need. And then we have a number of brands that call that are in the post phase of renovation that need work. Any work from everything on getting sharp on the consumer, sharp on the product pipeline, sharp on the structure to support the brand in the marketplace. And we're gonna do that work. So as I expect our growth curve going forward to be not a straight line, we're gonna have parts of our portfolio growing very at a faster rate, and then some parts, we're just trying to stabilize. We go into FY '27. Specifically around beauty, we've got an opportunity. We got we got some work to do in that area. And I can tell you this, the team is on it. They've gone through a big reset moment in the last twenty-four months. FY '27, we should see some improvement, but it'll be much more around stabilization and clarity of future than being in the green bucket of high growth, which we're getting from things like Olive and June. Osprey, and Braun, etcetera. I don't know, Brian, you have anything you wanna add. Brian Grass: I just say on Pearl Smith's, I mean, we're not giving that level of detail. Pearl Smith didn't have the best quarter in terms of our shipments in the quarter, but I wouldn't say that's indicative of the health of that business. Susan Anderson: Okay. Great. And then maybe just a follow-up. I guess, if you could talk about kinda how you're thinking about your leverage. I guess, where would you like it to go longer term? And, I guess, you know, I guess, how long do you think it would take you to reach that goal? And then maybe just a follow-up on, you know, kind of the portfolio and potentially rationalizing some of it. I guess, do you think there's opportunity there maybe even to help pay down quicker some of your leverage? Thanks. Scott Azel: Yeah. I'll take the first step, and Brian can step in. You know, in addition to I know you've growth, which I fundamentally think is a job one for Helen of Troy, and we have that opportunity against our brand. In addition to that, going as you'll hear in our plan forward, getting our balance sheet healthy and driving operational efficiency will also be kind of an in tandem strategic priority for us that we're gonna be focused on. I'll let Brian talk more about the leverage ratio. But specifically around the portfolio, I mean, just I've been doing this world of kinda running portfolios of brands for many years and always reevaluating the portfolio mid, short, mid, and long term. And I'd say in the short term, you know, we're gonna be focused on how do we bend the curve and improve our performance from our green brand and through and as well as our renovation brand. I think midterm and long term, we'll be looking at what is the right portfolio for Helen of Troy, and how does that create the long-term value for the company. We're not at a position today to or I'm not I'm not holding back right now that I have a specific specific brand and I'm like, oh, it shouldn't be there because we're doing the hard work of saying, how do we drive the right strategic plan for the company? And we're just not there yet. But, it's definitely something we will be considering and that she will wrestle with as we do the work. Do you have anything you wanna add on the leverage ratio piece? Yes. Sure. Go ahead. Go ahead. Let's turn it over to Brian. Brian Grass: Yeah. I just say, look. We have a base plan that we feel really good about in terms of our leverage and our ability to bring leverage down. We've got a big opportunity to tighten our balance sheet and make it more productive. We've been working on that, and we're gonna double down on that area of focus. That's you heard some of my comments earlier about inventory. We're gonna tighten up our inventory, which will produce a lot of cash, and we're gonna put that to work to pay down the debt. We also have some longer-term assets that we can look to monetize and we can consolidate from three distribution centers to two. That's gonna take a little time, but that's on our mind. So I would say that that's the base plan and plan A that we're kinda working first. But as Scott said, we're always, you know, thinking about divestiture, and I'll tell you, we get inbound interest on some of our brands. You know, on a regular basis. I think our focus is more on the plan A at this point while we're maybe thinking about and working on the plan B of divestiture. Divestitures are very distracting. They take a lot of work, and you can put all that work in and to the end, and you don't get the value that you're looking for. And you may not be successful. We have to be very choiceful about the ones that we're going to invest that level of work and time into. And I think Scott needs time to build his growth strategy and really look at this. And then once we've done all that and done that assessment, then I think we're better prepared to say we wanna focus on, you know, x, y, or z. So that's how we think about it. Susan Anderson: Okay. Great. That was very helpful, you guys. Thanks for all the details. Good luck in the New Year. Operator: Thank you. Our next question is from Olivia Tong with Raymond James. Please proceed. Olivia Tong: Great. Thanks. Good morning, and happy New Year. Based on the innovations you're planning for next year, do you think you find a revenue rebase in FY '27 or perhaps when do you think you can omit the commentary around the recovery not being linear? I know it's unlikely you'll provide a lot of building blocks for fiscal '27, but there are quite a few exogenous issues that hit this year. Both on revenue and profitability, most notably, obviously, the tariff hit. So what are the incremental hits that we should be thinking about after tariffs begin to enter the base in the late spring? Brian Grass: Yeah. I mean, Olivia, the first part of your conversation was, you know, kinda when do you think we'll inflect on it from a revenue perspective, and I wanna address that. And I think Scott, you know, can also address a piece of it. But then I think you're also saying, look. You had some exogenous headwinds during the year that you don't have to repeat as you go into next year, and I would agree with that sentiment. We had a lot of disruption in our revenue, you know, related to tariffs and direct imports and China dynamics. That is stabilizing. We still have work to do to ensure that we can recover all of that revenue base as we go into next year, and I'm not making a commitment on that at this point. We're doing the work, and we're trying to recapture all that revenue. And I think it's definitely no matter what. It's a definite building block year over year because we already know that some of that's back in our base. But whether we can get all of it is still an open question. So I, you know, I can't tell you to what extent at this point, but it's a work in process. And, yeah, the tariff situation is better. I think the hopefully, what you're hearing from our commentary though is that benefit that we're gonna get from things like tariff stabilization and they reduce the rate, and, you know, we now have pricing in the market. They're even talking about refunds potentially with the Supreme Court. We wanna put that back into the business to make sure that we have steady, consistent, reliable revenue growth. And then I think the algorithm on the profit improvement comes in. But that's gonna take a little bit of time. We're gonna focus on revenue first. We get that strong. Everything else kinda takes care of itself. But I don't expect that immediately. We gotta get the revenue back first, and then we're gonna two-step it to the profit. Olivia Tong: Got it. Maybe if I could double click on that about what you think is a potential steady-state operating margin for the company. Do you think you can get back to double-digit EBIT margin over time? If so, what sort of needs to happen to get there and what's your view on timing of that? Brian Grass: Yeah. I do think we can get back to that. But, again, hopefully, it we're not gonna time warp back to margins from three years ago. That's not the way it's gonna work. We're going as we get to revenue improvement first, then revenue growth, then we'll use the operating leverage to have some kind of an algorithm that delivers on profit growth to a degree, but we're gonna over-index on the revenue piece of it. So I don't wanna give you a specific margin at this point, but what I will tell you is we will once we get back to revenue growth, we will have an algorithm that produces margin expansion. And, you know, if it's two points of revenue growth, then it's probably 20 bps of margin expansion. If it's five points of revenue growth, maybe it's 50 points of revenue expansion. But just to be clear, that's a couple steps away. We have to get to revenue improvement first, then consistent revenue growth, then we'll focus on margin expansion. Olivia Tong: Got it. Thank you. Operator: We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing remarks. Scott Azel: Thank you very much, everyone. With renewed enthusiasm across the company, we're ready to leverage our portfolio and return to sustainable, profitable growth. Our path to our aspiration is becoming clear. This leadership team is determined to show sequential improvement across our business in the coming quarters. We will do this by staying focused on our North Star, which is keeping the consumer at the center of everything we do. By realigning our commercial triangle of product, sales, and marketing, we are reinvigorating brand building and strengthening retail operation execution. Our teams are energized. We're ready to fully leverage our diverse portfolio of leading brands to get us back to a path to growth. Thank you for participating today. We look forward to speaking with many of you at the ICR conference and the virtual CJS conference next week. Have a good day. Operator: Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.
Operator: Answer session will follow the formal presentation. As a reminder, this conference call is being recorded. It is now my pleasure to introduce Lisa Fortuna, from Financial Profiles. Miss Fortuna, please go ahead. Good afternoon, everyone. Welcome to the Simulations Plus Fourth Quarter Fiscal Year 2025 Financial Results Conference Call. Lisa Fortuna: With me today are Shawn O'Connor, Chief Executive Officer, and William Frederick, Chief Financial Officer of Simulations Plus. Please note that we updated our quarterly earnings presentation which will serve as a supplement to today's prepared remarks. You can access the presentation on our Investor Relations website at simulationsplus.com. After management's commentary, we will open the call for questions. As a reminder, the information discussed today may include forward-looking statements that involve risks and uncertainties. Words like believe, expect, and anticipate refer to our best estimates as of this call and actual future results could differ significantly from these statements. Further information on the company's risk factors is contained in the company's quarterly and annual reports and filed with the Securities and Exchange Commission. In the remarks or responses to questions, management may mention some non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to those most directly comparable GAAP measures are available in the most recent earnings release available on the company's website. Please refer to the reconciliation tables in the accompanying materials for additional With that, I'll turn the call over to Shawn O'Connor. Please go ahead. Shawn O'Connor: Thank you, Lisa, and welcome, everyone. We closed fiscal 2025 with strong execution across the business. Delivering on the full-year guidance we set in June. Revenue grew 13%, adjusted EBITDA grew 8%, and adjusted EPS grew 8%. Demonstrating resilience and operational discipline a year marked by significant market volatility. Importantly, 2025 was also a strategic reset for Simulations Plus. We completed our transition to a unified operating model aligning product and technology scientific R&D, strategic consulting services, and business development. Into a single client-focused, functionally oriented organization structure. This shift is already improving how we prioritize build, and deliver. For our customers, and positions us to move faster for the opportunities ahead. The external environment remained challenging throughout the year. Client budgets were pressured by broader pharmaceutical headwinds, including the threat of tariffs, and most favored nation pricing implementation, which created real disruption starting midyear. As we move toward calendar 2026, we're seeing early signs of stabilization. Large pharma has clearer visibility into pricing frameworks. Biotech funding has improved modestly. And our clients have entered their budgeting cycles with more confidence. Proposal activity and conference engagement have both strengthened. That said, we believe uncertainty will persist in the overall environment in the near term. Despite these challenges, the momentum behind biosimulation continues to accelerate. Our biopharma and regulatory partners are scaling their internal model-informed development capabilities investing in data curation, and digital infrastructure, and increasingly incorporating AI into modeling workflows. The convergence of cloud computing AI, and model-informed drug development is reshaping how the R&D teams within our biopharma clients operate. And our validated science puts us at the center of that shift. We started laying the groundwork for this future with the release of GastroPlus 10.2 earlier this year. And we'll continue with portfolio-wide updates in fiscal 2026. As our customers expand their internal biosimulation capabilities, they are turning to partners who can deliver scientific rigor, integrated workflows, and AI-assisted efficiency. All grounded in regulatory grade and scientifically validated models. Our product vision directly aligns with these needs. Connecting advanced science cloud scale computation, and AI-driven services into a unified ecosystem that supports teams through discovery, through clinical development, and commercialization. Taken together, these trends reinforce the long-term demand for our solutions and our leadership in the field. What we are hearing consistently from clients is that biosimulation is no longer a set of point solution tools. It's becoming the backbone of how R&D organizations operate. Teams want faster cycle times stronger interoperability, and AI-assisted workflows that reduce manual effort while preserving scientific rigor. They want systems that help them organize their data, standardize their modeling approaches, and deliver reproducible results for regulatory submission. This is exactly where our strategy is headed. Over the past year, we have been building toward an integrated product ecosystem that combines three strengths Simulations Plus can offer. Validated science, cloud scale performance, and AI that is grounded in regulatory grade modeling. In fiscal 2026, that strategy comes into focus. Across Gas Group Plus, Monolix suite, AdmetPredictor, our QSP platforms, and proficiency we are enabling advanced science continuous investment in the scientific engines trusted by global regulators leading R&D teams. A connected ecosystem interoperability across products, powered by the Simulations Plus Cloud, to support end-to-end modeling workflows from discovery through clinical develop. AI-driven services, tools that enhance data curation, accelerate simulation, interpretation, and streamline regulatory compliant reporting. AI and human collaboration, copilots and reusable modules that improve efficiency, consistency, and delivery times for scientists and consultants alike. These enhancements are not abstract concepts. They are tied directly to customer pain points and to the direction the industry is moving. And importantly, they position us to bring new capabilities to market with greater speed and cohesion than at any point in our history. We look forward to sharing much more detail about this integrated product strategy at our virtual investor day in January. Including the road map that unifies our scientific engines cloud infrastructure, and AI capabilities into a modern interoperable biosimulation ecosystem. With that, I'll turn the call over to William Frederick. William Frederick: Thank you, Shawn. To recap our fourth quarter performance, total revenue decreased 6% to $17.5 million. Software revenue decreased 9% representing 52% of total revenue, and services revenue decreased 3%, representing 48% of total revenue. Fiscal year total revenue increased 13% to $79.2 million. Software revenue increased 12% representing 58% of total revenue, and services revenue increased 15%, representing 42% of total revenue. Turning to the software revenue contribution from our products for the quarter, discovery products, primarily Admet Predictor, were 18%. Development products, primarily GastroPlus and Monolix Suite, were 77% and clinical ops products primarily proficiency were 5%. For the fiscal year, discovery products were 17%, development products were 75%, and clinical ops products were 8%. We ended the quarter in fiscal year with 311 commercial clients achieving an average revenue per client of $94,000. And an 83% renewal rate for the quarter. For the fiscal year, we achieved average revenue per client of $143,000 and our renewal rate was 88%. During the quarter, software revenue and renewal rates continue to be impacted by market conditions and client consolidations. Specifically, ADMET predictor declined 10% for the quarter compared to the prior year and grew 5% for the fiscal year. GastroPlus declined 3% for the quarter compared to the prior year, and grew 1% for the fiscal year. Monolix suite grew 3% for the quarter compared to the prior year, and grew 14% for the fiscal year. Our QSP QST solutions grew 22% for the quarter compared to the prior year, and grew 26% for the fiscal year. Proficiency declined 63% for the quarter and grew 206% for the fiscal year, with the prior year reflecting January revenue following the June 2024 acquisition? Shifting to our services revenue contribution by solution for the quarter, development, which includes our biosimulation solutions, represented 77% of services revenue and commercialization, which includes our MedCom services, represented 23%. The revenue contributions for the fiscal year were 76% and 24%, respectively. Total services projects worked on during the quarter were 191 and ending backlog increased 28% to $18 million from $14.1 million last year. Overall, we have a healthy pipeline of services projects and we continue to expect at least 90% of the backlog to convert to revenue within the next twelve months. Services revenue for the quarter declined compared to the prior year as expected and grew 15% for the full year, primarily due to the addition of the MedCom business. Specifically, PVPK services declined 10% for the quarter compared to the prior year and 14% for the fiscal year. QSP services declined 50% for the quarter compared to the prior year and 26% for the fiscal year. PKPD services grew 18% for the quarter compared to the prior year, and 5% for the fiscal year. 70% for the quarter and 622% for the fiscal year, with the prior year reflecting only fourth quarter revenue following the June 2024 acquisition. Total gross margin for the fiscal year was 58%, with software gross margin of 79% and services gross margin of 30%. On a comparative basis, total gross margin for the prior year was 2%, the software gross margin of 84%, and services gross margin of 30%. The decrease in software gross margin was primarily due to an increase in the amortization of developed technology with the acquisition of proficiency and higher amortization expense for capitalized software development costs related to the release of GastroPlus in May 2024. Turning to our consolidated income statement for the fiscal year, R&D expense was 9% of revenue compared to 8% last year, reflecting our continued investment in product innovation. Sales and marketing expense was 15% of revenue compared to 13% last year deliberately supporting initiatives to drive growth across our expanded portfolio and increase market awareness. G&A expense, excluding nonrecurring items, was 25% of revenue down from 28% last year. Total operating expenses including a noncash impairment charge of $77.2 million were 148% of revenue compared to 53% last year. Other income was $1.4 million for the fiscal year compared to $6.3 million last year, primarily due to a decrease in interest income and a decrease in the fair value of the earn-out liability. Income tax benefit for the fiscal year was $4.7 million, compared to income tax expense of $2.5 million last year and our effective tax rate was 7% compared to 20% last year. We expect our effective tax rate for fiscal 2026 to be in the range of 12% to 14%. Net loss and diluted loss per share for the fiscal year, including the $77.2 million noncash impairment charge were $64.7 million and $3.22 compared to net income of $10 million and diluted EPS of 49¢ last year. Adjusted diluted EPS was $1.03 this fiscal year, compared to 95¢ last year. Fiscal year adjusted EBITDA was $22 million, compared to $20.3 million last year at 28% and 29% of revenue respectively. Moving to our balance sheet, we ended the year with $32.4 million in cash and short-term investments. We remain well capitalized with no debt and strong free cash flow to continue to execute our growth and innovation strategy. Our guidance for fiscal year 2026 remains the same as we provided in October. Total revenue between $79 million to $82 million year-over-year revenue growth between 0% to 4% software mix between 57% to 62%, adjusted EBITDA margin between 26% to 30%, and adjusted diluted earnings per share between $1.03 to $1.10. We also anticipate first quarter revenue to be approximately 3% to 5% lower than the same period last year. Our fiscal year and first quarter guidance assumes a stable operating environment with market conditions in FY '26 expected to resemble those at the close of FY '25. Should market conditions improve and our clients increase spending in FY '26, we will be poised to respond. I'll now talk turn the call back to Shawn. Shawn O'Connor: Thank you, Will. As we look ahead to fiscal 2026, our thirtieth year as a company, We're energized by the opportunity in front of us. Simulations Plus is evolving from a set of pioneering modeling tools into a unified ecosystem supporting discovery, development, clinical operations, and commercialization. Our acquisitions our investment in science, and our integrated operating model have expanded both our reach and our impact. What remains unchanged is our core purpose. Helping our partners bring safer, more effective therapies to patients through science-driven innovation. What is changing and accelerating is how we deliver on that mission. With validated scientific engines, expanding cloud capabilities, AI-assisted workflows, and a coordinated road map We're positioned to support our clients with more speed, consistency, and interoperability than ever before. We look forward to sharing more about this strategy our product road map, and the next phase of our evolution at our virtual investor day on January 21. We're excited to give you a deeper look at how our ecosystem comes together and how it will create value for clients, investors, and patients worldwide. Thank you for joining us today. And with that, we'll open the call for questions. Operator: Thank you. Will now be conducting a question and answer session. Before pressing the star keys. Our first question comes from Jeff Garro with Stephens Incorporated. You may proceed with your question. Jeff Garro: Afternoon. Maybe start by asking about the demand environment I was hoping you could give us an update on recent trends and some of the underlying factors that can translate to bookings and revenue like RFP volumes? Pipeline development and SLPs win rate? Thanks. Shawn O'Connor: Yeah, Jeff. Thanks for thanks for the question. Yeah. I can give, you know, global metrics of the have been cited often. Certainly, an uptick in biotech funding, is a positive. So another funding, announced today, up modestly from where it's been over the last six to twelve months. Continued funding in that sector would support that element of our business, which is about 25% of our client base or revenue drive is out of the On the large pharma side, mixed bag mostly positive. But sporadic, you know, challenges from some of the large pharma in their encountering a program success or failure. But certainly an uptick there. We've we've we've come out of our heavy conference window of time. With our clients. And, boy, budgeting activity for next year seems to have some momentum. I'm cautious about that. There was momentum there last year, and, no surprises came after the first of the year. So, feel very positive in terms of the discussions we're having with customers setting up the proposals and budgeting activity for for next year, it it looks pretty good. And so we enter our fiscal year, '26 here, on on good footing. Being cautious, watching for an evolving marketplace where, you know, certainly, announcements often, you know, cause pause in the in activity of our clients, but, mostly mostly bright lights. Jeff Garro: Great. I appreciate all those comments. And and then the follow-up, know, I I don't wanna get too far ahead of ourselves in front of the Investor Day, but I am curious on the feedback for the GastroPlus release that's been infused with some AI capabilities. And and what that might mean for for that key product as well as demand for AI infusions and and other products. You know, you you hit the the the kind of macro details. We'd love to hear about the how the innovation plan is starting to to impact your client discussions even at an early state. Shawn O'Connor: Yeah. It is it is early stage. You know, the announcement of GastroPlus was followed with webinars and some training and, visibility provided to clients. Much visibility prior to its delivery is many of our clients participate, in, the development programs and provide input during the course of its activity. And, you know, the responses have been positive. They're digest it. We're seeing a lot of evolution in terms of our clients and their internal IT infrastructure and many of the cloud and AI capabilities that are being released now will fit into those new ecosystems that they're building internally. And, so initial response is good. As with most releases in in our space. Their adoption and installation in our clients. It's fit into their timetables and process. But I think everyone is looking for ways to leverage, AI capabilities Our clients are very focused in terms of their data management internal to their organization that feeds the analytical tools that we provide them, and, so great excitement in terms of they're seeing that, our platforms are staying ahead of the curve in terms of functionality that, they're looking to deploy, in the coming months and years. Jeff Garro: Sounds good. Thanks for taking the questions. Shawn O'Connor: Sure. Thanks, Jeff. Operator: Our next question comes from Matthew Hewitt with Craig Hallum. You may proceed with your question. Matthew Hewitt: Good afternoon. Thanks for taking the questions. Maybe first up, you know, and you've touched on this a little bit, but so you had most favored nation pricing. You've had tariffs. You've had, a soft funding environment, and it's seems like we're getting either clarity or improvement in all three of those Is there anything else that would result in large pharma being cautious, or is it just more confirmation on those three buckets, and that's when start to see kind of the the increase in in spend. Shawn O'Connor: Yeah. I mean, there's there's a a number of factors there, and it's you know, anecdotal with each client in their own specific PACSAT in terms of their drug programs and know, top top line patent expirations. Each each entity has their own know, guidepost that they've got to, you know, manage and strategize around and they'll respond. I mean, generally, it's an industry that responds to, its budgeting cycle. So, budgeting for the calendar year '25 is in place, not not changing, and now they're looking at '26 and putting budgets in place there. So there's sort of a know, more positive there. It doesn't necessarily translate to discord, but they're budgeting into into next year. You know, I think that we we all we all check our you know, phone periodically to see if been a tweet today or or not. So there's there's still that cautiousness. And, you know, foreboding of what what what may happen tomorrow. But, yeah, generally, you know, I think outlook is positive. Momentum into, the budget preparation. For '26 is is positive, and know, I think if we get, you know, some quarters in a row without any surprises that tend to you know, put a shock wave into the system. If we see a few quarters without that, then I think that confidence grows and and spending gets more firmly committed. Matthew Hewitt: Got it. And then maybe the the follow-up to that is, you know, if we do see the improvement, and you see a ramp in bookings and backlog, do you feel like you've got the right headcount now to support a higher revenue base at least over the near term, or do you feel like, know, depending upon how things shake out, you might be in a situation where you're having to backfill some roles that know, given the kind of the reductions over the past two years. Thank you. Shawn O'Connor: You know, the software side of the business is, leverageable in terms of, immediate needs to that are created to have business upticks. If it upticks, you know, there's not an immediate need in terms of people side, it's certainly a fair question on the service side of our business. And, you know, we feel very comfortable with the the capacity we have now, its utilization. Supporting, the guidance we've given into into '26 if that side of the business, accelerates, more quickly than we're you know, planning for, our ability to grow that capacity. Is much better today than it was in the past. When, the resources were a little scarcer and in terms of the scientific profile that did this type of work. You know, our we made our reduction in force last year with a little bit more confidence that, hey. If we if we need to step up in terms of, our team there, that we can do so. Relatively timely and supportive business volumes increasing. So I think we're well positioned today for our business in '26 as anticipated. It's a accelerates, our ability to meet that demand is what we should be capable of doing so. Matthew Hewitt: Got it. Thank you. Operator: Thanks, man. Our next question comes from Scott Schoenhaus with KeyBanc Capital Markets. You may proceed with your question. Scott Schoenhaus: Hey, team. Thanks for taking my question. Shawn, I wanted to ask about the guidance. It's reiterated, obviously. Maybe parse through if anything has changed underneath that guidance. I believe, you know, there was some caution around the services side. Software was sort of, there was headwinds in the first half. Mostly related or I think partly related to proficiency growth, comps, but that that eases in the second half. Maybe just walk us through if anything has changed on the background of the guidance and maybe parse through the first quarter guidance that you just spoke about on the prepared remarks? Thanks. Shawn O'Connor: Sure. No. I mean, in a short interval, since we delivered the guidance in October, you know, nothing significant has changed underlying the assumptions underlying that we, you know, entered fiscal year twenty six, you know, having, you know, post our adjustment back in June, July time frame, bringing down our guidance for the back half of the 2025 time frame. We achieved that back end fiscal year twenty five guidance, which reflected a little bit of stability in terms of the flow of revenues both on the software and, and and service size. Hope side is albeit at a reduced reduced level. We see some progress on an absolute dollar basis moving into excuse me, the first part of the the year, you know, normal seasonality pan or patterns exist. First quarter is not our most robust quarter for renewals. Most of those are timed in the second and third quarter or at least the peaks. In those two quarters. And in the first part of the year, we've got reduced levels of proficiency revenue contribution both in software with a proficiency platform as well as med communications service revenues that their comparable time frame in '25, those were their most, you know, highest revenue contribution post acquisition, and so some challenging comps there. So as we we indicated, three to 5% first quarter revenue below the comparable year in the first quarter. That fits into our 0% to 4% growth for the year. And so no no change in in in ex expectations or or assumptions underlying. The guidance we provided. And then, does your guidance assume any biotech end market recovery? And then, also, I know that there were some degree of cancellations baked into the guidance. Has sounds like the that the biotech environment, you know, is still cautiously optimistic. What would it take you to you know, view the cancellation projection or caution for the full year what would it what would what would it have to take for you to, sort of moderate your expectations there? Thanks. Shawn O'Connor: Yeah. I mean, two components to your question there in terms of biotech funding. You know, it if if it continues, it certainly will will will prove a a a positive in terms of contributing both on the software and and and consulting sides. You know, there's there's not an immediate translation in terms of funding today. And purchase order, issued tomorrow. They're it depends on the circumstance of the stage of, that particular funded biotech's programs where they are in the development timeline to, you know, driving what type of services I can support them. You know, obviously, if if it continues in a positive way here that we'll bring back that cyclin that contributed, certainly a a greater percentage of revenue on revenue growth you know, back a year or two, three years ago when it was relatively robust. Funding environment by type contribution to our revenue flow was growing at a much steeper rate than than than it has of late during the funding trough, if you will. And as we've projected into '26. We've now projected a significant uptick in the biotech funding leading to uptick in in biotech revenue contribution in '26. So that would be a a a potential potential upside. Second part of your question in terms of cancellations. You know, certainly in the cancellations can be two different things. I'm not sure what you were pointing to, but you know, we've had some consolidation in terms of our software renewals. Acquisitions that had led to one on one not equaling two in terms of two clients that have consolidated in terms of their renewal. You know, that, you know, that that is you know, an ongoing thing that, we've always experienced. Encountered, from quarter to quarter. It's was a little bit higher in the back half of fiscal year '25. Certainly keeping an eye on our client base in that regard. We've got no known cancellations of any magnitude that you know, are on the horizon in '26. Acquisitions that have been announced, with the effective date, down the road. Nothing nothing out there visible at point in time, but, you know, we we have in the past always had those. Doubt, though, there will be some of that into the future. Cancellations will also occur on the service side in terms of the programs that you know, are sometimes just delayed but, sometimes canceled, if the bad readout comes and the program is, is is curtailed. You know, we we had to significant one in the back half of twenty five that impacted us, relatively unusual. Circumstance, both in terms of its, well, in terms of its magnitude size of contract there. You know, no no standout risk of that nature in our back right now. But no doubt, there there will be, programs that have bad readouts and delays that will occur out of the contracts that sit in backlog. You know, are forecasting process of metering out when that backlog revenue will be taken to revenue certainly includes a discount factor, a risk factor that know, those delays will occur, and we believe we've been cautious in terms of an estimate of that impact in our assumptions underlying our guidance going forward. And, again, that that'll always be be there. We're in the business of helping our clients. Curtail programs, quicker, if their predictive outcome is not high. So, that's something that will always occur in our business. We just need to be adapted managing around them, which, in fact, we did very well in the fourth quarter. That large cancellation we had put a very large gap in our fourth quarter service schedule there. And the team did a very good job of replacing or reallocating resources to other projects that were current and and able to be worked on. Our sales team did a good job of closing business in the quarter, but could be started in the, in the quarter. And, you know, the silver lining there, the that was also all done with a pretty good flow of bookings. During the quarter. So our backlog was not depleted in that group. Seen an increase in backlog year over year. And so on the on the cancellation side, yeah, it will continue to occur into in the twenty sixth. That's a normal part of our business. We've implemented discount factors in our our forecasting at the sort of levels coming out of the the back half of the year. Maybe potential upside if if those slow down with that. Scott Schoenhaus: Thank you. Very helpful. Operator: Our next question comes from Max Schmock with William Blair. You may proceed with your question. Hi. It's Christine Rains on for Max Smock. Good afternoon. Thanks for taking our questions. First one, I imagine it touches on the answer for the previous question a little bit, just in terms of large pharma consolidation. But we noticed that the renewal rate in software remains below previous years and last quarter on a fee basis. So hoping you can provide some context on what it was on an account basis in the fourth quarter. And what factors are weighing on renewals and just kind of if and when we can expect renewals to return to the the 90% ballpark. Shawn O'Connor: Yeah. Good question. You know, we encountered renewal on fee step down into the high 80s, mid 80s, really driven by a couple three, maybe four impactful consolidations that hit us in the in the back half the year, the third and fourth quarter. Driving that down The the other element in there is that while while our clients you know, are generally not, reducing, their staffing and modeling and simulation and that, if you will, ties to the amount of software, the number of seats, if you will, that they're licensing from They in this, you know, constrained budget in environment, they they do take a very close look at configurations and, while, you know, reducing the number of platforms that they're licensing from us or generally the seats for them. You know, they do look at, hey. The modules that are associated with each seat and platform. And can they know, save some money there? And so, you know, we saw a lot more scrutiny of that nature, you know, in the back half of of twenty five, also contributes to that renewal on fees number coming down a bit. Hey. You know, it'll it'll it'll drive back towards 90 as we see you know, the absence of as many, cancellations I think having gone through their scrutiny on a module by module basis last year, the potential for that impacting the renewal rate this year is less. We've done that once, and you know, we'll have we'll have done that review and and filtered out things, but maybe they don't need as many of these modules or those modules. I think that will will help improvement going forward as well. And the other the other factor will be, you know, price increase. All things being equal, the renewal on on fees percentage is also impacted by the uptake of our annual price increase which has been a bit more aggressive this year than it was last year. And so that should have a positive effect on on renewal on fees rates as well. Christine Rains: Got it. That makes a lot of sense. And just one on margins for us, Given, the number of moving pieces on the cost side, hoping you can walk through what is baked into your EBITDA margin guide for gross margin overall and in software versus services. And then just broadly, any color you can give us on your EBITDA margin cadence over the course of fiscal 2026 maybe similar to the revenue guide, you gave in terms of down or up in the in q January imagine down. But anything you'd give would be helpful. Thanks. Shawn O'Connor: Yeah. From a from a, you know, kinda overall perspective, you know, we we come in and as we're looking at quarter to quarter on the expense side comparisons, are reduction in force contribute We announced the $4 million impact from the reduction in force million a quarter starting in the fourth quarter. So the '26 guidance anticipates that benefit when you're looking looking year over year over year there. Secondly, in know, a world in which, you know, your top line growth is you know, zero to 4% where we're at, or at, you know, that does not give a lot of leverage in terms of EBITDA in an environment where you've got other expenses that inevitably are gonna rise in terms of the, you know, the the computation increases for your staff on board and medical benefits and things like that. So our guidance in terms of adjusted EBITDA, 26% to to 30% adjusted EBITDA. Shows a little bit of improvement to see some greater improvement than that. I think we need to see some get back to where we were in terms of top line growth at 10% or above. Our expectation is still targeted at 35%. EBITDA, and I think our ability to get there does exist. It'll it'll need some time or some upside to the top line guidance that we've we've provided the this next year. Christine Rains: Great. Thank you. Operator: Our next question comes from David Larsen with BTIG. You may proceed with your question. David Larsen: Hi. Can you talk a little bit about the, the proficiency asset? I think you said in the fourth quarter revenue was down fairly substantially. I guess, can we just talk about why that is? Is it the software business or the service business? And what's driving that? I think it was down was it 63% year over year in the the quarter? Is that right? Shawn O'Connor: Yeah. Was saying 63% in terms of the proficiency platform. On the, on the software side. Services were commercial MedCom, services from the Proficiency acquisition were up 70% for the quarter. So the two contributions of revenue from the acquisition on the software side, as we've indicated. In the back half of fiscal year 'twenty five. The clinical trial starts and other factors. Have shown a a slowdown in that side of side of the Medical communications has been impacted somewhat, but, you know, still still growing quite nicely in there year over year. Was much higher in terms of fourth quarter. Their first quarter contribution last year versus this year. David Larsen: Okay. And and can you just remind me what percentage of proficiency revenue is software? Shawn O'Connor: It's, j I don't have the exact percentage. I don't know well if you've got it, but generally, it's about 40% software, 60% service or something of that nature? William Frederick: Okay. Yeah. We've definitely included in the investor deck kind of the percentage of total software revenue and percentage of services revenue that the proficiency software contributes towards in the medcom business, really integrating it as we sell the solution across the entire ecosystem. David Larsen: Okay. And then for for the one q revenue guide, I think that's through November. So you probably have very good visibility into that. Still a year over year decline. Is it I mean, in order to meet your full year guide for fiscal twenty six, I would I mean, you're gonna have to see some ramp up in bookings. I mean, do you do you have how much visibility do you have into that? Is it I mean, are those deals booked? Any sense for what percentage of the software or service revenue is under contract Shawn O'Connor: Yeah. Like like like any period, obviously, you know, our our earnings release here on December 1 is, later given the change in reporting status and whatnot. It gives us an ability to you know, re reaffirm our guidance for the year with good visibility, obviously, into first quarter here. And so that is all tracking to those numbers. Yeah. I think the you know, dynamics of the quarter by quarter contribution fiscal year twenty six here, shows better year over year growth percentages. But the absolute dollar revenue uptick, if you will, on a quarter quarter basis is pretty consistent. Given our seasonality. You know, first and fourth quarter, lower end software and whatnot. And the percentage growth is really impacted significantly by you know, the strong first and second quarters we had in '25 and the weak third and fourth quarters. That we had in in 25% say percentage growth dynamic that, will show a a big step up in the back half of the year. It isn't quite as big a step up when you look at it on an absolute dollar basis from our starting point coming out of the back half. Twenty five. David Larsen: Okay. Thanks very much. I'll hop back in the queue. Operator: Our next question comes from Constantine Davides with Citizens. You may proceed with your question. Constantine Davides: Thanks. Sorry, I just want to clear something up. Am I right to infer that you're 2026 guidance contemplates an extension of recent renewal trends kind of in the low to mid-80s. I just want to be sure I heard that right. Shawn O'Connor: It does. I would say, you know, it does in the sense of the the consolidations, you that sort of activity. As I mentioned earlier, we we have implemented a more impress more more higher price increase, this year. And so that, you know, you know, on a year to year consistency basis, that that contribution to the renewal rates, and our revenue guidance is, is baked in there. Constantine Davides: Got it. And then Shawn, you you guys talked about the strength of the balance sheet as well as cash flow. And I guess two questions on that. One is what's a good way to think about cash flow in fiscal twenty six? And then I I know you kind of always talk about being on the hunt for interesting assets. And just wondering if you can talk about your level of interest in terms of assets in your core markets, a newer market like clinical ops and and even the potential for a transaction outside of those markets. Thanks. Shawn O'Connor: Yeah. You know, cash flow, runs the seasonality pattern of our of of our revenue, driven by that seasonality of when our clients renew, and that drives the revenue into the core quarter buckets. You know, our outlook there is, you know, robust as it as it has been even in our challenging times. Cash flow is very positive. And turning to acquisition side of your question, Yeah. Our our, you know, scoping of opportunities out there No change in expectation that we will as we have in the past. Continue to grow through both organic contribution as well as acquisitions. Into our future opportunities exist in the two landscapes that we operate in primarily '26, '25, I say, was would be characterized as a year of integration of our large proficiency acquisition, '26 should give us an opportunity to take a look at how we can, you know, get to the next acquisition if you will in our in in our history. Operator: Our next question comes from Brendan Smith with TD Cowen. You may proceed with your question. Brendan Smith: Great. Thanks for taking the questions, guys. Maybe just quickly expanding on some of the earlier questions here, but can you speak to really how we should be thinking about pricing flexibility that you all have and and I guess maybe any plans at this point to lean into some of that next year, especially as some of the AI capabilities roll out across the platform? I'm really just trying to, you know, understand a little bit to what extent the 26 guiding includes any of those pricing assumptions kind of versus new customer ads, expansions of existing customer licenses? And just really what kind of levers we should think about that could kinda drive us closer to flat versus 4% or even more within that framework next year. Thanks. Shawn O'Connor: Yeah, Vernon. Good question. Yes, our pricing is a little bit more aggressive than it is, pardon parcel with the know, upgrades and new platform AI and cloud capabilities that are planned to be delivered during the course of the year. The monetization of that functionality comes through a combination of separately priced modules and some of that technology integrated into the base platforms, which supports a more price increase this year. The stickiness of the product has been such that we have and do raise prices on an annual basis. And when we've delivered significant improvements to the platform, we've sought to share the benefits of that with the with with clients, if you will, in terms of more aggressive pricing. Much of the AI, certainly the automation components of it will provide them greater efficiency and make their organizations that much more productive in modeling and simulation and therefore, a price increase is justified. So in these are sharing the wealth there a bit with them. How much of that is baked into our guidance going forward. You know, it's it's you know, keep in mind that it's, the answer is it's baked in, but discounted at a couple of different steps of the way. There's always a yield to a price increase. You don't get full price increase from every single one of your customers out there, and, and as well. It's filtered through the course of the year when when licenses are are renewed. And so it's it's paced and discounted, I guess, if I can use that phraseology. Price increase on the service side is you know, it it in an environment like this where there are fewer shots on goal, meaning there are fewer projects that are offered up in in the marketplace, makes for a little bit more price competition in that in that space. So while there inevitably is some price increase in terms of the standard hourly rates of our our staff and whatnot. We've, anticipated a a a very competitive still market to remain. In fiscal year twenty six. So I wouldn't say that any of what we normally do on a pricing basis from the service side there's no no step up. Baked into the guidance on the service side. Brendan Smith: Okay. Got it. It makes a lot of sense. Thanks for that color. Thanks, guys. Shawn O'Connor: Cheers. Take care. Operator: This now concludes our question and answer session. I would like to turn the call back to Shawn O'Connor for closing comments. Shawn O'Connor: Well, thank you again for joining our call and and your interest in Simulation Plus. On December 11, we'll be attending the TD Cowen third Annual Diagnosing Tomorrow: Tools and Technologies for the Next Decade. In New York. During the week of January 12, we'll be attending, the JPMorgan conference in San Francisco. And hope to see many of you at either of these, on the calendar coming up in the near term here. Other than that, appreciate your interest, and, take care. Operator: Ladies and gentlemen, thank you for your participation. This concludes today's conference. Please disconnect your lines and have a wonderful day.
Wendy D. Kelley: Good day, and welcome to the WD-40 Company's first Fiscal Year 2026 Earnings Conference Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. At the end of the prepared remarks, we will conduct a question and answer session. Please press 1 on your telephone keypad. Please make sure your mute function is turned off to allow your signal to reach our equipment. If at any time during the conference, you need to reach an operator, telephone keypad. I would now like to turn the presentation over to the host for today's call, Wendy Kelley, Vice President, Stakeholder and Investor Engagement. Please proceed. Thank you. Good afternoon, and thanks to everyone for joining us today. On our call today are WD-40 Company's President and Chief Executive Officer, Steven Brass, Vice President and Chief Financial Officer, Sara Hyzer. In addition to the financial information presented on today's call, we encourage investors to review our earnings presentation, earnings press release, and Form 10-Q for the period ending 11/30/2025. These documents will be made available on our Relations website at investor.wd40company.com. A replay and transcript of today's call will also be made available shortly after this call. On today's call, we will discuss certain non-GAAP measures. The descriptions and reconciliations of these non-GAAP measures are available in our SEC filings as well as the earnings documents posted on our Investor Relations website. As a reminder, today's call includes forward-looking statements about our expectations for the company's future performance. Actual results could differ materially. The company's expectations, beliefs, and projections are expressed in good faith but there can be no assurance that they will be achieved or accomplished. Please refer to the risk factors detailed in our SEC filings for further discussion. Finally, anyone listening to a webcast replay or reviewing a written transcript of this call, please note that all information presented is current only as of today's date, 01/08/2026. The company disclaims any duty or obligation to update any forward-looking information as a result of new information, future events, or otherwise. With that, I'd now like to turn the call over to Steve. Steven A. Brass: Thanks, Wendy, and thank you all for joining us today. Today, I'll start with an overview of our sales results for 2026 and then provide an update on the progress we've made against certain elements of our four by four strategic framework. Then Sara will dive deeper into our first quarter performance, review our business model, give a brief update on the divestiture of our home care and cleaning business, and review our outlook for fiscal year 2026. After that, we'll open the floor for your questions. Today, we reported consolidated net sales of $154.4 million, representing a 1% increase compared to last year. Let's take a closer look at these results and unpack what's driving our performance. Maintenance products remain our primary strategic focus, representing approximately 96% of total net sales for the quarter. Net sales for these products reached $148.9 million, a 2% year-over-year increase. While this performance came in below our long-term growth targets, we remain highly confident in the strength of our growth trajectory for both the fiscal year and longer term. As you know, we go to market through a combination of direct operations and marketing distributors. Our direct markets accounted for 83% of our global sales during the first quarter and maintenance products grew by 8% in those markets, in line with our long-term growth targets. The softness we saw in the first quarter was primarily due to timing-related factors within our marketing distributor network, not a decline in end-user demand. Marketing distributors represent about 17% of our global sales, and typically exhibit greater quarter-to-quarter variability. These markets offer significant long-term growth potential but can be more volatile period to period. As I shared last quarter, we anticipated the Q1 pullback, particularly in Asia Pacific, as distributors managed inventory levels. I'll provide more detail on Asia Pacific performance shortly. We remain confident in a strong rebound later this fiscal year. The second quarter is already off to an excellent start with solid growth across all three trade blocks. We have visibility into a number of upcoming initiatives, giving us confidence in delivering a solid fiscal year result. I'm also pleased to report that our gross margin continues to strengthen. In the first quarter, we reported a gross margin of 56.2%, which is an improvement of 150 basis points sequentially from the fourth quarter and 140 basis points compared to the first quarter of last fiscal year. Gross margin, excluding the impacts of the gas assets we currently have held for sale, was 56.7%. Sara will share more detail about our gross margin in just a few minutes. Now let's talk about first-quarter sales results by segments starting with The Americas. Unless otherwise noted, I'll discuss net sales on a reported basis compared to the 1st Quarter Of Last Fiscal Year. Sales In The Americas, which include The United States, Latin America, and Canada, was $71.9 million in the first quarter, an increase of 4% compared to last year. Sales of maintenance products were $68.6 million, an increase of 5% or $3.2 million compared to last year. The bulk of this growth was driven by higher sales and maintenance products in The United States and Latin America, which increased 312%, respectively. In The United States, sales of WD-40 Multi-Use Product increased following a modest price adjustment in 2026. But this was partially offset by lower volumes due to the timing of customer orders. In Latin America, higher sales of WD-40 Multi-Use Product were primarily driven by expanded distribution and successful promotion activity. In Mexico, maintenance product sales were also positively impacted by higher sales of WD-40 Specialist, which increased 14% primarily due to increased online retail sales, new distribution, and increased demand primarily in The United States. Home care and cleaning product sales declined 18%, reflecting our strategic shift toward higher-margin maintenance products alignment with our four by four strategic framework. In total, our Americas segment made up 47% of our global business in the first quarter. Now let's take a look at our sales in EMEA, which includes Europe, India, Middle East, and Africa. Excluding the impact of the home care and cleaning we divested in 2025, net sales of $58.7 million, an increase of 5% or $2.8 million compared to last year. This growth was driven primarily by a 27% increase in WD-40 Specialist sales fueled by heightened promotional activity and successful new product launches in key direct markets. Sales of WD-40 Multi-Use Product in EMEA remained relatively constant. We continue to see strong trends in many of our direct markets. However, the increased sales in our direct markets were fully offset by softer performance in EMEA distributor markets, primarily due to the timing of customer orders reflecting the inherent variability often experienced in our distributor markets. While distributor sales declined in aggregate, India was a standout delivering a $1.4 million increase. In total, our EMEA segment made up 38% of our global business in the first quarter. Now on to Asia Pacific. Sales in Asia Pacific, which includes Australia, China, and other countries in the Asia region, were $23.9 million, a decrease of 10% or $2.7 million compared to last year. Sales of WD-40 Multi-Use Product were $18.3 million in the quarter, a decrease of 12% compared to last year. Although segment sales declined in the first quarter, we achieved strong growth in China, where sales increased 8% over the prior year. This performance was driven by expanding distribution and effective promotional initiatives. These gains were fully offset by lower sales of WD-40 Multi-Use Product in Asia distributor markets, where sales decreased by GBP 3.3 million or 33%. As noted earlier, this was primarily driven by the timing of customer orders as distributors that heavily participated in promotional activities during 2025 adjusted to more typical inventory levels. This performance was anticipated and factored into our fiscal year 2026 guidance. Importantly, we continue to expect a strong rebound later in the fiscal year. In Australia, sales of maintenance products remain constant. Home care and cleaning product sales, remain a strategic focus for us in Australia, declined by 5% compared to last year, primarily due to the timing of customer orders. In Asia Pacific, sales of WD-40 Specialists were up 2% in the first quarter due to higher sales volume from successful promotions and marketing efforts in Australia and China. In total, our Asia Pacific segment made up 15% of our global business in the first quarter. Now let's talk about our Must Win Battles. Amos Win Battles focused on accelerating revenue growth in maintenance products. Starting with must-win battle number one, lead geographic expansion. In the first quarter, sales of WD-40 Multi-Use Product reached $118 million, decreasing 1% compared to last year. While this performance does not align with our long-term growth objectives, we've made excellent progress this quarter in many key markets. With strong sales growth of $1.4 million in India, $1.2 million in Mexico, $900,000 in Iberia, and $800,000 in China. At 72 years young, we captured only 25% of our global growth potential for our flagship product. We estimate the attainable market for WD-40 Multi-Use Product to be approximately $1.9 billion compared to fiscal year 2025 sales of $478 million, leaving an opportunity of roughly $1.4 billion to nearly quadruple current sales. Capturing that growth simply means continuing what works. Expanding brand awareness and distribution across 176 countries and territories. All occasional soft quarters are part of the journey, they don't change our strategy, our long-term opportunity, or our positive outlook. Next is must-win battle number two, accelerating premiumization. Our second must-win battle is to accelerate the growth of premium formats of WD-40 Multi-Use Product. Innovation drives this strategy. We design products like Smart Straw and Easy Reach, with end users at the heart of every decision. This end-user-focused approach strengthens brand loyalty, supports gross margin growth, and deepens our competitive advantage. In the first quarter, sales of WD-40 Smart Straw and EZ REACH when combined up 4% over the prior year. Premiumized products currently account for approximately 49% of WD-40 Multi-Use Product sales, leaving considerable room for continued growth. We target a compound annual growth rate for net sales of premiumized products of greater than 10%. Our third must-win battle is to drive WD-40 Specialist growth. When we introduced the WD-40 Specialist alongside the WD-40 Multi-Use Product, not just adding variety. We're strengthening our brand, capturing new segments, and offering end users more choice without diluting what makes our core brand iconic. In the first quarter, sales of WD-40 Specialist products were $22.5 million, up 18% compared to last year. We estimate the global attainable market for WD-40 Specialists to be about $665 million with only 12% of that potential realized to date with roughly $583 million in growth opportunity ahead. We target a compound annual growth rate for net sales of the WD-40 Specialist at greater than 10%. Our fourth must-win battle is to Turbocharge Digital Commerce. Our digital commerce strategy is a catalyst for growth across the business. Not merely a channel for online sales. It plays a vital role in advancing each of our must-win battles by increasing brand visibility, improving accessibility, and driving deeper engagement with end users across global markets. In the first quarter, e-commerce sales increased 22%, primarily driven by strong sales of WD-40 Specialist in The United States. Now let's move to the second element of our four by four strategic framework, strategic enablers, which emphasize operational excellence. Today, I'll provide an update on strategic enablers one and three. Our first strategic enabler is to ensure a people-first mindset. At WD-40 Company, we've long held the belief that first you build the people, and the people build the business. We strive to be an employer of choice for all employees and their best selves to work. In November 2025, we completed our latest employee engagement survey and I'm proud to share that we've been able to increase our employee engagement index score to 95%. A new record high for our organization. Additionally, 97% said they actively collaborated, shared knowledge and ideas, and drove better results. These results underscore how global collaboration accelerates our success and reflects our bold ambition to become a world-class global learning organization. Our third strategic enabler is achieving operational excellence in the supply chain. Profitable growth depends on a supply chain that's optimized, high-performing, and resilient. This enabler has been key to expanding gross margins through cost reduction initiatives such as packaging improvements, logistics efficiencies, and strategic sourcing. In the first quarter, we delivered global on-time performance of 97.6%. Even while we continue to increase production capacity to support our must-win battles. Our global supply chain team also made strong progress in engaging with key suppliers and advancing our responsible sourcing policy. With that, I'll now turn the call over to Sara. Sara K. Hyzer: Thanks, Steve. Today, I'll offer insights into our business model, highlight key takeaways from our first-quarter performance, and provide a brief update on the planned divestiture of our Home Care and Cleaning business in The Americas. Today, we are reaffirming our full-year 2026 guidance. While our guidance ranges remain unchanged, I will provide some additional color on our outlook. Let's start with the big picture. While our first-quarter results were below our long-term growth targets, we did expect to get off to a slower start this year. And we believe we are set up for a strong year. We have numerous activities scheduled in the back half of the year giving us confidence that we will be at the mid to high end of our guidance ranges. Our results can fluctuate quarter to quarter, driven by the timing of promotional activity and customer order patterns. WD-40 Company is built for durable value creation. Driven by brand strength, operational discipline, and a culture of continuous improvement. This foundation positions us for sustained growth and strong stockholder returns for decades to come. And with that, let's start with taking a closer look at our business model. Our business model is a strategic tool we use to guide our business. It is built around three core areas: gross margin, cost of doing business, and adjusted EBITDA. In the near to midterm, we continue to evaluate each component of the model within a range, allowing us to adapt while staying aligned with our long-term objectives. Because our business model is based on revenue, quarter-to-quarter variability in sales can lead to fluctuations in its performance. We will begin with gross margin performance, which continues to be strong, building off our solid recovery in fiscal year 2025. In the first quarter, our gross margin was 56.2%, up from 54.8% in the first quarter of last year, representing an improvement of 140 basis points and was most significantly impacted by the following favorable factors: a 110 basis points from lower specialty chemical costs and lower CAM costs, and 60 basis points from higher average selling prices, including the impact of premiumization. These positive impacts to gross margin were partially offset by higher filling fees, primarily in EMEA, which negatively impacted our gross margin by 50 basis points. Gross margin in The Americas rose to 90 basis points, from 50.4% to 53.3%, driven by higher average selling prices and by lower specialty chemical costs and lower can costs. Gross margin in EMEA increased 90 basis points from 57.8% to 58.7%, which was mostly driven by the favorable impact of foreign currency exchange rates partially offset by higher billing fees. While still well above our 55% target, gross margin in Asia Pacific decreased slightly by 70 basis points, from 59.6% to 58.9%, primarily due to decreases in average selling prices linked to changes in sales mix. We're very pleased with the trajectory of gross margin. But external risks like cost volatility, tariffs, and inflation remain part of the landscape. To mitigate these and strengthen margins over time, we're driving initiatives such as supply chain cost reduction, premiumization, new product introductions, geographic expansion, and asset divestitures. These levers reinforce our confidence in our gross margin's long-term potential. Now turning to our cost of doing business, which we define as total operating expenses plus adjustments for certain noncash expenses. Our cost of doing business is primarily driven by three areas: strategic investments in people, global brand-building efforts, and freight expenses associated with delivering products to our customers. Investing in our future remains a top priority. While our long-term goal is to keep the cost of doing business within a 30 to 35% range, we're making strategic investments to drive sales growth and enhance operational efficiencies. These investments strengthen our foundation and position us for sustained growth. We also need time to absorb the loss of revenue associated with the home care and cleaning divestitures. Revenue growth is a key driver of our cost of doing business ratio. With a slower start to the year and continued investments to fuel long-term growth, our cost of doing business temporarily moved above our target range. For the quarter, the cost of doing business was 40% of net sales, compared to 37% last year. Our first quarter typically carries higher expenses due to essential planning meetings and increased travel, which are critical for setting our strategic direction for the year. I view this quarter's cost of doing business as an anomaly. And as we execute our strategies to accelerate top-line performance, we expect this ratio to improve over the course of the year. In dollar terms, our cost of doing business increased $4.6 million or 8% compared to last year. Changes in foreign currency exchange rates had an unfavorable impact of $1.3 million this quarter. The majority of the remaining increase, $2.8 million, was driven by higher employee-related expenses, including additional headcount to advance initiatives in our strategic framework and strengthen our information system. In addition to higher travel and meeting expenses this quarter over the prior year. Advertising and promotional expenses decreased slightly year over year. As a percentage of net sales, A and P spend was 5.3% this quarter, compared to 5.5% last year. While we are currently tracking below our full-year guidance of around 6% of net sales, we have brand-building initiatives planned for the remainder of the fiscal year, which we expect will bring A and P investment in line with our fiscal year guidance. While we always seek cost efficiencies, scale, not cost-cutting, is what will move us toward our long-term cost of doing business target. As revenues grow, we expect the cost of doing business to trend toward 30% to 35%. With sales growth being the key driver of improvement. Turning now to adjusted EBITDA. Adjusted EBITDA as a percentage of sales is a key measure of profitability and operational efficiency. Our 20 to 25% target range for adjusted EBITDA margin is a long-term aspiration. However, we continue to believe we can move adjusted EBITDA margin back to our midterm target range of 20% to 22% once we have absorbed the loss of revenues associated with the home care and cleaning divestiture. Divestitures. In the first quarter, our adjusted EBITDA margin was 17% compared to 18% last year. Adjusted EBITDA is a critical component of our business model. With our low debt capital light structure, much of it converts to free cash flow, enabling consistent stockholder returns and long-term value. Now let's turn to other key measures of our financial performance. Operating income, net income, and earnings per share in the first quarter. Operating income declined 7% to $23.3 million in the first quarter. While net income fell 8% to $17.5 million. On a pro forma basis, which excludes the impact of the home care and cleaning products divested and those classified as held for sale, operating income and net income would have declined 45%, respectively. Declines in operating income and net income were primarily driven by softness in top-line sales, which we are expecting to bounce back over the course of the year. Decreases were also driven by higher SG and A expenses compared to the prior year. Diluted earnings per common share were $1.28 in the first quarter compared to $1.39 last year, reflecting a decrease of 8%. Our diluted EPS reflects 13.5 million weighted average shares as outstanding. On a pro forma basis, EPS would have decreased 5%. Now let's review our balance sheet and capital allocation strategy. We maintain a strong financial position and healthy liquidity, supporting a disciplined capital allocation strategy that drives long-term growth and delivers consistent cash flow and returns to our stockholders. Annual dividends will continue to be our priority and are targeted at greater than 50% of earnings. On December 10, our Board of Directors approved a quarterly cash dividend of $1.2 per share, an increase of more than 8% over the prior quarter. This reflects the board's confidence in future cash flows and underscores our commitment to returning capital to stockholders through consistent dividends. During the first quarter, we repurchased 39,500 shares of stock at a total cost of $7.8 million under our share repurchase plan. We have approximately $22 million remaining under our current repurchase plan, which expires at the end of this fiscal year. We have accelerated buybacks and plan to fully utilize the remaining authorization, reinforcing our strong conviction in the company's long-term fundamentals. Our focus remains on accretive capital returns that reflect confidence in the enduring value of our stock. Finally, before I move to guidance, I would like to provide a brief update on the household divestiture. We continue to make progress on the sale of our America's home care and cleaning product brands. Our investment bank continues active discussions with multiple potential buyers. Although there's no certainty of a deal, we remain optimistic, and I will provide further updates as appropriate. So let's turn to FY '26 guidance. As a reminder, we issued this year's guidance on a pro forma basis, excluding the financial impact of the Home Care and Cleaning brands. Currently classified as assets held for sale. While the exact timing of the transaction remains uncertain, we believe this approach will provide investors with clarity on the direction of the core business, and help minimize the noise surrounding the transaction. While first-quarter sales results were below our long-term growth targets, as we mentioned, we anticipated a slower start to fiscal 2026. The softness was driven by timing factors within our marketing distributor network, not by a decline in end-user demand. All indicators point to a strong rebound later in the fiscal year. Accordingly, we are reaffirming our guidance today. With the visibility we have into numerous activities already scheduled for the back half of fiscal year 2026, we are highly confident in delivering results at the mid to high end of our guidance ranges. For fiscal year 2026, we expect net sales to be between $630 million and $655 million after adjusting for foreign currency impacts. A growth of between 5-9% from the pro forma 2025 results. Gross margin is expected to be between 55.5-56.5%. Advertising and promotion investment is projected to be around 6% of net sales. Operating income is expected to be between $103 and $110 million, representing growth of between 5-12% from the pro forma 2025 results. The provision for income tax is expected to be between 22.5 and 23.5%. And diluted earnings per share is expected to be between $5.75 and $6.15, which is based on an estimated 13.4 million weighted average shares outstanding. This range represents growth of between 5-12% over the pro forma 2025 results. This guidance assumes no major changes to the current economic environment. Unanticipated inflationary headwinds and other unforeseen events may affect our view of fiscal year 2026. In the event we are unsuccessful in the divest of The Americas Home Care and Cleaning brands, our guidance would be positively impacted by approximately $12.5 million in net sales, $3.6 million in operating income, and 20¢ in diluted EPS on a full-year basis. That completes the financial overview. Now I would like to turn the call back to Steve. Steven A. Brass: Thank you, Sara. In summary, what did you hear from us today on this call? You heard that sales in our direct markets grew 8% in the first quarter in line with our long-term growth targets. You heard that this increase in sales was partially offset by softer sales in our marketing distributor network relating to timing-related factors, not a decline in end-user demand. You heard that sales of WD-40 Specialists were up 18% in the first quarter. You heard that sales in the e-commerce channel were up 22% in the first quarter. You heard that after seventy-two years, we've kept only about 25% of our global growth potential on our core multi-use product, leaving roughly $1.4 billion in opportunity to nearly quadruple current sales. You heard that in the first quarter, our gross margin was 56.2%, up 150 basis points from the fourth quarter and 140 basis points from the same period last year. You heard that we've been able to increase our employee engagement index score to 95%, a new record high for our organization. You heard that we've accelerated buybacks and plan to fully utilize our remaining authorization, reinforcing our strong conviction in the company's long-term fundamentals. You heard that our board approved a quarterly cash dividend of $1.02 per share, up more than 8% from last quarter, and this increase reflects strong confidence in our cash flow outlook and our ongoing commitment to stockholder returns. You heard that we are off to a strong start in the second quarter with solid growth across all three trade blocks. And you heard that reaffirmed our guidance ranges. With the visibility we have into numerous activities planned for 2026, we're highly confident in delivering results at the mid to high end of our guidance ranges. Thank you for joining our call today. We would now be pleased to answer your questions. Operator: Ladies and gentlemen, if you would like to register a question, your signal to reach our equipment. If your question has been answered and you would like to withdraw your registration, please press 1 again. One moment for please for the first question. Our first question comes from the line of Mike Baker with D. A. Davidson. Please proceed with your question. Michael Allen Baker: Okay. Thanks. I'll have a few. Let me start with Sara, you said you said let me get the exact quote. All indicators, point to strong, results. So what if you could give us more detail on what these indicators are. And then the guidance so mid to high end of the full year range, Is that more bullish than when you originally gave the guidance? I could be wrong, but I don't remember you. I remember you giving a range on the fourth quarter, but not necessarily planning to mid to high end. So can you help me on that? Thanks. Sara K. Hyzer: Yeah. Sure thing, Mike. Nice to hear from you. So yeah, as we sit here today and look forward into the back half of the year with the activities that we have locked in place, we do feel highly confident in being able to get to that mid to high end of the range. And that really is just coming from the, you know, promotional activities that we have scheduled, and that we've been able to lock in even since year-end. So we're feeling really good about where The Americas is going to be landing the year. And some of the very variability will also be driven by Asia Pac's recovery in the back half of the year. So while they had a slower start, particularly in the marketing distributor markets, you know, when we're starting to look at the recovery starting in Q2, but most mostly that recovery will come in the back half of the year. Michael Allen Baker: Okay. And to follow-up on that, the, are you sounds like second quarter is off to a good start. It it Can we say are we specifically seeing a recovery in those Asia distributor markets? Or, I guess you sort of just said it. It sounds like it's maybe starting a little bit, but it's more in the back half. But but can we are are we seeing a recovery yet? Those Asia distributor markets? Steven A. Brass: Hey, Mike. It's Steve. So, we are. We're already seeing that beginning of Q1, and that's our expectation. So, we had a relatively softish Q1 overall. Q2, you're going to see stronger results, but then the real power comes in the back half of the year. And so as Sara is alluding to, we're going to have a US year like we haven't had in quite a while, a really strong year in The US, and that's the foundation. Are you European direct markets performing very, very well and we expect that to continue. It's really about those Asia distributor markets and that kind of Q4, Q1 kind of impact with that beginning to recover beginning in Q2 and then into the back half. And also our European marketing distributor markets recovering also. Michael Allen Baker: Got it. Let me sneak in one more. The buybacks, I so last year, bought back $12 million. I think at one point, you had said you expect it to double. Be about $24 million. But now you're saying you you expect to go through the entire, 30 another another $22 million this year. That that's more than a double, I think, if if my math is correct. Yep. Yeah. So so that's a more confident moment. Is that fair to say? Sara K. Hyzer: Yes. It's fair to say, Mike. That is good math, and, yes, I think we as as as soon as the window opened up, we the buybacks and really just have it phased to utilize the entire I think, just under $30 million availability up through the end of the fiscal year. Michael Allen Baker: Got it. Awesome. Thank you. Appreciate the time. Thank you. Steven A. Brass: Thank you. Operator: Our next question comes from the line of Daniel Rizzo with Jefferies. Please proceed with your question. Daniel Rizzo: Hey, you guys mentioned taking reducing supply chain costs. I was just wondering if you can provide color on what specifically you guys are doing. I mean, are you I don't know, multi-sourcing more or or, yeah, just which is the steps you're taking? Sara K. Hyzer: Yeah. Sure. So we a couple years ago, we actually invested in not only a head of global supply chain, but also head of global sourcing. And so there's been some new thinking around how we source supply, and we started with cans. So some of the can reductions or the can reductions that you're starting to see impact the business in the back half of last year and into this year is really the result of a different way of thinking about sourcing more globally. And the next phase of that is going to be moving into to to the specialty chemicals area. So there are concrete actions that we are taking to look at how and where we are sourcing our raw materials from. In addition to that, there's a lot of activity happening on the supply chain side around how to take costs of the miles traveled for our costs out of or miles traveled for our product. Cost out of the system, along with a fresh look at the distribution network, particularly in The United States and making sure that we are the distribution center sorry. Making sure that we're taking a look at how we're where our distribution centers are situated. Again, with the idea of trying to reduce the mileage that our products are traveling. So there are structural changes that are in the works. Some of that won't impact the business until FY '27 and beyond, but we're really excited about the work that the supply chain team has really taken on in the last couple of years and starting to see that come to fruition. Daniel Rizzo: So with the increase in the distribution centers, would that suggest maybe that there's some come some CapEx spend or some sort of spend to kind of just include improve your footprint in different in various regions? That's my first question. And two, given these moves, is I I know your guidance is 55% gross margins, but it seems where we are now and maybe even a little above is is is annually achievable or sustainable for over the long term. Sara K. Hyzer: So I'll address the CapEx piece. Since it's a completely outsourced model, a lot of the investments, if we do have to make investments, are happening by our third-party providers. We may at times help supplement the cash investment that they have, but a lot of that doesn't qualify as CapEx from our perspective. So think our guidance of 1% to 2% from a maintenance CapEx standpoint is still going to be a very good target that we'll be landing within. And then secondarily, and of course, as I answer the CapEx question, I'm blanking on the second part of the question. I was just wondering given all the moves you're making with reducing costs fine. Operator: Yep. Okay. Sara K. Hyzer: Yeah. The 55%. So, I mean, we're sitting above 55% right now. I hate to commit to something over the long term as we are always subject to oil availability and just specialty chemical variability. But we are continuing to find opportunities for us to take costs out of the system. And so we believe you can see in the guidance this year, we believe that there's opportunities for us to get margin accretion even this fiscal year and some of those initiatives that we have in the pipeline. Are gonna benefit us in in in next fiscal year. So we'll we'll be able to obviously guide to next fiscal year as we get to the end of this year, but there is right now, we're fairly confident a strong gross margin. Daniel Rizzo: Alright. Thank you very much. Operator: Thank you. Ladies and gentlemen, that does conclude our allotted time for questions. We thank you for your participation on today's conference call and ask that you please disconnect your line.
Operator: Welcome to the AEO Inc. 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 Judy Meehan, Head of Investor Relations and Corporate Communications. Please go ahead. Judy Meehan: Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer; Jen Foyle, President, Executive Creative Director for American Eagle and Aerie; and Mike Mathias, Chief Financial Officer. Before we begin today's call, I need to remind you that we will make certain forward-looking statements. These statements are based upon information that represents the company's current expectations or beliefs. The results actually realized may differ materially based on risk factors included in our SEC filings. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Also, please note that during this call and in the accompanying press release, certain financial metrics are presented on both a GAAP and non-GAAP adjusted basis. Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website at www.aeo-inc.com in the Investor Relations section. Here, you can also find our third quarter investor presentation. And now I'll turn the call over to Jay. Jay Schottenstein: Thanks, Judy, and good afternoon. I hope everyone had an enjoyable Thanksgiving weekend. I'm extremely pleased with the trend change we've seen across brands, reflecting a number of decisive steps we've taken from merchandising to marketing to operations. These deliberate actions are having a positive impact on our near-term results and also serve us well for the long run. We delivered record revenue in the third quarter and very strong momentum has carried into the fourth quarter. We're seeing an encouraging response to the newness the teams are delivering with each new collection gaining steam, most notably, Aerie and Offline are generating exceptional growth across categories. As discussed last quarter, we have made incremental investments in advertising, which is contributing to stronger demand while better positioning our business for enhanced long-term brand awareness and overall customer engagement. At the same time, we are focused on operational improvements and cost efficiencies to drive higher profitability in what continues to be a dynamic macro environment. Turning to the quarter. Total revenue increased 6% to $1.4 billion, a third quarter record. Operating income of $113 million exceeded our guidance of $95 million to $100 million, fueled by higher-than-expected demand and well-controlled costs. As previously noted, our results also included about $20 million of net impact from tariffs. Diluted EPS for the quarter of $0.53 increased 10% compared to the adjusted EPS last year. The strong top line reflected a return to positive comps, which increased 4%. This was a meaningful acceleration from the 1% decrease last quarter. Improvement was made across both brands and channels, all posting positive comps. Aerie's 11% comp in the third quarter was a real standout where strong demand was broad-based across all categories. Growth accelerated throughout the period, which has continued into the fourth quarter, where we are seeing exceptional demand so far. As we look to the future, we continue to see untapped opportunities within Aerie and Offline, which are rapidly emerging as important customer destinations. At just under $2 billion in revenue and less than 5% market share, this indicates a significant runway for future expansion, underscoring our ability to capture a much larger piece of the market as we execute our strategic initiatives. American Eagle's comp growth of 1% marked a sequential improvement from last quarter. Strength in jeans, coupled with better results in men's were among the drivers. As Jen will review, AE's business strengthened with greater in-stocks in our strongest sellers and new product flows. Positive trends have continued so far in the fourth quarter, including a terrific Thanksgiving weekend. Beyond product, our results have benefited from the success of our recent marketing campaigns, which have driven engagement and attracted new customers. We are encouraged by the impact of the campaigns and collaborations with Sydney Sweeney and Travis Kelce and now holiday gifting with Martha Stewart. We see measurable benefits, especially across our digital channels. Looking forward, we will build on this momentum with more exciting campaigns ahead. All in all, I'm very pleased with the progress and meaningful turnaround from the first half of this year. Now the holiday season is upon us, and the fourth quarter is off to an excellent start. We are seeing a clear acceleration from the third quarter, including a record Thanksgiving weekend with strong performance across brands and channels. As a result, we are raising our fourth quarter outlook. We remain well positioned with exciting new collections centered on gift-giving and events planned throughout the season to continue to delight our customers. Before I turn it over to Jen, I want to take a moment to acknowledge our incredible team for all their hard work and tremendous dedication. Their efforts have fueled a meaningful trend change across our leading brands. Great work continues, and I couldn't be more optimistic about the long-term outlook for our business. We look forward to driving more success as we head into 2026 and beyond, driving profitable growth and enhanced value for AEO. Let me turn it over to Jen. Jennifer Foyle: Thank you, Jay, and good afternoon, everyone. I am very encouraged by the stronger performance across our brands, marking a significant turnaround from the first half of the year. This demonstrates the resilience and product leadership of our portfolio of iconic brands. The increasing customer demand, which has accelerated in the fourth quarter, is spanning new and existing customers, fueled by a well-coordinated effort across both merchandising and marketing. Compelling product collections, combined with higher engagement and expanding brand awareness are driving our performance. And the teams are executing very well, leveraging our expertise in key categories and most importantly, by listening to our customers. Let me walk you through a few highlights in the third quarter, beginning with Aerie. The Aerie brand continues to exceed expectations. We achieved record revenue with the third quarter comps up 11%, fueled by strength across all categories, including intimates, apparel, sleep and Offline. Aerie and Offline's performance has been especially impressive with a meaningful acceleration in demand since the spring season. In fact, comps have strengthened with each new delivery. The resurgence in intimates has been very encouraging with solid growth in both bras and undies. Greater depth and breadth of our signature fabrications, strength in new fashion across bralettes and bra tops and fun prints with matchbacks to apparel are just a few highlights fueling the brand's double-digit growth. Aerie apparel remained consistently strong, driven by bottoms, fleece, tees and sleep, which has emerged as a powerful growth category. Offline by Aerie also continues to gain meaningful mind share as we expand awareness and move into newer markets. We remain highly focused on growing the Activewear segment. We are building on our signature fabrics and franchises such as our core leggings while also launching newness with updated fashion silhouettes. Needless to say, we are very excited about our future for both Aerie and Offline. We are well positioned for the remainder of the holiday season and continue to believe in the substantial long-term opportunities ahead. Now moving to American Eagle, which posted a positive 1% third quarter comp, demonstrating a meaningful improvement from the spring season. Positive demand was fueled by trend right new fall collection combined with bold marketing and exciting product collaborations. Underpinned by our dominance in denim, our strategies to reset the brand and firmly position American Eagle at the center of culture are beginning to yield results. The quarter marked an improvement in our men's business, where we saw nice wins across tops, sweaters, fleece, graphics and knits, all areas we have been working to recapture. Bottoms provided a stable foundation with jeans and non-denim pants trending positive. And favorable trends have continued into the fourth quarter, reflecting the positive reception of our new product. In women's, although we had a very good back-to-school season, the quarter in total was not as strong. Robust demand early in the period led to a number of out of stocks in some of our best-selling items. Non-denim bottoms, shirts and dresses proved more challenging, while knit and fleece tops as well as jeans were positive highlights where we continue to see strong demand. And importantly, better in-stocks late in the quarter drove positive results, which have continued into the fourth quarter. AE is a true holiday destination with amazing gift-giving focus combined with fun fashion and party dressing. The response to date has been highly encouraging. Now shifting gears to marketing. This fall season, American Eagle launched its largest, most impactful advertising campaigns ever, which are delivering results. By collaborating with high-profile partners who are defining culture, we are attracting more customers and have more eyes on the brand than ever before. Combined, the Sydney Sweeney and Travis Kelce partnerships have garnered more than 44 billion impressions. Total customer counts are up across brands and customer loyalty grew 4% in the quarter. AE is clearly building long-term awareness and desirability and has captured the attention of both new and existing customers. Traffic has also increased consistently throughout the quarter, which is most evident within our digital selling channels that include both AE and Aerie. Although it's still early days of our renewed marketing strategy, we know that having the right talent amplifies our brand and product at key moments. We are very encouraged by our progress and expect to continue fueling brand excitement into 2026 and beyond. Our recent holiday campaign with Martha Stewart is yet another example of how we are creating fun moments to delight our customers while reinforcing our position as the go-to gifting destination. The holiday season is in full swing. And as Jay mentioned, we are encouraged with the results so far. We are heads down and focused on the rest of the year to deliver long-term sales and bottom line growth. Thanks to our amazing teams, and thanks to all of you for your ongoing support. I wish everyone a happy and healthy holiday season. And with that, I'll turn the call over to Mike. Mike Mathias: Thanks, and good afternoon, everyone. I'm pleased to see the steady progress throughout our business, which led to strong revenue and profit above our expectations in the third quarter. In addition to generating a meaningful top line improvement, we successfully controlled costs, created efficiencies, managed promotions and navigated through a highly dynamic sourcing environment, minimizing the impact of tariffs. Consolidated revenue of $1.36 billion increased 6% to last year, fueled by comparable sales growth of 4%, with Aerie up 11% and AE up 1%. We saw growth in transactions across brands driven by higher traffic. The average unit retail price was flat to last year. Gross profit dollars of $552 million increased 5%, reflecting higher demand. The gross margin declined 40 basis points to 40.5% compared to 40.9% last year. Net tariff pressure was as expected at $20 million or 150 basis points. Higher markdowns were largely offset by positive sales growth and lower non-tariff costs, including favorability in freight. Buying, occupancy and warehousing leveraged 20 basis points due to higher sales and a continued focus on operational improvements. For example, we drove lower cost per shipment within our direct business, which has been an area of ongoing focus. SG&A increased 10% due to investment in advertising as previously discussed. With our focus on long-term brand benefits, the campaigns are already delivering results and helping to advance our goal of expanding our reach and generating growth across brands. The balance of expense is leveraged, reflecting our ongoing cost management program. Operating income of $113 million was above our guidance of $95 million to $100 million, driven by stronger-than-expected demand. The operating margin of 8.3% declined from an adjusted margin of 9.6% last year. Consolidated ending inventory cost was up 11% with units up 8%. Inventory is balanced across brands, reflecting better in-stocks for American Eagle jeans, new store openings and the demand acceleration at Aerie and Offline. The increase in cost includes the impact of tariffs. Third quarter CapEx totaled $70 million, bringing year-to-date spend to $202 million. We continue to expect CapEx of approximately $275 million for the year. As a reminder, this includes a onetime spend of about $40 million to relocate our New York design center as we previously disclosed. We're on track to open 22 Aerie and 26 Offline stores, which are coming out of the gate quite strong. We'll complete about 50 AE store remodels with full upgrades to our modern design. A few great examples of recent store upgrades are the Aventura Mall and Sawgrass Mills in Miami and our new SoHo location in New York City. All of these A+ stores are among our best, and we want to ensure the customer experience is unmatched. The upgraded footprints have allowed us to showcase our signature brands, AE Aerie and Offline. We're utilizing new technologies to elevate the shopping journey and create a cohesive and modern retail experience. Overall, our remodeling program is generating comps nicely above the average. As we continue to position our fleet for profitable growth, we're also on track to close about 35 lower productivity AE stores. Our capital allocation priorities remain unchanged, and we're focused on prudently investing in growth to continue to build our brands while returning excess cash to shareholders through dividends and share repurchases. As a reminder, during the first half of this year, share repurchases totaled $231 million and year-to-date dividend payments have totaled $64 million. We have a strong balance sheet and ended the period with cash of $113 million and total liquidity of approximately $560 million. Now turning to our outlook. The fourth quarter is off to an excellent start. As the team noted, we're encouraged by the broad-based strength across brands and channels with particular strength in Aerie and Offline. Our inventory and product offerings are well positioned to deliver a successful holiday season, and we're all focused on achieving a strong fourth quarter result. Based on quarter-to-date sales trends and the recognition that we have important selling weeks still ahead, we are raising our fourth quarter operating income guidance to a range of $155 million to $160 million based on comp sales growth of 8% to 9% with similar growth in total revenue. Guidance includes approximately $50 million of incremental tariff costs. Buying, occupancy and warehousing costs are expected to increase due to new store growth for Aerie and Offline and increased digital penetration. SG&A is expected to increase in the low to mid-single digits, driven by investments in advertising. Given the top line strength, we expect both BOW and SG&A to leverage in the fourth quarter. The tax rate is estimated to be approximately 28% and the weighted average share count will be roughly 173 million. To wrap up our prepared remarks, clearly, we're very encouraged by the progress made across our brands. We're highly focused on delivering the remainder of the year, driving strong profit flow-through and sustaining this momentum into 2026. Now we'll open up the call for questions. Operator: [Operator Instructions] The first question comes from Jay Sole with UBS. Jay Sole: My first question, I think, it's for Mike. You talked about the acceleration of fourth quarter to date, and you raised the guidance, the comp guidance, I think you said 8% to 9%. That's pretty significant from where you ended Q3. Can you just talk about where you're trending quarter-to-date to be able to guide to that level? And what's driving the acceleration. And then maybe for Jen, you mentioned strength in denim. If you could elaborate a little bit if people aren't wearing skinny denim like they were, like what are the new silhouettes that are working? And how durable are those trends? Do you think the trends that you're seeing can last well into 2026 or beyond? And if you can help us on that, that would be great. Mike Mathias: Yes. Thanks, Jay. I can talk you through the guidance. So the 8% to 9% comp increase includes a nice improvement or acceleration for both brands quarter-to-date from what we just reported in Q3. I would say if you want to break it down by brand, we'd be looking for the AE brand to be in the low to mid-single digits and Aerie in the high teens, mixing to that 8% to 9% comp. And both brands are ahead of that quarter-to-date, but we know we've got some big weeks ahead of us, only about half the quarter in, but definitely pleased with how November turned out and where we are quarter-to-date through the Thanksgiving weekend. Jennifer Foyle: Yes. And Denim has been very strong. In fact, particularly in women's, we saw acceleration throughout the quarter, getting into the back half of Q3 and into black. It's been our #1 Black Friday as far as denim is concerned. The jeans are certainly winning for us. And as you know, that's our key competency business. Look, silhouettes are changing faster than ever. And I always reemphasize that our teams strategically do just extensive testing and scaling. And we did have some out of stocks, particularly in women's in Q3. Sydney Sweeney certainly accelerated some of that, and we needed to move swiftly to get back into business. And I like what we're seeing at the end of Q3 and headed into Q4 with the denim business. So we're excited. Operator: And the next question comes from Matthew Boss with JPMorgan. Matthew Boss: Congrats on the improvement. So Jen, at Aerie, maybe if we could dig a little deeper. Could you speak to the drivers of the same-store sales improvement over the past two straight quarters? And with that, I guess maybe could you break into customer acquisition trends that you're seeing and initiatives in place to sustain double-digit comp growth in your view? Jennifer Foyle: Yes. It's certainly exciting to see Aerie back on track. Coming off of Q1, we definitely needed to pivot as a team, and we really hunkered down and really thought about our strategy and what we needed to get back to win, not only coming from our core competency businesses, which all accelerated and have been accelerating starting in Q3 into Q4, but also there's new businesses in town. Sleep is doing quite well for us, and it's proving to be a year-round business for us. So a new category there. So obviously, we have Offline too, which is our secondary business coming off of Aerie and that business has proven where you're hearing some decel in the athletic apparel areas. We're holding our own and our leggings are still tried and true and winning for us. The customer acquisition has been strong. Our customers are spending more. We're seeing even so. So coming off of Q3, as we head into Q4, they're actually -- our acquisition has been accelerating. Last week was an incredible week for Aerie, where we saw a huge amount of customer acquisition. So we are taking advantage of our traffic. We're winning our customers. I think we're showing up really proudly. We launched our new 100% real campaign, which is tied to our core competency of how we launch this business, what our platform is. And it's talking to our community, it's speaking towards-- it's playing off of no air brushing our models. And now we've leveraged some of that into the AI world and thinking about how we approach that differently. So Aerie does things differently. We always think into the white space that sometimes can be scary, but we're so proud of what we do in this brand. And I think the team is doing an incredible job leveraging our community, amplifying marketing, but also it's 100% about our product. What we do every day is about our product and winning our customer. Matthew Boss: That's great. And then Mike, could you speak to expectations for markdown in the fourth quarter relative to the third quarter just overall health of your inventory? And how best to think about gross margin levers remaining into next year? Mike Mathias: I can start with inventory, Matt. I mean we're very pleased and comfortable with the plus 11 in total dollars, plus 8 in units, is positioned well to continue to fuel this Aerie and Offline trend. We definitely, as Jen talked about in her remarks, kind of resetting some denim inventory to make sure we're continuing to be in stock and don't miss a sale within the AE jeans category. And again, that plus 11% cost includes the impact of tariffs along with just supporting those businesses. On the markdown front, look, we competed in the third quarter. Markdowns are up a little bit in terms of the total impact to the quarter. We expect Q4 to be similar. We're just be ready to compete in these big days. We competed over the weekend. This November trend that we've seen or the quarter-to-date trend includes a little uptick in markdowns to compete. But definitely winning in terms of the top line growth and the overall margin dollar growth attached to that. And it is in a couple of places. I mean, Aerie is similar markdown rate to last year. So we're driving this trend on markdown rates similar to history. We're not driving it through promotion. And then it really is competing in jeans more than anything from a category perspective that's adding to the markdowns a bit. But we're -- we think that's the right strategy from here. Gross margin then in total, really pleased with the third quarter results. We talked -- we disclosed or we hit the $20 million guidance roughly on the tariff impact. That's about 150 basis points. But as you can see, gross margin only deleveraged by 40 baiss points on four comp. So the team is doing a great job, not only just mitigating tariffs on the front end, but then finding kind of opportunities and efficiencies on other non-tariff impacted line items within our costs. We highlighted freight but there's more work than just on the freight line. So Q4 is similar. I mean, we're guiding to a $50 million impact and kind of the net absolute value or the net impact of that -- absolute impact of that would be about 300 basis points. But we're obviously not guiding gross margin down that much. So we expect to see the same opportunities in terms of offsets and other line items. And then just on an 8% to 9% comp, obviously, we're leveraging a lot of expense lines that are up in gross margin, including and BOW, so including rent, digital delivery, distribution costs, compensation up there as well. But other cost line items within our product costs are being leveraged, too. So we continue to expect to do that going forward. Operator: And the next question comes from Paul Lejuez with Citi. Kelly Crago: This is Kelly on for Paul. I guess first question for you guys. Just could you talk about why -- given you've had these very splashy and high-profile marketing campaigns that were more kind of -- more based on American Eagle marketing campaigns, like why you didn't see that accrue more to AE versus what you're seeing in Aerie, where it seems like you're benefiting a lot from whether that's the product assortment or maybe some of the marketing campaigns. Just help us kind of understand what's happening there. And then just secondly, on the tariff impact, I think you said $50 million impact in the fourth quarter. Is that the right net tariff impact that we should be thinking about for the first half of '26? Jennifer Foyle: Sure. As a company, we're leaning into advertising, we need to compete. When we see what our competition is doing, there was definitely opportunity for us to lean in. And certainly, Sydney Sweeney and Travis, I mean, with the 44 billion impressions, really it was something that we did not expect. And certainly, I mentioned some of the out-of-stocks in women's particularly, but men's certainly turned around in the mid-single-digit comp zone. And that was really -- we are so pleased to see that. And I just wanted to say sometimes there's a halo effect in marketing, right? So as we saw -- as we got into -- as denim, we got our stock in stocks back to more normalized levels towards the end of the quarter. We saw acceleration, particularly in women's and into black. As I mentioned, it was an incredible week for us, Thanksgiving week and Friday was amazing. So we're seeing the results now. And look, this is important for our future. We need to remain strong and competitive, and we need to amplify our product. The teams have been working tirelessly on this price value equation that I think American Eagle does better than anyone, and we're leaning in, and this marketing will certainly amplify. Jay Schottenstein: Jen, I'd like to also add -- we've also seen a significant increase in our loyalty members, too. We saw over 1 million more loyalty members join us in these past few months. And as Jen said, you don't see it right away. As you also pointed out that it's interesting with Sydney Sweeney, the jeans that we have made specifically for Sydney Sweeney, they sold out like within 2 days. They boomed right out right away. Mike Mathias: Then I can take the tariff question. I think maybe the best way to provide some color is just to give the quarterly impact. So we'd expect to go forward, if tariffs hold as is in terms of the impact, we'll see how that continues to progress, about a $25 million to $30 million impact in each of the first and second quarter. So call it, somewhere between 200, maybe 200 to 225 basis points of impact in Q1, same impact in Q2, $40 million to $60 million, call it, in the first half. Next Q3 on the $20 million we just incurred in Q3, we expect Q3 on a full basis to be about a $35 million to $40 million, so call it, $15 million to $20 million impact incrementally next year. And then with the anniversary roughly the $50 million that we're guiding to this fourth quarter. So it's about a 200 to 225 basis point impact on a full year basis. And -- but again, with continued offsets in work, we'd expect the gross margin to not be impacted to that level just like we've seen here in Q3 and Q4. Jay Schottenstein: And Mike, there may be like as Supreme Court ruling coming on shortly, too. It may have changed everything right away. Kelly Crago: So the assumption then would be that you would be taking some like-for-like pricing into next year? Mike Mathias: Yes. I think, I mean, on the pricing front, we definitely do not have a specific strategy to pass through the impact of tariffs to our customers. We continue to take shots where we know we can, where we're making price moves that we still fit within our price value equation that the customer expects, and we don't see any resistance to those price changes from the customer. And just ticket changes that allow us to create a little more room on the promotional front, too, to make some decisions within our lease lines. So we'll continue to do that. I think we're seeing success doing or approaching it that way in the back half right now. We'll continue to do that in next year. Operator: And the next question comes from Jungwon Kim with TD Cowen. Jungwon Kim: You mentioned strong customer acquisition across both brands. Maybe you can give us a little bit more detail around who those customers are and if you're gaining more higher income cohorts. Just curious on who you are gaining share from as you acquire new customers? And then another question, just a follow-up to that is, what are your strategies around retaining those customers you gained in the last 2 quarters? Jennifer Foyle: Look, both brands have -- our customer file is stronger than ever. And -- we certainly have seen acceleration, as I mentioned, going into even leaving Q3 -- exiting Q3 and going into Q4 with some really high -- it's really high-end problems here that we're seeing. Look, it's what we do every day. Our teams need to certainly focus on the retention. And we've been all year long, that's what we've been up to. Our retention is not even -- we're winning on retention. We are winning on customer acquisition. The teams have strategies. Those I tend to not share publicly, but the strategies are already paying off. You can see it in the news that we're just reporting today. We're getting talent. We're working on our influencer programs, but we're also working on our communities. And that is the most important thing. We have powerful brand platforms that we stand for something, and it wears the test of time. And when that works and we have the great product attached to it, we can win and show up in a new way. And the teams have very many strategies, whether it's upper funnel, getting out there and bringing in new customers or working on our performance marketing spend and our influencer strategies. So it's not only -- it's never about one part of the strategy. It's about getting the product right first and making sure that our tactics will amplify that strategy. Certainly, Sydney -- an example, Sydney and Travis, but even the more recent Martha, I mean, that is talent, that's upper funnel. That is us getting our brands out there in new ways. But if you lean into Aerie and how they're working, their marketing strategy, they're leveraging our community in a new way and showing up with how do we go from not air brushing our models I just mentioned into what does AI mean to such a pure brand as Aerie with such an amazing platform. So it is about -- we have two different brands. We have a portfolio of brands in the same token that we leverage our brands. Certainly, we share a platform, but it is about making sure that we play up each brand DNA in the right way, and it's working. That strategy is working. I can just -- I can say that now, and there's work to do always. As we look ahead, we have exciting collaborations, new talent and just new ideas. We're constantly thinking of new ideas. Operator: The next question comes from Rick Patel with Raymond James. Rakesh Patel: I wanted to double-click on your expectations for AUR in Q4. As we think about the company remaining competitive with promotions, but also factoring in some product and perhaps some pricing wins, where do you see AUR landing in the fourth quarter? And then second, what are your expectations for where inventory will end the year, both in terms of dollars and units? Mike Mathias: Hey, Rick, yes, the AUR for the third quarter was relatively flat even with a bit of a markdown increase, just the mix of the businesses between the brands, category mix, our AUR was relatively flat at the company level. We're expecting a similar thing in Q4. November to date here, we saw it play out that way. Aerie is actually driving these comps on some uptick in AUR. We know we're spending a little more markdowns in the jeans category in AEs to drive the business. So the mix for the quarter, we'd expect right now to be similar around a relatively flat AUR for the fourth quarter. And I think it's the way we really expect to plan the business go forward. Rakesh Patel: Great. Any thoughts on inventory? Mike Mathias: Q4, we're not providing specific guidance, but at the end of the day here with the uptick in the trend exceeding plans, we're definitely in chase mode here, which is a good thing when we make -- we have -- we see a lot of profit flow-through when we're doing that, especially on the Aerie side of the house. So we expect inventory in line with sales. We're guiding to the plus 8% to 9% comp. And as of now, I'd expect similar kind of inventory in line with sales or at least units in line with the sales growth, knowing there will be a tariff impact ongoing. But we're not providing specific guidance at this point, but that's what we'd expect to see. Operator: And the next question comes from Chris Nardone with Bank of America. Christopher Nardone: So first, can you just refresh us on how we should think about plans for both the Eagle and Aerie store fleets heading into next year? And if the recent results of both businesses has changed how you're thinking about that versus maybe 90 days ago? Mike Mathias: Yes, Chris, I think for the AE brand, we talked about closing roughly 35 stores at the end of this year. We're looking forward into plans next year, and I expect that to slow down as we've largely closed, I think, over the last 3, 4 years, kind of the lower productivity stores in the fleet in the mainline AE fleet. So 35 at the end of this year here in January, maybe something lower than that, I would expect next year. On the Aerie and OFFLINE growth front, we talked about 22 Aerie, 26 OFFLINE openings this year in 2025. We're looking at a similar 40 to 50 store count at the moment, probably similar weighting offline, a little more -- a little higher count in OFFLINE than in Aerie. But we are looking at this tremendous growth, and we'll -- if we did anything, we'd maybe accelerate some openings on the Aerie and OFFLINE side, but those plans are still in work. Right now, a similar 40 to 50 count is what's in the plan. Christopher Nardone: Okay. Got it. And then just a quick follow-up. I think you alluded Aerie comps are running above the high teens for the quarter, quarter-to-date. And if AUR is roughly flattish, can you just unpack a little bit further? It sounds like you're seeing inflections across the product suite, but are there particular channels, whether that's digital versus retail or certain categories where you're seeing the biggest inflection? We're just trying to understand a little bit better what has changed so drastically over the last 6 months. Mike Mathias: Yes. Look, correct. The guidance we're giving at the 8% to 9% comp, I'll just reiterate, American Eagle low to mid-single expectations, Aerie high teens. Both brands are running ahead of that trend November to date or through the Thanksgiving weekend. Digital ahead of stores. And I think the marketing campaigns that Jen and Jay are talking about, the traffic we're seeing digitally off of those campaigns is significant, and that's where we're seeing a lot of the gains from those efforts and from the effectiveness of those campaigns. So digital was -- both channels were positive in Q3, but digital was on the high end or the high single-digit level for Q3. And we'd expect for Q4 at a plus 8% to 9%, same kind of outcome that digital would really outpace stores, and we've seen that through November and especially over the holiday weekend here where both channels were positive, and we're happy with the success in both channels, but digital is where we're seeing the outpaced growth at the moment. Jennifer Foyle: And in Aerie specifically, I mean, as I mentioned before, men's, we saw an incredible turnaround. And Aerie specifically, all categories are working. Look, the team -- when you have to pivot coming off of Q1, we focused on our product and winning that customer back and ensuring that we could get that momentum that we deserve again. This brand is incredible. And I did want to say, I need to remind everyone on this call that Aerie's brand awareness is only at 55% to 60%. So when I think about our opportunity as we build into 2026, we have an incredible runway in front of us. So we're pulling in product as we speak. We're chasing and the team is working fast and furiously so that we can continue this momentum into next year. Jay Schottenstein: And also, Jen, I think our merchandise is better, too, which help. Jennifer Foyle: I'd like to say that, yes. Operator: And the next question comes from Alex Straton with Morgan Stanley. Alexandra Straton: Congrats on a nice quarter. On these big campaigns that you guys have pursued, can you just give us some context on where you think you'll end the year on marketing expense as a percentage of sales versus typical? Like are you investing more than history? And then as we think about next year, should that line item continue to move higher? Or how do you think about kind of that flywheel between the marketing investment and growth? Mike Mathias: For this year, yes, we're -- I mean, obviously, we made a significant investment in Q3. Q4 is up as well within our guidance, not anywhere near the increase on a percentage basis that Q3 was. Really pleased with the SG&A leverage we'll see in Q4 off of this comp guide. Advertising is still deleveraging a bit, but we're leveraging all other expense categories as intended pretty significantly in the fourth quarter. For the year, we're going to wind up somewhere in the mid-4s as a percentage. And historically, we've been more in the -- I think last year, for example, around 4%. So we're definitely resetting a baseline for advertising spend at the moment. It's working. We're continuing to monitor it. Jen and I and our teams are working very closely and cross-functionally on really on a week-to-week basis, how we're pulsing the spend in advertising on top of the campaigns that are obviously planned well ahead of time. I'd expect -- we expect in our initial plans here for next year is to continue this in the first half, possibly passing more toward a 5% type of rate to reset ourselves and then leverage all our expense lines, funnel some expense or some investment toward advertising and anniversary this come next year around this time in the third quarter. I think that 5% is a good sweet spot that we'd like to maintain over time. So as we're kind of resetting the baseline, we're pathing towards 5%, like the top line growth we're seeing from it. Again, just to reiterate, anniversary it come next year and start to just maintain that type of rate, and we'll evaluate things from there. Jay Schottenstein: And Mike, and trips in the bank, too. We're not saying we have more trips in the bank. Mike Mathias: Yes. More to come. We'll talk -- we have some things on our fourth quarter call in March probably to talk about more exciting things to come. Alexandra Straton: That's great. Maybe one follow-up for you, Mike. Just kind of zooming out here. I know there's been some wrenches in your medium-term outlook since you provided it a couple of years ago. But maybe as we move into the final year of that plan and excluding some of the noncontrollable headwinds like tariffs, can you just like, big picture, talk about where you've made the most progress versus that plan and where there's still more work to be done in this final year here? Mike Mathias: Yes. I'll start on the top line. I know we obviously had a few missteps here in the first half of the year in the first quarter, but the net result of this year with this guide is actually going to wind up kind of in that low to mid-single or within the algorithm we've talked about wanting to achieve every year. So we'll be at a kind of low single-digit trajectory on the full year with this back half being kind of the mid- to high single-digit range. So I think that's the continued focus. I'd also say we made a lot of headway in just the culture change around expenses in total. So we continue to control costs across the P&L. I think the leverage that we're seeing here in BOW, this back half of the year and then SG&A in this fourth quarter is a testament to that. Even with the significant increase in advertising this year that you just asked about and I just provided the calendar on all the other SG&A line items are leveraging in this year. And SG&A in total will be relatively flat on the year at the kind of the low single-digit total year outcome. So I think that's a big change for us over the last several years. It's been a massive focus to have a different mentality around controlling expense. It's allowing us to funnel some of these dollars toward advertising. And so we'll continue to do that. And yes, to your point, the tariff headwind is something we can't control. But I mean, our goal is still this 10% aspiration. Tariffs are going to set that back a little bit. But we're going to continue down the path that we're on, on controlling all other costs, investing some dollars in advertising, fueling Aerie and OFFLINE, hitting that kind of low single plus trajectory in AE and passing back toward that 10% that is still our ultimate goal. Jay Schottenstein: Yes. And Mike, as a general thing, this team after the first quarter, and Jen couldn't emphasize it enough, really took a hard look at everything. We went through all the different areas of the business, every single area, every opportunity the merchandise to the operations, looking where -- what's important, what's not important to the company. The dedication of the associates have been amazing in the last few months, and I'm so proud of this team because that first quarter, we got kicked very hard and nobody quit. Nobody cried about it. Nobody quit. Everybody went to figure out how can we do things better, transformational, looking for where the real opportunities are, looking for where we should go in the future, where the opportunities are and what's it going to take to be the best. And one thing I'm very proud of, if you go into our stores, we have the best-looking stores, the best maintained stores in the mall. If you walk in the mall, our stores look the best. If you go look at our new stores, you go to down to SoHo and you look at our new store we just opened in SoHo, you go to Aventura down in Miami, you'll be very impressed by the stores. They're very, very impressive stores. They're very functional stores. And so I think that we're very excited. I know what we have planned for marketing next year. I know where the merchants are focused. I know the excitement that everybody has in this company, and it's going to be great. Operator: And the next question comes from Janet Kloppenburg with JJK Research Associates. Janet Kloppenburg: Congratulations. And I agree the stores look terrific. Aerie in particular, but American Eagle as well. I just wanted to ask about -- I think you had to chase product earlier in the year as well, Jen. And I'm wondering what's going on there and if that situation is resolved now with the comps being as healthy as they are. And then for Mike, on a 4% comp, you weren't able -- did you leverage buying an occupancy? I think you may have. And what is the target point on that? And in terms of price increases, are they all behind you now? Have you taken them all? Or are there more to come? Jennifer Foyle: Yes, for sure. Thanks, by the way, Janet. We -- it's -- primarily, it's been in women's denim, to be frank. We've been sort of in chase mode since Q1. And quite frankly, we haven't been able to keep up with the demands. And as you know, we have a huge short business, and that business never really turned on. We expect shorts to turn on as we enter Q2, back half of Q1 into Q2, and that never happened. So then we continue to see this demand in long legs, and we really couldn't keep up with that demand. So moving into Q3, we felt like we were in a better position, but we wanted to be prudent as well with our inventories. As you know, denim is probably our higher cost of goods as well, but it's our biggest business. So it's always an art, managing that business. And with the launch of the Sydney Sweeney and actually Travis, we couldn't really keep up with that demand. The teams worked swiftly. We were definitely in the right businesses. We definitely had the right silhouette and the right investment in silhouettes, which led to some of that out of stock, good news there. Bad news, we needed a little bit more inventory to carry and to get that business -- to get women's in total because of the penetration of denim. So good news is certainly in the back half of Q3, we saw nice levels of inventory getting back into our key silhouettes. The top 5 jeans, just to give you some perspective, we planned at -- this is just top 5 jeans styles in women's. We planned up 25% they were up 50% on demand. So we had a lot of work to do. We feel better as we head into Q4. And nodding to what Mike mentioned, we're going to look at denim a little bit differently so that we're maintaining that business while we grow new categories. Mike Mathias: And Janet, on BOW, yes, we did leverage BOW by 20 basis points in the third quarter on the 4 comp. And then that's a good target for us that low to mid-single-digit result to leverage expense really across the board other than this advertising reset we're talking about. And then the fourth quarter on the 8% to 9% comp, we obviously definitely expect to leverage BOW at that kind of result as well. And SG&A will leverage significantly on that kind of result for the fourth quarter. Janet Kloppenburg: Okay. And then just on pricing? Mike Mathias: Yes. We talked about a little earlier. We're not -- I mean the AUR is flat for Q3. We're expecting similar AUR in Q4. We're not pathing through the impact of tariffs to the consumer purposely. We are taking our shots on price moves where, as Jen has said, keeping -- maintaining that price value equation that our customer expects and making sure we're not impacting conversion and give ourselves a little room on the promotional side when we do that as well. So we'll continue to kind of optimize that, take our shots, but net AUR similar to last year is the intent. Operator: And the next question comes from Janine Stichter with BTIG. Janine Hoffman Stichter: Congrats on the great quarter. With this quarter-to-date acceleration, it sounds like a lot of it's been driven by traffic and new customer acquisition. Just wondering what you're seeing on conversion, particularly with some of the product improvements you've made. And then maybe if you can just share your thoughts on the Gen Z consumer. We've certainly heard a lot about that consumer potentially being pressured and pulling back, but it doesn't seem like you're seeing that at all in your business. So I would just love to hear your thoughts on kind of where the consumer is and how they're spending? Mike Mathias: Yes. I think on the metric side of things, traffic was definitely a driver in Q3. We continue to see that here in the fourth quarter through November. With AUR flat, it's been a mix of sort of traffic and then ADS or the UPT, part of the ADS equation, AUR flat, some uptick in UPTs and then traffic with conversion being relatively flat with AUR being relatively flat. That's sort of your mix of metrics that we saw in the third quarter and early days here in Q4, obviously, a big traffic uptick that we've capitalized on through November and through Thanksgiving, and we'll see how that continues to play out. But with AUR relatively flat, we would assume a similar kind of mix of metrics, traffic being a driver, ADS being a driver with AUR flat, conversion relatively flat, and we'll see how it pans out through December. Jennifer Foyle: Yes, we're not feeling that -- we're entertaining Gen Z in all of our brands. So even when you look at Martha Stewart, that might be a question mark, right, why Martha Stewart, but Martha Stewart resonates with Gen Z. That's a perfect example of what we're up to. We're seeing momentum in all age groups. We do have still some opportunity on the lower age scale in AE women's in particular, and we're up to invigorating some product to entertain that age bracket. But honestly, we're not seeing it. And also, this is a critical time to for gift giving, too. So we see mom and dad out there purchasing as well. Judy Meehan: Okay. We have time for one more question. Operator: And the last question comes from Corey Tarlowe with Jefferies. Corey Tarlowe: Mike, I just wanted to ask on SG&A for Q3 and Q4 and just kind of how to think about it next year from a dollar perspective. Is there anything that either comes in or goes out, whether it's marketing? I think you talked -- maybe you talked about incentive comp in prior years, how to think about that just structurally, understanding on a rate basis, obviously, with Q4 sales being so strong, there's going to be a bit of a delta there, but curious what you could unpack for us. Mike Mathias: Sure. Yes. I think, as I said, we'd expect to see some continued investment in advertising through the first half of next year, incremental to where we've been intention to pass toward, call it, that 5% rate annually. So we'll anniversary things in the back half that we're doing currently. Incentive comp is a bit of a TBD. We're still setting plans for 2026. Those annual plans are based on our EBIT target is the success metric. So we'll probably -- we'll give more color in March around 2026 SG&A and how we think that will pan out by quarter with advertising and possibly a bit of more incentive comp in the mix, but more to come in March. Corey Tarlowe: Great. And then just a quick follow-up on Aerie. The momentum has been very, very strong. Curious what you think is specifically working there versus the competition when you either walk the mall or view kind of the competitive set, how you think about your market share gains and the opportunity there? Jennifer Foyle: Yes. I did mention the brand awareness still is -- we have opportunity there. We're still only at 55% to 60%. So as we gain and look towards the future, we have a lot of opportunity there. It's never about one thing. Certainly, we doubled down on the product, the design team and merchant teams really came together and thought about our future strategies and where we were seeing some losses and how we recalibrated all of our categories. And the team did an excellent job from launching new ideas to rebuilding old franchises, i.e., undies. Undies is a fire starter for any order, any basket. And our undies tables have never looked better. So it's all about the product. But strategically, we built into promotions that makes sense, but we pulled back in other areas where it doesn't make sense. And then you layer on this great marketing campaign that we've had in Aerie, which it's been really resonating, 100% real. It's what we're all about. And the team has doubled down and our influencer campaign, getting our clothes on our influencers has been a real win. And there's more to come. We have so many great new ideas, innovations for the future. The team is 100% locked and loaded on thinking about each category, new fabrications, new ideas, new launches. newness in general has been a win for Aerie with our new drops, and that's been really working. So we have a lot in store for 2026. But in the meantime, we're pulling goods in for -- to pull out Q4. We're excited about what's happening right now.
Operator: Thank you for standing by. This is the conference operator. Welcome to Aritzia's Third Quarter 2026 Earnings Conference Call. [Operator Instructions] and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Beth Reed, Vice President, Investor Relations. Please go ahead. Beth Reed: Thanks, operator, and thank you all for joining Aritzia's Third Quarter Fiscal 2026 Earnings Call. On the call today, I'm joined by Jennifer Wong, our Chief Executive Officer; and Todd Ingledew, our Chief Financial Officer. As a reminder, please note that remarks on this call may include our expectations, future plans and intentions that may constitute forward-looking information. Such forward-looking information is based on estimates and assumptions made by management regarding, among other things, general economic and geopolitical conditions as well as the competitive environment. Actual results may differ materially from the conclusions, forecasts or projections expressed by the forward-looking information. We would refer you to our most recently filed management discussion and analysis and our annual information form, which include a summary of the material assumptions as well as risks and factors that could affect our future performance and our ability to deliver on the forward-looking information. Our earnings release, the related financial statements and the MD&A are available on SEDAR as well as the Investor Relations section of our website. I'll now turn the call over to Jennifer. Jennifer Wong: Thanks, Beth, and good afternoon, everyone. I hope all of you had a wonderful holiday season. I'm pleased to share that Q3 of fiscal 2026 was another standout quarter. Our teams executed on our strategic growth levers at a high level across the entire business, and our strong momentum has continued into the fourth quarter with record-breaking results over the holiday shopping season. In Q3, we achieved for the first time ever $1 billion quarter. Total net revenue of $1.04 billion was well above the top end of our guidance range. Sales in October and November exceeded our expectations, particularly as we started to lap the exceptional top line growth beginning at the end of Q3 last year. On a 2-year stack, trends accelerated sequentially throughout the quarter. This was fueled by broad-based strength across channels and geographies. The unparalleled demand for our everyday luxury offering, combined with our digital initiatives, new boutique openings and strategic marketing investments drove a 43% top line increase over last year. We're extremely pleased with our performance across both channels, with net revenue increasing 58% in e-commerce and 35% in retail. Comparable sales grew an outstanding 34% fueled by double-digit positive growth in all channels and all geographies, led by our U.S. e-commerce business. The holiday season was off to a great start as we delivered another record-breaking Black Friday event. Retail sales in both Canada and the United States hit all-time daily highs with nearly 60% of our boutiques, achieving all-time sales record. E-commerce sales in both Canada and the U.S. also hit record daily highs. In addition, we benefited from lower markdowns compared to last year's event driven by increasing affinity for our brand, broad-based demand for our product and our strong inventory position. During the quarter, our performance in the United States continued to drive our overall results. In Q3, we generated a 54% increase in U.S. net revenue. This highlights the extraordinary demand for our product and the tremendous momentum of the Aritzia brand. Our results were fueled by accelerated growth in e-commerce, supported by the launch of our mobile app and our investments in marketing. In addition, our new and repositioned boutiques over the last 12 months continued to perform well. We also generated outstanding comparable sales growth in our existing boutiques. In Canada, we accelerated our sales growth for a fourth consecutive quarter. We achieved a 29% increase in net revenue in Q3. This was fueled by exceptional performance in e-commerce and strong comp growth in our boutiques. In our retail channel, we delivered net revenue growth of 35%. This was driven by the success of our real estate expansion strategy and strong boutique comp growth in both countries. Over the past 12 months, total retail square footage growth was in the high teens. We opened a total of 13 new and 4 repositioned boutiques. This included 5 new boutiques in the third quarter, all in the United States as well as the reposition of our Flatiron flagship. The strong comp growth in our boutiques continue to be primarily driven by traffic. This was fueled by the increasing affinity for our brand, which we supported with our strategic investments in marketing. Our real estate expansion strategy continues to yield exceptional results. This underscores the vast opportunity for growth in the United States, where we have just 72 boutiques today. The boutique we've opened in the U.S. in fiscal 2026, they are tracking to payback in less than 1 year on average. This continues to be our target of 12 to 18 months. In Q4, we expect to open 4 new boutiques in the United States. These include locations in Cincinnati, which is a new market for us as well as in Las Vegas, Los Angeles and Scottsdale. We've also already opened and repositioned boutiques in Laval, Quebec. Our immersive retail experience is truly unmatched. This includes our operational store design, passionate style advisers, incredible cafes and of course, our beautiful product. Our boutiques, particularly our flagship are the best showcase of the Aritzia everyday luxury brand ethos. In November, we opened our third New York City flagship located right in the heart of Manhattan's iconic Flatiron District. It's just a couple of blocks away from our original boutique, which opened in 2015, and now a decade later, our new space is nearly 2x larger and it includes it's very own AOK Cafe. To celebrate, we hosted a series of exclusive events, which garnered significant social and media coverage, amplifying the enthusiasm for our brand and introducing Aritzia to new audiences. Every flagship marks a major milestone for our business. With every launch, we've raised the bar, refining and perfecting our strategy along the way. Our Flatiron flagship is a testament to that progress, celebrating the passion, collaboration and drive of our team as we continue building momentum and shaping our success across the United States. In e-commerce, we delivered an increase in net revenue of 58%. This was driven by the increasing appreciation for our brand as well as the successful launch of our mobile app. Our focus on full funnel marketing continued to fuel website traffic, which increased meaningfully in both countries. We also continue to benefit from site enhancements, operational improvements and higher omnichannel engagement. The launch of our mobile app at the end of October achieved exceptional results and surpassed even our highest expectations. We drove strong adoption and excitement with elevated marketing and an exclusive product drop that sold out in just 1 day in the U.S. The Aritzia app was the most downloaded app in the entire app store on its first day. In Canada, it remains the #1 shopping app for 9 days straight. In the U.S., it was #1 for 4 days. Total downloads to date are more than 1 million, far exceeding our expectations for the entire first year and reflecting the love clients have for our brand. Clients were quick to discover the value the Aritzia app provides to them, including greater access to our product assortment, styling expertise and guidance and exclusive product and content. This is driving increased conversion and helping further fuel the momentum in our e-commerce business. We've already launched new app features and updates to elevate the client experience with many more to come. In addition, our new international e-commerce website continued to perform well. Sales in the quarter more than doubled compared to Q3 last year. This enhanced shopping experience is already fueling higher revenue growth through increased conversion. Turning now to product. Throughout the third quarter, our assortment continued to resonate with clients across both Canada and the United States. Our fall and winter launch was exceptionally strong. We saw a positive client response across our iconic franchises, new styles and new colors. We offered excitement through the launch of the app, including collabs and drops such as the Nike Aritzia collab and the multiple color [Sweatleece drop]. In addition, we remain well positioned with the right inventory in the right place to drive sales. Our rigorous focus on inventory and the exceptional demand for our brand enabled us to deliver an improvement in the year-over-year markdown rate and higher full price sell-through. We continue to refine our integrated marketing approach to help grow awareness, build brand affinity and emphasize the features behind Aritzia's unique value proposition. These include our high-quality beautiful products, our aspirational shopping environment and our engaging client service and our captivating communication, all at attainable price points. We're reaching more and more new clients while reinforcing our connection with existing clients. This is a key contributor to the outstanding momentum in our business. In the quarter, we also continued to leverage product collaborations to introduce Aritzia to new audiences. This further amplifies our brand and creates interesting moments to captivate our clients. In Q3, this included the partnership with Nike as well as our collab with Salt & Stone. Both of these created excitement and helped drive traffic online and in our boutiques. As I mentioned earlier, our strong performance has continued into the fourth quarter with another record-breaking holiday period. Excellent operational execution across our 3 strategic growth levers, geographic expansion, digital growth and increased brand awareness is driving sustained brand momentum and keeping Aritzia top of mind. This momentum, along with our proven operating model and healthy balance sheet gives me immense confidence in our long-term goals for the business. As we look to fiscal 2027, we remain steadfast in further advancing our growth levers. First, our real estate strategy has continued to perform exceptionally well. We have yet another exciting pipeline of boutiques in premier locations planned for next fiscal year. Second, we have several digital initiatives that will support continued momentum in our e-commerce channel. These include additional app features and enhancements, further digital marketing optimization and client engagement initiatives. Third, our new boutiques and marketing investments are proven multiyear strategies to help grow brand awareness in the United States. We also plan to keep making strategic investments to fuel our rapid growth. This includes investments in infrastructure, such as technology and the second distribution center in the United States. As always, we will continue with a long-term focus and balance investing for the future with driving profitable growth. In closing, I'd like to thank our people for their unwavering commitment to creativity, excellence and teamwork. Without this dedication, our incredible achievements in 2025 would not have been possible. What's even more impressive is these exceptional results came against the backdrop of significant macroeconomic challenges. Our teams have set the standard for everyday luxury, and I couldn't be more proud. With that, I'll now hand it over to Todd to discuss the details of our financial performance. Todd Ingledew: Thanks, Jennifer, and good afternoon, everyone. In the third quarter of fiscal 2026, we generated record net revenue of over $1 billion. Top line growth in both the United States and Canada was well above our expectations. We also continue to expand our margins, all combining to deliver a 55% increase in adjusted net income per diluted share. Turning to the details of our performance. Third quarter net revenue increased 43% from last year to $1.04 billion. This was above our guidance range of 20% to 24% as trends from the middle of October through the end of the quarter exceeded even our highest expectations. Comparable sales grew 34%, driven by outstanding growth in all channels and across all geographies. Here's what drove this unprecedented performance. First, we saw an exceptional response to our winter product. This was supported by our strong inventory position. Second, we generated accelerated momentum in e-commerce, fueled by the successful launch of our mobile app. Third, our performance was further driven by total retail square footage growth in the high teens. And finally, our increased investments in full funnel marketing generated substantial traffic growth and helped sustain our brand momentum. In the United States, third quarter net revenue increased 54% to $621 million. This was driven by tremendous momentum in our U.S. e-commerce business, powered by traffic growth of nearly 60%. In the U.S., we also benefited from square footage growth of approximately 30%, including a total of 15 highly productive new and repositioned boutiques over the last 12 months. In addition, we delivered outstanding comp growth in our existing boutiques. The consistent momentum we are generating gives us great confidence in our long runway for growth in the U.S. as we bring Aritzia to new markets and strengthen our presence in existing markets. In Canada, net revenue growth increased sequentially for a fourth consecutive quarter, up 29% to $419 million. This was driven by accelerated growth in e-commerce, which was supported by the launch of our mobile app and strong comparable sales growth in our boutiques. Turning to our sales channels. In e-commerce, net revenue increased 58% to $383 million. This tremendous performance was fueled by strong traffic growth driven by exceptional demand for our products, the successful launch of our mobile app, our investments in digital marketing and the halo effect from our new boutique openings. In retail, net revenue increased 35% to $657 million. This was driven by the ongoing strong performance of our new and expanded boutiques as well as outstanding comparable sales growth in our existing boutiques. Importantly, boutique openings continue to be our most predictable driver of top line growth, enhancing brand visibility and supporting client acquisition in both new and existing markets. This top line performance was instrumental in delivering gross profit of $479 million, an increase of 44% compared to the third quarter last year. Gross profit margin expanded 30 basis points to 46% despite 410 basis points of pressure related to tariffs and the elimination of the de minimis. This pressure was more than offset by leverage on fixed costs, improved markdowns and freight tailwinds. SG&A expenses for the quarter were $290 million, leveraging 170 basis points as a percentage of net revenue to 27.9%. The improvement was primarily driven by expense leverage and savings from our Smart Spending initiative. Adjusted EBITDA was $208 million, an increase of 52% compared to the third quarter last year. Adjusted EBITDA margin expanded 120 basis points to 20%. The consistent margin improvement we've now delivered for 7 consecutive quarters underscores our dedicated focus on delivering multiyear margin expansion. Excluding the nonoperational FX impact this year and last, adjusted EBITDA margin expanded 220 basis points. Turning to the balance sheet. Inventory was $508 million at the end of the third quarter, up 10% from last year. Our inventory continues to be well positioned to meet client demand and a key driver of our sales momentum. Our liquidity position is strong with $620 million in cash, no debt and 0 drawn on our $300 million revolving credit facility at the end of the third quarter. With our growing cash balance, we are reviewing our capital allocation strategy with our Board of Directors. In the meantime, we plan to continue to opportunistically repurchase shares under our NCIB. Since the implementation of our NCIB on May 7 and through the end of the third quarter, we repurchased 474,000 shares, returning $41.3 million to shareholders. Turning to our outlook. The strong momentum in our business has continued into the fourth quarter, fueled by another record-breaking holiday season. Given quarter-to-date trends, we expect net revenue in the fourth quarter to be in the range of $1.1 billion to $1.125. This represents an increase of 23% to 26%, driven by double-digit comparable sales growth and the contribution from our boutique openings. We expect gross profit margin in the fourth quarter to be approximately flat to up 50 basis points compared to the fourth quarter of fiscal 2025 as ongoing leverage on our fixed costs and lower markdowns are offset by approximately 400 basis points of pressure from tariffs and the elimination of the de minimis exemption. We forecast SG&A as a percentage of net revenue to be approximately flat to down 50 basis points compared to the fourth quarter last year as expense leverage and savings from our smart spending initiatives are offset by strategic investments in digital and technology to fuel our growth. Given our year-to-date performance and improved outlook for the fourth quarter, we are raising our net revenue forecast for the full fiscal year to the range of $3.615 billion to $3.64 billion, representing growth of 32% to 33% from last year. We are also increasing our outlook for adjusted EBITDA as a percentage of net revenue to the range of 16.5% to 17% for fiscal 2026. The strength we've generated in our business and our mitigation strategies are more than offsetting the 280 basis points of additional tariff and de minimis pressure this year. Importantly, excluding this pressure, our adjusted EBITDA margin for fiscal 2026 would be above our previous long-term target of 19%. We are extremely pleased with the sustained momentum in our business, particularly as we've begun to cycle the extremely strong revenue growth starting in November of last year. This puts us well on track to achieve our fiscal 2027 revenue target 1 year early. Our proven operating model, healthy balance sheet and long runway for growth in the United States gives us confidence in our ability to sustain strong momentum in our business. We are executing at a high level, and we continue to make strategic investments to fuel our growth. This leaves us well positioned to create long-term value for our shareholders. Thank you. Jennifer Wong: With that, operator, let's please open up the line for questions. Operator: [Operator Instructions] The first question comes from Irene Nattel with RBC Capital Markets. Irene Nattel: And congratulations on another exceptional quarter. As you noted in your commentary, boutique openings continue to be the most visible driver of growth. And you mentioned a few times the long-term sustainable runway. And I'm wondering whether we should be thinking that at this point, maybe you might be accelerating the number of new store openings as we look ahead. Jennifer Wong: Irene, thank you for your question. We certainly did have a tremendous quarter, and we have talked about the market potential in the past, particularly in the United States, where we have just 72 boutiques right now, I have mentioned that we see a long-term opportunity of anywhere from 180 to 200, possibly north of 200 boutiques in the U.S. And our focus continues to attract to be on attracting new clients and engaging our existing clients. And so right now, we're talking about opening a minimum of 12 to 14 boutiques in this year and in the next year. And as we look forward, we think that this cadence probably makes sense for us. That also includes a number of repositions, 4 to 5 repositions. And at this time, this is the cadence of store openings and repositions that we're looking at. Operator: The next question comes from Luke Hannan with Canaccord Genuity. Luke Hannan: I wanted to ask about the app. More specifically, how successful was the launch of the app and the promotion for the 20% off on the initial order? How successful was this in driving new clientele, both online and in-store. Jennifer Wong: Thanks for your question. The app launch was phenomenal. In 2 words, I'd say it was wildly successful. In my prepared remarks, I talked about downloads of over $1 million to date is at 1.4 million downloads. In the first day that we launched, we were the #1 app in the entire app store in both countries. I think we were the #1 shopping app in Canada for 18 days. we were beating out ChatGPT there for a number of days, particularly in Canada. So I mean, the app launch was beyond our wildest expectations. And we couldn't be more pleased at the results, I'm so proud of the team. Operator: The next question comes from Corey Tarlowe with Jefferies. Corey Tarlowe: I just had a couple of questions. One, on the complexion of the comp, could you just talk a little bit about the traffic versus ticket and maybe how that's trended so far throughout the year? And any color on what that's looked like quarter-to-date? And then the second one is just a follow-up for Todd. On the second DC that you're opening, are there any considerations about what that cost might look like from a margin perspective or the fact that you're comping so strongly? does it just basically get netted out? I'm curious if you could provide any color there. Jennifer Wong: So on traffic -- Corey, on traffic, we said in our prepared remarks that our business, our top line and our comps, in particular, are primarily driven by traffic. We are seeing a huge change in terms of any other indicators like ticket price or basket size. I would say our business is primarily driven by traffic. Todd Ingledew: Great. And on the new distribution center in Vancouver, which I assume is the one you're referring to, not the potential second DC in the United States. For next year, obviously, we will have incremental rent. As that DC ramps, we do expect to have savings from it, but not at the beginning. And we are still planning for increased margin or margin expansion next year, and we look forward to providing guidance in May as it relates to the distribution center and the rest of our line items. But we do anticipate margin expansion next year despite the DC starting up. Corey Tarlowe: Great. And is there any color on maybe any category specifically or anything you can provide there? That resonated really well in the quarter and then maybe quarter-to-date as well where you've seen some nice traction. Jennifer Wong: Yes. There's nothing really that we can speak of in terms of category. The demand for product was broad-based across all of our assortment. And everything -- when our business is -- we've said this before, when our business is good, and we're delivering 43% top line increase, I mean there's a lot of things working really well. And certainly, our product assortment is just fantastic. I love what I see when I walk into the stores and when I'm scrolling online. I think our product looks absolutely fantastic. And what's even more is that we are in and have been in an excellent inventory position to meet the demand. So everything is working. Operator: Next question comes from Brian Morrison with TD Cowen. Brian Morrison: I want to go back to the mobile app. Can you just talk about perhaps what the penetration rate as a percentage of e-commerce was, maybe elaborate, Jen, on you talked about additional initiatives or new features that are forthcoming. And does the initial reception make you feel in time it could represent 40% of e-commerce sales? Is that realistic? And then just as a follow-up, your international website, can you just comment on where you're seeing the greatest traction with respect to regions? Jennifer Wong: Yes, all really good questions. Thanks, Brian. It's still very, very early days for us with the app. We just launched it. It's really only been up and running for a couple of months now. And I have also said that it's going to take us a few quarters to really see where the app nets out. What we're seeing with our best-in-class peer set is that the app makes up anywhere from 20% to 40% of their overall e-commerce business. I would say we are on track to be in that best-in-class category for sure. And so I'm very encouraged to see these early results. But as I said, it's probably too early to tell. I do anticipate that a portion of that will be incremental lift to our e-commerce business. And so only time will tell. And certainly, as it relates to the new features that you're asking about? I suppose a byproduct of our success is that everyone is watching us. So keeping in mind the competitive factors, I can share probably in very broad strokes what we we're leaning into. Certainly, the digital styling is something that keeps our customer returning to the app will produce more content, more interesting content, unique content and storytelling for the app. Of course, there will always be smaller optimizations to reduce the friction in the shopping journey, looking to integrate the app with the boutique experiences in store for a truly omni experience. So things of this nature. We've got a really robust road map that the team has put together. And again, super excited for future releases of the app and upgrades. And so just, again, couldn't be more thrilled with the performance of the app so far. As it relates to international, continue -- it's almost -- I mean that was a big piece of news, too, and Todd and I were actually kind of joking that after the app news, it's almost like a secondary thought, but still a really important aspect of our overall digital business. We're already seeing higher revenue growth driven by increased conversion on the international e-com site. I realize that it's only just over 1% of our current e-commerce business, but we've stated that we see that tripling in 2 years, and we are, again, well on track to see that. And so right now, I don't know if we're sharing what the top 5 areas of the world are, but certainly, I guess I'll say in no particular order, English-speaking countries like the U.K. and Australia, which isn't a surprise. Certainly, we have interest in Central Europe, like Switzerland and Germany. And certainly, Asia, like China is a very big market for many people. And so you would expect that to be a good response there, too. What I'd say the good news is that we're getting lots of good information for future expansion of the Aritzia brand. Operator: The next question comes from Jon Keypour with Goldman Sachs. Jonathan Keypour: So I was wondering, given the momentum you guys are seeing and the seeming synergies in the word of mouth and the awareness around the brand. Are you finding any flexibility in the previously stated target of low single-digit marketing as a percent of sales? Jennifer Wong: Yes. Marketing has certainly amplified our brand and created a building greater affinity for our brand. I think it's been a huge add in the last year, 1.5 years to our overall playbook. And what we see with marketing is increasing the marketing spend in line with sales. So it will grow commensurate with our overall top line sales and remain a low single-digit percentage of sales. Jonathan Keypour: Great. If I could get a follow-up. Just curious about the progression of the sales momentum from the pre-Black Friday period to the off-sale period between Cyber Monday and Boxing Week, so like the 2 periods of nondiscounting. Just what the momentum between those 2 periods look like? Jennifer Wong: I mean as both Todd and I say, we're absolutely thrilled with the momentum going from Q3 into Q4, effectively, we -- the momentum has been tremendous. We have -- it's -- and what do I say, we've had a phenomenal season. We've had a phenomenal last quarter, couldn't be more thrilled with what's happening going into Q4. We remind you we're lapping extremely robust growth last year in Q4, and we just really see our business firing on all cylinders. Operator: The next question comes from Mark Petrie with CIBC. Mark Petrie: And I'll echo my congratulations on the stellar results. Two areas of follow-up, I guess. first, just on the app integration or introduction, where would you say that put you in terms of e-commerce 2.0? Like how far are you in terms of, I guess, execution? And then how far along do you think you are in terms of seeing the payoff from that with consumers? Jennifer Wong: Yes. We -- about 2 years ago, we embarked on e-commerce 2.0, and we had a real concerted effort and intention to accelerate our digital and omni business, with the build-out of the team and leadership there. I think we're probably 1/3 to approaching halfway through. I think we've built a lot of good fundamentals, a lot of good base infrastructure. We re-platformed our technology stack. We've restructured the team and our ways of working a little bit. We've now hit a couple of milestones with the international e-commerce side with the app. There's still a lot of runway to go and still a lot of really exciting things for us to do. And I think with it continuing to be about 1/3 of our business, while our retail business is absolutely taken off as well. I think back when we were talking about e-commerce 2.0, the retail -- we had been projecting the retail business at a certain clip. And the retail business has actually outperformed what we originally thought then, too. So considering that our penetration has stayed the same and continues to keep up with the retail base continuing to grow at the clip that it's growing. I think overall, our business in both channels is doing phenomenal. And certainly accelerating digital and the omni-experience is a big part of that. Operator: The next question comes from Joe Civello with Truist. Joseph Civello: I just wanted to ask, were there any transitory costs associated with kind of logistical process shifts due to de minimis exemption change. And then secondly, as we build through next year, can we just talk more about some of your IMU initiatives and what inning you're in there, especially as scale continues to grow so rapidly? Todd Ingledew: Yes. Thanks. 100%, there were costs in Q3 embedded related to the de minimis removal and the shift of all of our fulfillment in the United States. That makes up a portion of the 410 basis points of pressure that we experienced from the tariff and the removal of the de minimis with about 2/3 of the pressure coming from the tariffs and 1/3 coming from the removal of the de minimis. Of note, obviously, we are extremely pleased that we still leveraged 30 basis points for really a total increase of 440 basis points ex the tariff and de minimis in the quarter. So pleased with that. And there was some benefit from IMU improvement in Q3. But as we look forward, we are continuing that multiyear IMU improvement and do anticipate that it will be part of the driver of what helps us improve our margins again next year. Operator: The next question comes from Mauricio Serna with UBS. Mauricio Serna Vega: First, maybe could you talk a little bit more about the brand awareness component. You mentioned that as one of your levers. How has that progressed in the U.S.? How does that look relative to Canada? And then quick follow-up on the Q4 guidance. Is it fair to assume on sales that, that implies around like a mid-teens comp for the quarter? And what is that -- like what is the comp looking quarter-to-date? Jennifer Wong: Thanks, Mauricio. I'll take the first part of the question on our brand momentum. I mean experiencing amazing brand momentum, particularly in the last 1.5 years when we increased our marketing efforts and our strategic investments in marketing and that, coupled with the boutique openings themselves and the flagships are opening. So I think it's not any one thing. It's many things all coming together and certainly the marketing is amplifying all of the amazing things that we're doing in the business to elevate our brand and to really ensure that everyday luxury comes to life in everything that we do in every touch point with the client. And certainly, I think our business itself is showing the results of the increased brand awareness in the U.S. and not just awareness but actual affinity for the brand and love for the brand. In Canada, we're very well known and loved and that our goal was to achieve that same level in the U.S. And I think we are well on our way. And certainly, our results with the 43% top line increase, a $1 billion quarter shows that. Todd Ingledew: Great. And I'll take the comp portion of the question. In the fourth quarter, our guidance assumes comp in the high teens, which delivers the 23% to 26% revenue growth. And we are trending slightly ahead of that today. Mauricio Serna Vega: Got it. Just a very quick follow-up on that. So I guess like if I think about your commentary that you said 2-year stacks accelerated throughout Q3. That means like that acceleration has continued into December and quarter-to-date just based on this guidance and what you -- yes, what you're expecting in the comp? Todd Ingledew: Yes. Yes, 100%. It's accelerated slightly. Obviously, we're lapping 26% comp in Q4 last year. So we've got 43% to 46% approximately from a comp -- a 2-year stacked comp that we have embedded in our guidance. And we're extremely pleased with what we're seeing in the fourth quarter. And we were obviously a number of months ago, seeing great momentum in our business and knowing that we had November and the acceleration that we saw in November coming up. And obviously, we've just moved right through that and continue to see the extremely strong momentum in the business. Operator: The next question comes from Chris Li with Desjardins. Christopher Li: Congrats on the strong results. My first question is, I know that over the last couple of years, you have done a lot of work to make the inventory more productive and efficient. Are you pretty much where you need to be now? Or is there room for further optimization that will allow you to really capitalize on the strong product demand and drive further margin improvement? Jennifer Wong: Thanks for your question, Chris. We have done a lot of work in terms of how we approach our inventory. And I would say the team has done tremendous work and has taken things to the next level in terms of how they're looking at our inventory and the level of sophistication with our inventory management is just phenomenal. So I would say nothing is ever perfect around here. I mean I think that's one of the things that drives us is we're striving for perfection and we're -- we have this culture of continuous improvement and always refining right down to the last minute and finding detail of what we can be better. So we're always going to be honing our craft here and always getting better, and we always do get better. But certainly, as it relates to inventory, I would say that is a huge driver, one of the many things that we're doing very well, but it's a huge driver to these fantastic results. Certainly, we have had the inventory to meet the demand and the increase in demand that we've experienced, particularly in the last year. And again, I couldn't be more pleased with what the team has done in order to make sure that we are in that position and continue to be in that position. Christopher Li: That's very helpful. And if I may squeeze in just a follow-up. Just in terms of the comps guidance for Q4, the high teens would imply north of 45% 2-year stack. I know you guys haven't given guidance for next year. But as you start really lapping really strong comps, it's sort of that 2-year stack reasonable to expect for next year, given really the strong momentum that you guys are continuing to see? Jennifer Wong: Yes. I like your enthusiasm for what's going on here for us. I mean we're just as enthusiastic about 2027 as well, although we're not providing any guidance on this call today for 2027. What I will say is we are thrilled with the momentum. We do have to keep in mind the 2-year stack. That said, we are super well set up to succeed and have a strong year with all the elements in place to deliver in 2027 like we have in so far in 2026. And we're going to stick to our strategy and stick to our playbook and because that's proven that that's delivered, whether it be having the right product in the right place at the right time, increasing our square footage growth with the 12 to 14 boutique openings and additional repositions. We got those digital initiatives on the go. and certainly, the strategic investments in marketing that help create more demand and drive even more traffic. So all of those things remain in place, and it gives me tremendous confidence for what we have ahead. I've been with the company now for a very long time. I'm coming up on 39 years, and I've never been more excited about the business as I am right now. Operator: The next question comes from Ike Boruchow with Wells Fargo. Irwin Boruchow: Let me add my congrats. I guess 2 questions from me, maybe for Todd. I guess, I know you're not going to comment specifically on guidance for next year, but last quarter, you kind of took the 19% off the table and just went a little bit lower to high teens given the tariffs that you've meaningfully outperformed in Q3 and your implied 4Q just went up by a lot. So I mean, are you comfortable putting the 19% back on the table just because of the upside you've kind of generated this quarter and what's coming up in the fourth quarter? And then a quick follow-up to that is it's a product of your own success. You guys are going to be lapping something like 25% plus comps annually next year. You go back a couple of years ago, you guys also had a phenomenal year, and you had a little bit of trouble lapping those tough compares. It doesn't seem like that's happening at all here. But are there learnings from fiscal '24 that you kind of apply to kind of make sure that doesn't happen again? I'm just kind of curious how you can compare and contrast what's coming up in '27 versus kind of what happened back in '24? Todd Ingledew: I'll take the first question. So first off, no, we would not put the 19% back on the table at this point. And I think we're most comfortable with that high teens. We do plan to have further margin expansion next year. But I think we're more comfortable with the high teens than leaving the 19% or putting the 19% back on the table. But we look forward to providing guidance again in May. Jennifer Wong: And the second part of your question, which is kind of a broad question. My response to that is it comes down to execution. And what we're experiencing right now is an example of as close to impeccable execution as you can get. And I think we've always prided ourselves on executing in the business. And when we're executing in all areas of the business is when we see these exceptional results. So what I would say to your question is, right now, I find it immensely gratifying to see how our strategy, which has not changed and the focus of the last 3 years is coming to fruition and delivering on these results. And I think if we stick to that and continue to do what we're doing, we will see consistency in our growth and in delivering results. Operator: The next question comes from Navin Nuchem with BMO Capital Markets. Unknown Analyst: Nevin on for Steve today. I'm hoping you can provide an update on your sourcing exposure by company -- or sorry, country rather and just confirm whether you're on track for the mid-single-digit percentage or less from China by spring '26. Todd Ingledew: Yes, we're on track. That's one of the things that we're extremely pleased with what we've accomplished over the last 12 months. The team has done a remarkable job. Sitting here this time last year, we were receiving our spring inventory and approximately 30% to 35% of that was being sourced from China. And today, we are in the mid-single-digit country of origin from China. And so it's actually remarkable what the teams have done over that 12-month period. We are more weighted now to Vietnam and Cambodia as well as a number of other countries. But I think over time, the next phase of our sourcing initiative is to balance more evenly and try to get to a position where maybe we have no more than 20% to 25% sourced from any given country. Operator: The next question comes from Michael Glen with Raymond James. Michael Glen: Just 1 question for me. The 1.4 million downloads that you spoke about, Jennifer. How do we think about that in terms of a penetration rate across your overall customer base? And how does that penetration rate compare against what you see with peers. Thank you. Jennifer Wong: Yes. Great question. Obviously, the response to our app has been tremendous. And I think our clients have been very quick to recognize the value that the app offers and hence, the number of downloads. And so the majority of the customers downloading the app are our existing customers. They are a highly engaged customer. The great news is that there is a good portion of those downloads that are new customers. And what I find particularly encouraging is that we even have a few reactivated customers, customers who haven't shopped with us in quite some time. And because of the app that they renewed their relationship with us. So I think on all different points, the app is providing us tremendous benefit and certainly is allowing us to engage with a customer even more deeply. Michael Glen: And I know you're unlikely to give me a number, but is 1.4 million, how do we think about where that number could eventually get to over time? Jennifer Wong: As I said earlier in this call, it's too early to tell and you're absolutely correct, I am unlikely to tell you that number. But really, it's very early to tell. And certainly, there was a lot of marketing support around the launch of the app. So we came out with fantastic success. And we'll share more as we know more as the quarters progress. Operator: The last question comes from Martin Landry with Stifel. Martin Landry: Congrats on your results. Maybe just a quick one for me on fiscal '27. You've talked about 4 -- 12 to 14 boutiques opening and 4 to 5 relocations. What does that mean in terms of square footage growth? Todd Ingledew: Overall total square footage growth, it would be in the low teens. Martin Landry: low teens. Perfect. Okay. Thank you so much, and congrats again. Operator: This concludes the question-and-answer session and today's conference call. Thank you for joining, and have a pleasant day. You may now disconnect your lines.
Operator: Good day, and welcome to the Lindsay Corporation Fiscal First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Randy Wood, President and CEO. Please go ahead. Randy Wood: Thank you, and good morning, everyone. Welcome to our fiscal 2026 first quarter earnings call. With me today is Sam Hinrichsen, our Chief Financial Officer. Once again, I'm very proud of our team's execution in the quarter despite external headwinds impacting our business. While ongoing trade uncertainty, low commodity prices and high input costs have negatively impacted customer profitability and sentiment, our team's focus on price and cost management and operational efficiencies gained through our diversified global footprint helped us deliver solid profitability and maintain earnings quality in the quarter. In our domestic U.S. irrigation business, customers continue to delay large capital purchases due to high input costs and low profitability. In our international business, we're encouraged by the strength and opportunities in the project market, including the Middle East and North Africa. Our ability to help growers globally improve productivity and optimize resources remains a key differentiator for Lindsay and has supported performance amid a challenging macroeconomic environment. Subsequent to the end of our fiscal first quarter, we announced a supply agreement to provide Zimmatic irrigation systems and FieldNET remote management and scheduling technology in the MENA region. This project is valued at approximately $80 million in total revenue with approximately $70 million of revenue realization this fiscal year. This announcement reflects our ability to compete and win large-scale projects globally, but also demonstrates Lindsay's role as a trusted partner in advancing sustainable agriculture while supporting localized production and enhancing food security. We're very proud of our team's commitment to delivering transformative projects in our international markets and look forward to executing this important project in the region. Our Infrastructure segment delivered solid performance in the first quarter with total revenues up 17% year-over-year. Increased road construction activity supported segment performance in the quarter, and we continue to see solid interest in our Road Zipper solutions product. Moving forward, we expect further momentum as infrastructure funding and road project activity advance. Turning to our market outlook. As we mentioned last quarter, in North America, we expect softer market conditions to persist in the near term. Market indicators suggest the current trough environment will persist until there's greater clarity around international trade impacts and an improvement in customer profitability. The U.S. administration has announced a $12 billion Farmer Bridge Assistance package designed to offset trade-related pressures on U.S. farmers. The program includes onetime payments of approximately $44 per acre for corn and $31 per acre for soybeans. While this support will be appreciated by growers, we don't expect it to drive significant incremental demand in the short term. Within our international markets, we remain encouraged by the overall outlook for future growth and market fundamentals in Latin America, including Brazil. Elevated interest rates and ongoing constraints on credit access for growers continue to weigh on near-term equipment investment in the region, tempering what otherwise remains an attractive long-term growth opportunity. Within our infrastructure segment, we continue to see opportunities develop across system sales, leasing and road safety products, and our sales funnel remains strong. As previously communicated, we do not see a large Road Zipper project exiting the funnel in fiscal year '26. This creates a difficult comparison, particularly in Q2, where we shipped a large $20 million project last year. We do have incremental opportunities for smaller projects and other segment growth to offset half of that total with the majority coming in the second half of the fiscal year. Road safety funding in the United States remains steady, and we remain very excited by the long-term potential of our Road Zipper leasing model, which continues to gain traction and supports a more stable and balanced margin profile over time. With that, I'd like to now turn the call over to Sam to discuss our fiscal first quarter financial results. Sam? Samuel Hinrichsen: Thank you, Randy, and good morning, everyone. It is a privilege to join you today for my first earnings call as Chief Financial Officer at Lindsay Corporation. I'm excited to continue partnering with this talented team as we drive our strategy forward, deliver on key initiatives, and create meaningful long-term value for our shareholders. I look forward to building on the strong foundation already in place. Now let me walk you through our financial results for the quarter. Total revenues for the first quarter of fiscal 2026 were $155.8 million, a decrease of 6% compared to revenues of $166.3 million in the same quarter last year. The decline in revenue was driven by lower volumes in our irrigation segment as continued uncertainty around trade, lower commodity prices, and higher input costs continue to weigh on farmer sentiment. Lower volume in irrigation was partially offset by year-over-year growth in our infrastructure segment. Operating income for the quarter was $19.6 million, a decrease of 6% compared to $20.9 million in the prior year period. Operating margin for the quarter was 12.6%, consistent with the prior year. Despite a lower revenue base, our solid operating margin performance for the quarter reflects continued execution of our operational strategy, coupled with effective cost and pricing management. While near-term irrigation market conditions in North America are expected to remain soft, we anticipate that our business will continue to show resilience. Net earnings results for the quarter were $16.5 million or $1.54 of net earnings per diluted share, marking a slight decline compared to net earnings of $17.2 million or $1.57 per diluted share in the first quarter of last year. The difference in net earnings when compared to the prior year period was largely attributable to lower operating income and a slightly higher effective tax rate. These were partially offset by an increase in other income. Turning to our segment results. Irrigation segment revenue for the first quarter were $133.4 million, a decrease of 9% compared to segment revenues of $147.1 million in the prior year. North America irrigation revenues of $74.3 million decreased by 4% compared to $77.7 million in the prior year. Within our North American markets, the impact of lower overall unit sales volume was partially offset by higher average selling prices compared to prior year. In international irrigation markets, we delivered revenues of $59.1 million compared to $69.4 million in the first quarter last year. The decrease was primarily attributable to 2 factors. First, the timing of project revenues in the MENA region is difficult to predict. First quarter results were impacted by the timing gap between last year's project and the recently awarded new project in the region. Secondly, sales volumes in Brazil were lower than anticipated as this key market continues to be constrained by elevated interest rates and an unfavorable credit environment, which is weighing on investor activity for growers in the region. These declines were partially offset by approximately $1.5 million of favorable effects of foreign currency translation compared to the prior year. Total Irrigation segment operating income for the first quarter was $23 million, a decrease of $1.8 million compared to $24.7 million in the first quarter last year. Segment operating margins of 17.2% of sales grew compared to 16.8% of sales in the first quarter of last year. Despite lower segment revenues, our irrigation margin profile continues to reflect resilience in a down cycle market. In our infrastructure segment, revenues for the first quarter increased 17% to $22.4 million compared to $19.2 million in the prior year. The increase was driven by higher sales of road safety products, while Road Zipper System revenues were similar compared to the prior year. Infrastructure segment operating income for the first quarter increased 9% to $4.5 million compared to $4.1 million in the prior year. Infrastructure segment operating margin for the quarter was 20.1% of sales compared to 21.5% of sales last year as revenue growth was offset by higher operating expenses. Turning to the balance sheet and liquidity. Our total available liquidity at the end of the first quarter was $249.6 million, which includes $199.6 million in cash and cash equivalents and $50 million available under our revolving credit facility. Free cash flow for the quarter was impacted by an increase in working capital to support business growth and elevated capital expenditure levels. We also utilized our strong free cash flow conversion to opportunistically buy back shares in the open market. In the first quarter, we deployed $30.3 million into share repurchases, exhausting our original authorization. During the quarter, we were pleased to announce the authorization of a new share repurchase program of up to $150 million. Our team have strategically maintained a very robust balance sheet, and this authorization provides us with the ongoing flexibility to continue returning capital to our shareholders. We are pleased with our strong financial position and balance sheet, which enable us to deliver shareholder returns while continuing to invest in future growth opportunities and innovation. This concludes my remarks. And at this time, I will turn the call over to the operator to take your questions. Operator: [Operator Instructions] Our first question comes from Nathan Jones with Stifel. Nathan Jones: I guess I'll start with North America irrigation, still down a little bit, but it seems to be bottoming out here. Does it feel to you like we're getting to the trough of the market here? Are there risks that we could take another leg down here? Or I know Valmont's commented that they kind of think we're at replacement level. Is that kind of your feeling about the market where -- I mean, obviously, there's a lot of external headwinds that you can't control, but they seem to all be lining up about as bad as they could get at the moment, which is probably a good thing in itself that if it can't get any worse. Just any commentary you might have about how you're thinking about the domestic irrigation market here? Randy Wood: Yes. Nathan, this is Randy. I'll take that one. And we would agree that we are bouncing along the trough here. And there's been some announcements on incremental funding. That's always good news, not enough to move the needle. And I don't think when we talk to customers that they see a lot of upside until there's more certainty on profitability. So in the near, near term, we don't see it getting progressively better, but I would say also we don't see it get progressively worse. So I do believe bouncing along the bottom of the trough here is how we'd characterize it. Nathan Jones: I guess the pipeline on international projects here, nice to see the $80 million one. Can you talk about opportunities for other projects? Could we see some more of those come through this year? I think they've been -- most of the ones you've done over the last few years have been with one customer. Are there opportunities outside of that? Are there things in the funnel that are coming from outside of that? Just any commentary around that, please. Randy Wood: Yes. I would say in the region, we have had some repeat business, which we view as a good thing. If you execute well, you get the opportunity for that repeat business. But we've also attracted new clients in the region. So it's a combination of recurring business with repeat customers and some new customers that we've pulled in as well. And I think the language around projects is the same as it's been for the past couple of years. We do see a robust funnel. We see a multiyear runway on projects like this one in this part of the world. And not all of them are in the same country or the same part of the country. We see a broad spectrum of opportunities across the MENA region for the same drivers around food security and stability for those countries in that part of the world. So we do see a good runway here, Nathan. And whether there's another one in 2026 is up in the air. I think the same caveat always applies. These are complex, large, difficult negotiations. Even when you have a deal, you move into credit. logistics. So it's never easy. It's never quick, but I would say there are more opportunities in the market. And again, our track record is a good one. So we'll fight and win for the ones that we want to pull across the finish line. And when we are in a position that the project is locked in, credit secured, that's when you'll hear us talk more about it. Until that time, we'll continue to comment on the positive elements of the funnel and the long-term growth potential in that part of the world. Nathan Jones: And I guess one more for me. You guys have had elevated CapEx in fiscal '25 and planned again in fiscal '26 as you're doing a lot of upgrades in Lindsay and around some of your plants. Can you talk about how that's gone, where you are in that process, what contribution that's already generating to profitability, and how we should think about the improved throughput, improved efficiency that you'll gain from that, this year and as we head into next fiscal year as well? Randy Wood: Yes. I'll start on kind of the narrative on what we're doing and where we are and then Sam can comment more specifically on how that might impact some of your models, Nathan. But we, in Lindsay, Nebraska right now have activated our large tube mill investment. This is a world-class tube mill, improving safety, efficiency, productivity. Testing has gone extremely well. And I expect in the next 30 days, we'll turn that over to full production once we get certification from our vendors. That project has gone extremely well and will change the way that we produce tubing and really decrease our reliance on labor, which was a key part of some of these investments. We have a second investment in our galvanizing facility that will completely reengineer that process for us, make it safer, more efficient, more environmentally friendly. And that investment will continue to make throughout this calendar year, and we would expect around the end of calendar 2026, we would see that operation potentially kicking off and going into production. I turn it over to Sam for a little more narrative on the numbers. Samuel Hinrichsen: Yes. So if you think about margins, this is an ongoing project. It's not been finalized. So there's no impact from a margin perspective in the first quarter. And as Randy alluded, in the short term, once completed, incremental depreciation will offset productivity gains at the current demand level. We expect to see improvements in margins from operating leverage once demand picks up following the completion of the project. And then following, again, the installation, we also expect to get back to more normalized capital spending levels. Operator: Our next question comes from Brian Drab with William Blair. Brian Drab: I wanted to ask maybe a similar question to what Nathan was getting at. But can I ask if this new $80 million MENA project is with the same customer in the same country as the June 2024 $100 million project announcement? Randy Wood: We would acknowledge, Brian, that this is a repeat customer in the same part of the world. Brian Drab: Okay. And then can you comment, Randy, at all on the margin that you're expecting with this new $80 million order? Randy Wood: I would say, overall, we would acknowledge project margins generally are going to be dilutive to the overall business. It does create a lot of operational efficiencies and absorption through the facility. So if we characterize it, the margin profile in this project will be as good as or better than the prior project. I think that's about as directional as we'd want to get, Brian. Brian Drab: Okay. But a little bit below segment average or overall irrigation margin? Randy Wood: Slightly below, correct. Brian Drab: Got it. Got it. Okay. Randy Wood: And that's consistent with the projects of this size. Brian Drab: Yes. Understood. Just wanted to check on this one specifically. Okay. And then just -- I'm curious if The Big Beautiful Bill, I think you mentioned in the slides, I'm not sure there was a lot of commentary in the prepared remarks, but I'm just wondering, did you see any demand related to accelerated depreciation? Is that a narrative that you're hearing from the customer base? And do you expect that to drive any demand going forward? Randy Wood: We -- I would say we didn't see a lot of significant impact, and we didn't anticipate it. I think some of the negative macro market drivers just overwhelmed a little bit of potential incremental benefit from the bill and accelerated depreciation. So not a significant contributor. Operator: Our next question comes from Ryan Connors with Northcoast Research. Ryan Connors: I wanted to -- you talked about the cycle earlier in North America in the first question there from Nathan. But I wanted to kind of come back to that and look at it from a bit of a different angle. So we were down 4% irrigation in North America in the first fiscal quarter here. Is that kind of reflective of how we should maybe be thinking of a reasonable run rate for the balance of the year? Or do things get better or worse? Just kind of curious how you think that the 1Q print on North America, what that tells us about the balance of the year specifically? And then also, if you could maybe unpack that on a price versus volume basis as well, that might be helpful. Randy Wood: You bet, Ryan. I'll cover the first part and kind of turn it over to Sam for the second part. And I think we'd characterize North America as flat to down on a full year basis. And whether that 4% carries forward or degrades slightly, improves slightly, as you know, the tricky part for us in Q4 is going to be storm volume. And last year was a relatively light storm volume year. The year before that was relatively high. So if we kind of split the difference, I think the run rate that we saw through Q1 could be pretty consistent with what we see the rest of the year. So we're planning for flat to down in our spending, our inventory, our supply chain, and we'll react up or down if we have to. But I think that's probably a good starting point. I'll let Sam cover. Ryan Connors: And then -- yes, on the price versus volume. Samuel Hinrichsen: Yes. So again, if you think about pricing, we called out that average selling prices in North America were up during the first quarter. We have a history of price stewardship, and we expect to be able to continue maintaining solid margins. Pricing is one key contributor. In addition, of course, there's cost management, there's productivity gains across the organization that are contributing to maintaining this margin profile despite the current top end situation. Ryan Connors: Yes. Okay. And then kind of -- maybe while I have you there, Sam, a bit of a below-the-line item. Pretty nice contribution from the interest, other income line, as you mentioned. Is there any color you can give us around what drove that, and how we should think about modeling that line over the balance of the year? Is that something that should continue? Or are we going to kind of revert back to normal there? Samuel Hinrichsen: So I can't go into the very specific details, but I would say interest income, of course, is driven by the regional mix of funds at the interest rates in various regions. And that's why we have seen an increase year-over-year in Q1. I'm not going to speculate on the interest rate environment, but that's what's the key driver for this improvement in Q1. Ryan Connors: Got it. Okay. And then lastly, we haven't really talked much about infrastructure here in the Q&A. And I wondered, Randy, if you can kind of unpack for us this lull in Road Zipper. I mean, obviously, it's a lumpy business and there are lulls from time to time. But is there anything we should read into that in terms of are we -- is the low-hanging fruit plucked to any degree in terms of the TAM there? Or just any color you can give us on how you're thinking about the fact that we're into a pretty light year it looks like on Road Zipper? Randy Wood: Yes. And I don't think we're anywhere near plucking all of the easy to pick fruit or addressing the cap on the TAM. This is a lumpy project-oriented business. And I think just like the irrigation business, the good news for us is we're at the table. We're engaged with our sales funnel. We're talking to specific customers about specific bridges, about specific project sites where Road Zipper is going to allow them to solve their problem better than any other option in the market. It just takes time. So this is a very different type of business. And I think as you model it out, you look at the historical lumpiness, some of the big projects that we've dumped in prior fiscal periods, we love them. When they hit it, it just creates a really difficult comp the next year because they're not -- we can't calendarize one every second quarter, every fiscal year. So this is us being transparent, I believe, in what we think we see in the market. And as we start to get better clarity on fiscal '27, fiscal '28, that's where we see more of these Road Zipper projects landing right now. And if that changes, where we see some accelerating because incremental funding is available, we'll certainly be transparent and clear with you. But I think the narrative we've shared indicates what we see this year, but it's not an indication that the market is any better, any worse, any softer than it has been. It has been lumpy project business. It's going to continue to be lumpy project business. Again, the good news is with our shift-left strategy, we've got better visibility, both short and long term. And I think that's where we're willing to be more transparent and open with you guys, so you can kind of work that into your models as well. But we see long-term growth opportunities for Road Zipper well into the future. Operator: Our next question comes from Brett Kearney with American Rebirth Opportunity. Brett Kearney: I know the most recent project win you have, Middle East North Africa includes your FieldNET capabilities. Obviously, I think those are incorporating all the Pivot sales you make in North America at this point. But just curious what you're seeing as you look to the international irrigation project funnel today, what kind of adoption appetite there is an opportunity for you all with some of your technology offerings in some of these regions? Randy Wood: I'd characterize it this way that when you're making these significant investments. These are huge agro operations where there has been basically nothing. And in the Mid East, it's essentially desert that they're converting to be these highly productive, highly efficient farms. And with the size of investments they're making, they want every piece of technology that's available to them. And this isn't a normal technology adoption curve where you start with small equipment and you migrate towards large equipment. They're starting with the biggest tractors, the biggest planters, the biggest combines, and they want every technological advantage that they can find to be as efficient as they can be in their production, in their consumption of water and energy. So I think this has really been a shift in the last 5 to 10 years where the technology has proven itself, where it brings real value to our customers. And again, at these investment levels, I think the customers are intelligent. They're smart, and they want every advantage that they can bring to the table. And certainly, FieldNET, FieldNET Advisor and the advantage that it creates for our growers is an important part of that mix. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Randy Wood for any closing remarks. Randy Wood: Thank you all again for joining us today. We appreciate your ongoing support, and we look forward to updating you on our second quarter earnings call. Thanks for joining us. Operator: Thank you for attending today's presentation. The conference has now concluded. You may now disconnect.
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 Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Nate Gilch, Investor Relations. Nate, please go ahead. Nathaniel Gilch: Good morning, everyone, and thank you 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 Matthew Gupta, our Chief Financial Officer. A playback of today's call will be archived on our Investor Relations website located at investors.dicks.com for approximately 12 months. As a reminder, we will be making forward-looking statements, which 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 14th full month of operations post acquisition. As such, all reported comp sales for this quarter and for the upcoming year pertains 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 excludes the dilutive effect of the 9.6 million shares issued as part of the Foot Locker acquisition. Second, the Foot Locker business refers to our newly acquired operations, including the Foot Locker, Kids Foot Locker, Champs 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'll now turn the call over to Ed. Edward 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 in an industry-leading omnichannel ethlete experience. This is the flywheel of our success as a company, and 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 when 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, Ann Freeman a long-time former Nike executive, is now serving as Foot Locker North America President. Ann 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 3 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 a preliminary number of stores that need to be impaired or closed. We initiated certain pricing actions in late Q3 and will 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 rates for the Foot Locker business to be down between 1,000 and 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 '26, excluding onetime costs. What amplifies our confidence are the talented people we found inside the Foot Locker business. Over the past 2 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 omnichannel 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 4 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 3 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 6 new Field House 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 Field House locations across the U.S. These innovative formats are delivering powerful financial 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 3 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 purchased 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 Collectors Club House in 20 Health 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 complement 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 3 examples of ways we're building strength and differentiation 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. 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 location. 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 8 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 2-year and a 3-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 3 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 14th 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 margin 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 Foot Locker business. For the DICK'S business, expense dollar 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 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 6 Field House 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 as we initiated certain pricing actions in late Q3. Importantly, since the acquisition of Foot Locker are 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 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 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 of contribution from the Foot Locker business, which include a $0.52 negative impact from Foot Locker operations, including the gross margin decline as well as the higher tax rate, a $0.19 negative impact from the increased share count, which was up $5.9 million prorated for the 8 weeks of the Foot Locker ownership. On a GAAP basis, our earnings per diluted shares were $0.86. This includes the noncash gains from our nonoperating investment in 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 DICK'S business increased 2% compared to Q3 of last year. We believe the inventory in 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 Ed 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 of 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 onetime costs. Now moving to our outlook for 2025. Today, we are providing an updated outlook that is specific to 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 DICK'S business in the range of $14.25 to $14.55 compared to our prior expectation of $13.90 to $14.50. Our earnings guidance for 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 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 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 onetime 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 onetime costs. 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 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. Operator, you may now open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Robbie Ohmes with Bank of America. Robert Ohmes: My first question is, I know we're going to be talking a lot about Foot Locker today. But on the DICK'S business, it looked like a really, really great quarter, comps up 5.7%, et cetera, and you raised guidance. But just how are you driving that? And how are you guys thinking about your confidence going into holiday here? Lauren Hobart: Thanks, Robbie. We are so proud of the team for 5.7% comp. And importantly, we are comping strong comps, so a 2-year stack of 10%. And as you know, it's been several quarters -- 7 quarters in a row actually 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. And 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. And 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 license business and our trading card business really doing well. So as it flip to holiday, all of those themes are the reasons why we are so excited and confident as we look to Q4 and then 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. And we've got great gifts across our entire portfolio. So we're really pleased going into Q4. Robert 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? Edward Stack: Thanks, Robbie. As we take a look at store closings, we're still addressing that. We've got some stores that we think we're going to close. We're also looking to address just the upside that we think we have in these stores and how 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 Foot Locker 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 will position the business really well for 2026. Operator: Your next question comes from the line of Simeon Gutman with Morgan Stanley. Simeon Gutman: 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? Edward Stack: Sure. Thanks, Simeon. I can't tell you we 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 to -- 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. We have tremendous confidence in this management team that we've assembled in North America, as we talked about, it's being led by Ann Freeman, a long-time Nike executive that we've got a tremendous amount of respect for, and the brands have a tremendous amount of respect for. We just announced today that Matthew Barnes is going to run our international business, and he's a Brit, and we think that EMEA 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 -- we really think they're 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, but it's also great for the brands 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 2 parts. First, just to that point on '26 accretion. That's Foot Locker stand-alone, 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 2, you don't tell us what your footwear gross margin is inside of core DKS. 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? Edward 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. They 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, and he said, we're a great running store. We just got Nike's running construct in last week. And 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 yes, 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 a 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? Edward Stack: That's core Foot Locker. That's not to say we might not -- as we've said, we've been -- we'll be 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 '26. Operator: Your next question comes from the line of Kate McShane with Goldman Sachs. Katharine McShane: We were curious about how you're going to manage the markdowns at Foot Locker. I guess the concern is, 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? And 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? Edward Stack: Sure. Thanks for the -- 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'll sell -- we're confident we'll sell that at full price. And the consumer out there is looking for a new fresh product that is innovative in the marketplace. And 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 products, more premium product that you'll see product that's not as fully distributed in the marketplace, and we don't see that -- the promotional activity impacting our business a whole lot. Operator: Your next question comes from the line of Adrienne Yih with Barclays. Adrienne Yih-Tennant: Great. It's great to see the continued momentum at the DICK'S brand. I guess, Lauren and Ed, obviously, I'm going to talk a question from 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 and some longer-tailed structural things about the business? Secondarily, are there banners within Foot Locker that no longer perhaps make sense? And if you could talk about that. And 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. Edward Stack: That's a lot, Adrienne. Let me start -- 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 -- 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 involved, 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 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 the 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 and 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 these 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 -- we're going to take markdowns to get this out of the store of older underperforming SKUs. And we do expect at 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. So that's why we're moving as quickly as we can to get a fresh start in 2026. Lauren Hobart: Yes. 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. It's core Retail 101. And one of the things that's been so amazing to see if 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 -- 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, this is a heavy operational focus. All of those things are being transferred by osmosis coaching mentorship, all of that. And that's what gives me the confidence that we are moving in the right direction. Adrienne Yih-Tennant: 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 -- premium performance at DKS. So there's no crossover there. Edward Stack: The product that we're marking down is not a key product at DICK'S Sporting Goods. It's an older product that quite frankly, and with the visual we used with the Foot Locker team and it is kind of caught on globally is we just got to clean out the garage. We've 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-Tennant: Fantastic. Makes 100% sense. Good luck. Operator: Your next question comes from the line of Michael Lasser with UBS. Michael Lasser: The first one is relatively straightforward. The expectation that Foot Locker will be accretive next year is based on the $14.25 million to $14.55 million 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. Yes, let me clarify on exactly like you said. Yes, the basis is on the $14.25 million to $14.55 million as the basis for 2025 results, and the kind of the dependency, I think it 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 is going to be the first and foremost priority as we look to the building blocks for how can this business be accretive. And keep in mind, 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 that 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. So 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. But to your point, it starts with sales and margin. And in addition to that, we'll look into cleaning up to the garage to position the business for a profitable growth into 2026, especially in the -- 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: Got it. Thank you, Michael. One of the absolute prerequisites for us to do this acquisition was 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 8, 10 weeks in now, I'm even more confident that, that is how we're doing it. We've 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 remotely working -- 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. Operator: Your next question comes from the line of Mike Baker with D.A. Davidson. Michael Baker: Great. A couple to start on. First, a little bit more detail on that 11 store test. Maybe any initial results or pop in sales? And I mean, is it just as 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. Edward 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 encouraged on them. And it's not just as simple as laying out the wall as we've kind of taken some of the older product out of that -- 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 we'll -- 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 as Foot Locker gets back to it will have a meaningful impact on their business. Michael 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 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 FERC, presumably, the first half not be as strong? Edward 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 -- and we're 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. Operator: Your next question comes from the line of Christopher Horvers with JPMorgan. Jolie Wasserman: This is Jolie 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? Edward Stack: We can have some impact on Q1 and Q2, probably hopefully a little bit more on Q2 than Q1, but 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. Jolie 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 -- this is all for DICK'S promotional environment tariff costs and the other inputs we discussed last quarter, like the GameChanger business? Navdeep Gupta: Yes. So we reported today a 27 basis points expansion in our gross margin. Keep in mind that, that 27 basis points of gross margin expansion is on top of 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. The 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 5 basis points on top of almost about 60 basis points of impact -- from 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 merchandising 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. Operator: Your next question comes from the line of Paul Lejuez with Citi. Paul Lejuez: Can you talk about the $500 million to $750 million in charges that might be coming? How much of that is cash versus just write-offs? And how many stores are actually being reviewed when you think about that range of $500 million to $750 million? And any split that you can share in U.S., international or banner? Navdeep Gupta: Yes, Paul, we'll share much more of the detailed assumptions. As you can imagine, we are 10 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 the $500 million to $750 million, I would say there are 3 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 -- vast majority of that will be addressed here in Q4. That does include some of the 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 have to position the business and the profitability of the business for 2026. In terms of the cash versus noncash, I would say it will be a combination of both things. 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: Great. And then just on the synergy number, the $1 million to $1.25 million, how much of that are you assuming you can capture in F '26 to get to those accretion numbers? I'm curious if you're thinking that you might be actually playing for a bigger number than that $100 million to $125 million in longer term. Navdeep Gupta: Yes. Well, the $100 million to $125 million, I would say we have -- there's 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 nonmerchandising vendors, and those conversations are happening right now. So to now have a better line of sight, call it, 12 weeks from now as 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. So absolutely, that's a focus within the organization. Operator: Your next question comes from the line of Cristina Fernández with Telsey Advisory Group. Cristina Fernandez: 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? Edward Stack: Yes. Foot Locker has always been steeped in basketball culture, and it will -- 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 will be very profitable. Cristina Fernandez: And then my second question is on Foot Locker also have been on a pretty significant remodel and refresh program. Have you continued with those Foot Locker reimagined stores? Or have you paused that program and looking to make changes in that real estate strategy that they have been on? Edward Stack: I think the Foot Locker reimagined stores has 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 [ Kicket ] 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 turn that into giving the apparel presentation more space and really focusing from 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. Steven Forbes: 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 2 businesses. I think one of the thoughts out there is maybe more exposure to lower income, but I'd be curious to maybe just hear 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? Edward 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 a 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 the 2026, we'll start to have more of that product. And by the third quarter, we think we'll be fully invested in that newer -- the newer innovative product that the consumer across all income levels is looking for. Steven Forbes: And then just a quick follow-up for Navdeep. Maybe just so we're on the same page here, a slightly negative adjusted EBIT for Foot Locker on a pro forma basis, that compares to the $118 million last year. Just, I guess, confirm that. And then is there any way to sort of think through how you sort of view 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: Yes. 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 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 2, the numbers and the estimates that we gave out for the Foot Locker business. 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, and you may now disconnect.
Operator: Good morning, everyone, and welcome to Pure Cycle Corporation's First Quarter 2026 Earnings Call. We have had a great start to the year, and we're excited to share with you guys our results for the first quarter. A couple of housekeeping notes. The earnings presentation is on our website. So if you're listening on a phone or on replay, you can download the slides from our website. [Operator Instructions] And with that, I will turn over the call to our President and CEO, Mark Harding. Mark Harding: Thank you, Mark, and I'll add my welcome. As Mark sort of foreshadowed, we've had a very good first quarter. Typically, our first quarter is usually a little more challenging just because of weather issues. And for those of you that are watching for ski reservations, we've had a pretty dry year and a good weather year. So it's allowed us to really advance a lot of our construction projects out of Sky Ranch. So with that, let me go ahead and start the presentation. Our first slide is always our forward-looking statement, which includes the fact that statements are not historical facts contained in reference in this corporation are forward-looking statements. I'm sure most of you are familiar with our forward-looking statements qualifier. Always want to give a shout out to our management team. And here with me is Marc Spezialy as well as Cyrena Finnegan, our Controller, in the event that they have any specific questions that they might be able to weigh in on. But a great team of professionals that continue to really provide leadership to the company and really all segments of what it is that we're doing as well as our Board of Directors. We have a terrific Board, very heavyweight Board for a company of our size and all are really engaged and provide significant contributions to the company. But I want to give a shout out to our team and let you know their continued support and engagement. As most of you know, this is just a quick investment snapshot. We've got a continuing streak of profitable quarters. So we're very thrilled that we continue to deliver profitability and shareholder value. We operate in all 3 business segments: land development, water utilities and single-family rentals, and they're all doing great. We have good visibility with our land development. We're really striving to continue to develop and build our recurring revenue base. And then our great balance sheet, we continue to build, fortify our strong balance sheet and continue to invest in our business lines as well as grow the business and create shareholder value. So really a solid diversification of the company's activities. Let me jump into the quarter results. And as you see from a revenue side, great quarter on the revenue. Q1, really, I think it was a record-setting Q1 for us just because of the seasonality issues. And what we really see on the highlights are we brought in 2 new homebuilders to our portfolio that are really engaged in Phase 2D, which is what we're working on. We punched out completion of Phase 2C at the end of our fiscal year last year and continuing through with Phase 2D, and we'll talk a little bit more about 2E coming up. But due to the weather, we were able to get a lot of the curbs and even asphalt down in the November, December time frame, which is really unheard of here. So we're about 80% done with the roads in 2D, and that's about 5 or 6 months ahead of schedule. So really capitalizing on the weather, and we really kept our contractors engaged on the site so that as we continue to have that weather, we were able to capitalize on that. Moving over to the profitability side, net income and earnings per share, significant increases in net income and earnings per share, and that's a result of the progress on Phase 2D. So you see a significant uptick in both of those. So we're very pleased to be able to continue to deliver those results and streamline our revenues throughout the year. And this would be a more typical even flow of those earnings and those revenue streams. But with the seasonality, we kind of have those variability factors. Through the first quarter, we achieved about 1/3 of our fiscal year forecast. So we're ahead of schedule on what our guidance was. Take a look at that great start, bringing in a little over $9 million in revenue and then about $6.2 million in gross profit. So terrific results from our management team and our operators and folks in the field. Year-to-date results, net income, earnings per share, similarly, we're ahead of our guidance. We've got about 37% of our full year guidance on that. So terrific opportunity to continue to deliver that. And then really moving forward from how we're looking at developing the land side of it, really being able to be in a position to deliver more results on Phase 2E continuing to produce those lots for our homebuilder customers. So I really want to take those results and parse those out a little bit for everyone, so we can separate that out into the 3 segments and show you kind of what the contributions are for each of those segments, breaking them down into the water utility segment. As most of you are familiar with, we really have 2 revenue sources -- 2 classes of customers. We have our domestic customers, which is where we deliver water and wastewater to residential units. So those are customers that are at Sky Ranch. They're at other projects that we provide water service to in other areas. And then we have our industrial customers where we provide water to the oil and gas industry, primarily for fracking wells that they're drilling in and around mostly Roble County. We have done wells in other counties, but the bulk of our activity really centers around Roble County and the Lowry Ranch, which is our service area. And then in those revenues in the water and the wastewater side, we kind of have 2 different forms of revenues. We have the recurring monthly revenues where we're doing that on a metered basis. And then we also have the capital component of that, which are connections, which are really connecting to our water system from our homebuilder customers, our homes, businesses to each individual system connection and those are through the form of tap fees, and they're high capital costs, which are usually incorporated into a mortgage or the development of that business. And so those are the 2 revenue streams attributable to that. When you parse out that data, we continue to see strong customer growth of the recurring revenue. So we get a 22% customer CAGR. So we're very pleased about continuing to grow that recurring revenue. And while we had a record quarter overall, the water segment, a little bit softer than normal, and that was primarily attributable to just the timing of getting building permits, getting some of those tap fees and then also taking a gap in the oil and gas deliveries. We had our oil and gas operators concentrating on building a portfolio of well permits. And we'll see that sort of tick up the rest of the year. We've got a number of wells that have been drilled and completed, and then they're just starting fracking later this month, and they'll be fracking most of the year. So you're going to see a substantial uptick in that. You take a look at that in comparative quarters through the last couple of years, that shows you really kind of the variability of the oil and gas side, but we do expect that to tick up for the rest of the year. Taking a look at kind of that one specific industry on the oil and gas side, they fluctuate. And that, as I said, it really is a function of kind of permits and getting the sites constructed. They're building these large multi-well pad sites that will have somewhere between 10 and 20 wells on each of these pad sites. So they're really concentrating their activity to a pad site and they have the directional drilling on these pad sites. But as you see some of the trending in that, this is kind of an annual snapshot of how we look for oil and gas revenues. And as an illustration in 2024, they were pretty evenly distributed throughout the quarters. I think you're going to start to see a little bit of that similar activity of the quarterly distribution for the rest of the quarters for us in fiscal 2026. What we do like to do is kind of give you a feel for capacity, how much water is available for our high-volume customers like the oil and gas customers as well as where we're at on continuing to invest into the company's assets. So what we like to try to do is make sure that we have a steady pace of investment in water and wastewater infrastructure for our customers. and balance that out with sort of the need for that portfolio. And this kind of shows you we do have a substantial amount of capacity that we've invested in. And if you took a look at it just for the quarterly area, really didn't use all that much of it just because of that oil and gas variability. So we're really only using about 3% of our overall water portfolio and then taking a look at the capacity that we have for annual production, we can produce about 2,800 acre feet, and we really only used about 150 acre feet of that. So it does give you a sense of kind of what the pedal strength is on our water portfolio and our water system. Let's take a look at our land development segment. We're -- this aerial shot is illustrative of high school that is under construction. So we're very pleased to see that being coming out of the ground, and that will be completed in time for our kids for the fall of 2026. In our land development segment, you've heard us talk a lot about the various phases. Phase 2C, which we did complete last fiscal year, we're midway, a little bit more than midway on Phase 2D, and we have a percent completion methodology for how we recognize revenue on that. Continued lot protection for Phase 2D and then also moving into Phase 2E, which will be about another 160 lots, but we'll start grading on that sometime in this March time frame. And really enjoying some of that good weather so that we can continue to do some of that pavement and curbs and gutters for delivering those lots. If you take a look at the lot development revenue, this is really where the strength of the quarter came from is really building into that Phase 2D. We're complete with Phase 2C, really kind of highlighting some of this, if you want to take a look at the number of homes that are being built. And that's really kind of a function of the housing market. And I know there's a lot of press out there about the housing market and the strength of the housing market and how interest rates are impacting that. But we're seeing substantial continued support for what it is that we're doing. And I think that's largely indicative of our market segmentation as an entry-level product. Taking a look at the homes complete or under construction in Phase 2B, which is really going to balance out the inventory for each of our homebuilders out at the project, we've got about 85% of Phase 2B completely built out. Taking a look at Phase 2C, which is what we just delivered. There's -- we have one of our newer homebuilders going vertical with a strong portion of their portfolio. And then we even have one of our new builders into the portfolio already starting homes in Phase 2D, even though we haven't fully completed 2D, we have completed enough of the -- much of that infrastructure where we've got all the water, sewer, storm, curbs and gutters and access for that for them to start in 2D before we deliver all of those finished lots. And so what you're seeing is we typically had annual lot deliveries for what was a portfolio of 4 builders. And they try and manage out that inventory so that they don't take any more inventory than what they foresee is for an annual year production. And as we -- as the market sort of slowed, what we saw was that there was availability for other builders in there. So we moved our portfolio up to 7 national homebuilders working on that. So that gives us a strong portfolio of builders that each of them are continuing to maintain their desired level of inventories, and we can continue to pace our development of the project so that we're continuing to accelerate the monetization of the land side. This is kind of an illustration of sort of the snapshot -- the visual snapshot of each of the phases from the sub phases from Phase 2 here, some nice aerials with certain activities, each of our entry-level segmentations on these and a lot of product diversity where we have a 35-foot lot, 40-foot lot, 45-foot lot on the standard [indiscernible] but then we have segmentation into paired product, which is a townhome product -- I'm sorry, a duplex product and then also townhome products that really offer a variety of price points for this entry-level market. The land development time line, this is kind of an illustration of how we do the accounting for that, right? There's 3 basic phases that we deliver lots to our homebuilder customers. And that's at a plaque where you've got a severable title instrument to the individual lot, and we typically get 1/3 of our revenue for the lot payment on that. Then we do the grading and wet utilities with that money to deliver that progress payment. And then finally, moving into the roads, curbs and gutters to get the finished lot payment. So that kind of shows you a phasing of that, and it really shows you how we layer in the phasing by quarters. And really, I think the key area for us this year was being able to really substantially do a bunch of finished lots in this Q2, which typically doesn't happen for us just because of the seasonality. I want to really talk a little bit. We were able to expand and amend our interchange access permit with CDOT and really got us another phase. We've been talking about a lot of these subphases for 2, which started out as about 850 lots. And I think we have the flexibility to get about another 180 lots in there. And so this Phase 2E is about 159 lots. This is an aerial of where that's going to look. It's right across the street from the school there. And so we'll start grading on this spring, and you're going to start to see a bit more overlap in that chart we had before on how we deliver those lots to our homebuilder customers. As I mentioned, the key milestone was the start of production of the high school. And so this gives us a full K-12 campus on site, which is very -- it's a high advantage. Most of our homebuilder customers really in the feedback that they're getting from their purchasers, the school is one of the key elements that are driving people to Sky Ranch just because it's a local school, it's walkable for everybody. It's a terrific asset for us. What we always like to highlight is kind of some of the key areas of where the Denver metropolitan area is growing and kind of gives you a perspective. I think this is a graphic that many of you have seen before, but it kind of gives you the fact that we really grow one direction, right? We can't grow west just because of the mountains, and we find ourselves in really the most attractive submarket of the Denver metropolitan area along the I-70 corridor. If you're looking at the mapping on the right of this illustration, that black line at the top is the interstate I-70 shows you where Sky Ranch is positioned on that. And then the pink area is really our service area, the Lowry Ranch. And what you're seeing is more and more development occurring around the borders of the Lowry Ranch. And so we're excited about continuing to expand our operations out of the Lowry property as the State of Colorado determines what it is that they're looking for and how they'd like to monetize that asset for the school trust. I want to give you an update on single-family rental segment. We've got 19 homes now completed and all rented. So that segment continues to drive recurring revenues. We've got another 40 units under contract. And what we're trying to do is phase how those really hit the market. We're trying to phase those as around 4 or 5 units coming online each month, and that will start beginning in May and then bringing those units online so that we make sure that we can get them leased and continue to really offer an opportunity for those who are looking for a house but are running into the affordability challenges. And that continues to be one of the key issues in the housing market is the affordability. Taking a look at some of the individual performance on there, continued growth in the rentals. That's because adding more units online as well as capital appreciation of those assets. It's a very tax-advantaged segment for us because we retain the equity of the lot and the water service connections in there, and those houses continue to grow in value as we continue to add value to the overall community. Little bit about kind of the phasing of how we're looking at bringing these units online for each of these different phases from the first Phase 1, which we completed several years ago up through what we're looking for in 2E. So bringing online about 100 units for that. I'll talk a little bit about our capital allocation and kind of how we're building that continued shareholder value. Really want to emphasize each of these segments, the water segment, where we're growing assets in each of these segments through investing in them, whether we're investing into the brick-and-mortar of the land segment, whether we're investing into pumps and pipes and diversion structures for our water segment and then building our home inventory for single-family liquidity. We continue to grow the balance sheet in all 3 of these segments. and then really take a look at protecting and preserving the balance sheet so that we can have that liquidity for continuing to invest in our each business segment and deliver recurring revenues for our customers. How that looks? We drive shareholder returns through those recurring revenues in water, single-family units and a diversified mix of revenue from tap fees to industrial water fees. We have oil and gas royalties, which were substantially -- they were very strong last year. We continue to build our earnings. And really, each of these segments kind of build value from each other. So there's a vertical integration in some of those segments that give us where we get value to one, we're adding value to all. Shareholder value reiterates our fiscal year guidance as well as gives you some interim and build-out forecast revenues for our asset growth. So when you take a look at kind of the segment of the revenues, the water recurring revenues as well as single-family rental revenues, gives you a snapshot of how we're building that through the portfolio as well as what that asset growth is. We've talked substantially about kind of bringing on that asset value from Sky Ranch, building out the rest of the residential projects as well as the commercial projects. So great opportunities, and we continue to execute on that. Trending. This illustrates the profitability trend and our fiscal year guidance and kind of the near-term outlook. So again, we want to stay on pace with that. We've had a great quarter on delivering ahead of schedule and ahead of results on fiscal 2026. And then this kind of shows you as we get that interchange constructed, how we look to open up and unlock the balance of the portfolio value. Valuation and sensitivities. Our fiscal year guidance was in that $26 million to $30 million range. Earnings per share, $0.43 to $0.52 per share and kind of the upside in the timing acceleration for delivering some of those lots and how we might continue that trend. Continuing to reinvest in ourselves with our share buyback program and balance the liquidity needs of the company and how we're investing into each of our land assets against what we continue to believe is an undervaluation of the company's current trading price. What I also wanted to do, a bit of a new slide this quarter and really kind of illustrate, you've heard us talk about the interchange, its importance and kind of how it's phasing, and what we're looking to do is get that permit finalized with the county and CDOT sometime early half of this year and then really take a look at the bonding opportunities with some mill levies that we've reserved at the project and start construction on that in 2027. But this is kind of what it looks like, and how it's going to orientate to the overall development. We're -- the existing interchange will go away. We'll realign that along the section line and give it kind of a diamond interchange capacity here. And so this is obviously an important component for us to continue to build into Phase 3 as well as bringing online the commercial opportunities for that. Taking a look at a little bit longer-range outlook. The commercial parcels really provide a lot of the high-value land and a lot of the AV. That assessed value is really where the public improvement reimbursables get their strength on us not having to advance those funds, getting reimbursed. I think our receivable on that is currently around $50 million. And so the combination of the assessed value, Colorado's what we define as a sales tax incentive state. So we get literally 4x the tax revenues from commercial assessed value as we do residential assessed value. And then in this particular case, we get public improvement fees on that, which is really a sales tax receipt on that. So those 2 are significant revenue drivers. And so this kind of gives you a feel for some of the land planning that we're doing there with some grocery anchors and then taking a look at a flex building structure like this, where what we're looking at is maybe offering opportunities for us to partner with others that might be high water users. Some of the current activity, we've engaged local realtor -- real estate -- commercial industrial real estate brokers that are very active in data centers, and we have a very unique opportunity here at Sky Ranch and together with PureCycle, given the fact that we have a high availability of water, so we can really distinguish ourselves for these high water use and high water-intensive type users. So we'll see how that develops over the next few months, year or so. So with that, those are our prepared remarks. And maybe what we can do is open it up to some questions and get a little bit of color if you'd like on kind of how things are rolling along. So if you're on mute or if you're not on mute and you've been quiet, thank you. And just go ahead and shout out. And if you've got a question, we'll try and give you some detail. Elliot Knight: Mark? Mark Harding: Yes, Elliot. Elliot Knight: Very interesting to see you put the estimates of earnings out there. There was one pretty obvious blank, and that was for fiscal '27. What should we be thinking about in terms of estimated earnings range for fiscal '27? Mark Harding: Good question. '27 is going to be a large component of Phase 2E and then taking a look at how we roll into some of the interstate construction and some of the other segments. So I think it's going to look a lot like the last couple of years. It's not going to be a real breakout year in 2027, but we really think that breakout year is going to be more once we get the interchange complete and get that commercial online and into development. There are opportunities to do non-high-traffic commercial users out there that we're marketing to. But as we continue to grow traffic, we have that obligation to kind of continue to build that infrastructure. Elliot Knight: Okay. So probably $0.75 a share is too high for fiscal '27 is what I think you're saying. Mark Harding: Yes. I wouldn't say that, that would be a good clear guidance. But when we take a look at that commercial and bringing on that in that 2028 time frame, you really do supercharge because what we're really going to see, we're going to see delivery of lots on the residential side, and then we think we double up on that revenue stream on the delivery lots on the commercial side. Elliot Knight: Okay. Refresh my mind. I can't remember whether on taps sold, the pretax margin is 50% or 60%, which is it? Mark Harding: That's a great question. When we look at it on the aggregate, if you look at the build-out of what will be 60,000 units of it, we believe that margin is around 50% because we have to continue to build that system. In a more short-term basis, I think we're seeing a lot more margin on those because we've kept ahead on developing capacity on that. And so when we're looking at year-over-year in the last couple of years and the next couple of years, those margins might be a little bit higher on that. But when we look at it on an average build-out, if you take $40,000 applied to 60,000 taps at $2.4 billion revenue potential on that, that's usually about -- it's going to cost us about $1.2 billion to build that system out. But I think near term because we have that excess capacity, those actual realized margins are going to be higher than that 50%. Elliot Knight: Okay. So when you in the past have talked about we're going to have to spend $1 billion, that $1 billion, is it amortized in the cost when -- is the 50% pretax margin after including amortization of that $1 billion that you talk about? Unknown Executive: That's included. Mark Harding: Yes. Elliot Knight: Okay. Unknown Executive: It is included. Tucker Andersen: Mark, Tucker Andersen, can you hear me? Mark Harding: I can, Tucker. Nice to hear from you. Tucker Andersen: First, I'd like to take a minute as long as you guys were nice enough to provide it to shout out hello to my old friend, Elliot Knight. Anyway, a couple of questions. First, what do you see as the opportunities for water acquisition at this point? As you've talked about in the past, you're always on the lookout for adding to your water acquisition and opportunities for utilizing that water. Could you talk about that broadly? Mark Harding: You bet. I'd say we've got a very strong water portfolio right now. And when we take a look at water acquisitions because we always do and one of the ones that folks are constantly knocking on doors with projects, I think are -- we're content with where our portfolio is today. And our acquisitions are really going to be strategic where they are adjacent to our existing portfolio, right? They provide the most economies of adding to it and the synergies around where we've got our investments today. So I would say our appetite for water acquisitions is probably it has to be the right water right. It has to be in the right location. And so it -- I'd say we're more cautious about water acquisitions than I think we would otherwise be in maybe some of the other areas like land. We'd be more aggressive on land acquisitions than water acquisitions right now just because we want more portfolio on vertically integrating that value because where we buy that land, we have water that we can serve it. We have infrastructure that's there that we can serve it and then building into the land portfolio and then single-family rental portfolio, that really -- that drives all 3 segments where a water acquisition would be nice. It will be valuable because we not make it anymore. And in fact, it's getting dryer and dryer. So the existing water rights continue to illustrate value. But it's a bit -- we already have a deep portfolio there. So Tucker, I would say they have to be the right water right in the right location. Tucker Andersen: Well, you've just segued into the next topic on my question list here, and that is what's happening in the area of land acquisitions given the sort of tension between homebuilding having slowed down substantially, but you still being in a fairly rapidly growing area where, as you pointed out, you can only grow in so many directions. And are you seeing -- are you more optimistic, less optimistic or sort of the same in terms of your potential for land acquisitions? Mark Harding: I'm more optimistic. I'd say conversations that we've had with the landowners through the years and where they were previously and where they are today are much more interesting and much more active. So I would say I'm more optimistic about where that sits for us to expand our portfolio and really show a stronger runway of beyond the $600 million, $700 million that we think we're going to monetize out of Sky Ranch. Tucker Andersen: I look forward to that, although you know my baseline comparison is always going to be the attractiveness of Sky Ranch, and I'm not expecting you to buy anything quite that attractive at this point. Mark Harding: Well, you're right about that. And I'd hate to see the economy that leads us to what it would look -- what it looked like when I did acquire Sky Ranch, but... Tucker Andersen: Third, in terms of the -- I found the data center comment interesting. Where in your area are there potential locations of data center and -- data centers? And how does that sort of fit in with your service area? Mark Harding: Great question. And we spent a bit of a time working on this data center opportunities. There's a lot, a lot of money sitting, waiting for ready-to-go sites. And there's really -- there's 3 metrics for data center. Where are the property location, availability of power, and availability of water. And I'd say we have -- the advantage that we have is we have the water side. And a lot of these cities and municipalities really don't want that type of user just because it doesn't grow their AV as fast. They may end up having to commit 700 homes worth of water to one user, and that user is not going to have the same tax base as that 700 homes worth would. And so we have the ability of providing that water to them. We're long. It's a good allocation for us. The siting of it is less important. They can move around, but they do need to be close to water. They do need to be close to power. And because of Sky Ranch's location, it really does check all those boxes. And so we have had conversations with specific users. We've had engagement with Cushman and they're one of the largest brokers that are managing sites for data centers. So we're very optimistic that, that might lead to a great opportunity for us. Tucker Andersen: And last, my question is, in your market, what's happening to price appreciation in general in the Denver market on existing homes? And two, is your first phase or maybe your first 2 phases been in existence long enough so that you're starting to see resales and how those resales compare to the owner's original cost? Mark Harding: Yes. We are seeing great appreciation on the resales in Sky Ranch. And I think that's attributable to when we broke into the market, we had a very attractive lot value, which allowed our homebuilders to have a very attractive home price. And so some of the Phase 1 home prices are up as much as 30%, 40% since they were built, which is terrific for the community. It's terrific for those homeowners. On average, home appreciation is in that 4% to 5% on a national average. I'd say we're seeing a little bit stronger performance on that at Sky Ranch because you're getting more amenities, you're getting schools, you're getting a more mature community on that, and there's less inventory at this price point. And so if you bought a house for $430,000, that appreciation is going to -- there's still no homes for sale sub-$500,000. And so there's a lot of opportunity for appreciation of those homes sub-$500,000. Tucker Andersen: So that makes Sky Ranch then -- that's one of the real attractions for your existing builders in effect? Mark Harding: It is. It is. I'd say that's why in a relatively weak market, and you can see in some of the local press where a lot of homebuilders are dropping a lot of projects in and around the metropolitan area, but we're getting new homebuilders in our existing project. Tucker Andersen: Thanks Mark. Keep up the good work. Joakim By: This is Joakim from Circulus Asset Management in Stockholm, Sweden. So I have 2 questions. And the first one was on the guidance range. It would be interesting to hear you elaborate a little bit around the 2 different -- it was quite broad outcomes... Mark Harding: Say that again... Joakim By: The guidance range that you provided here... Mark Harding: You know what that's going to be is really a flex into how much oil and gas we get in there. We -- they pay us to be at their back and call, right? They pay us a lot of -- a high rate for delivering raw water, and they want a ton of water, but they go from 0 to 100 in days, right? And so sometimes it depends on how the rig availability is, how -- what I do know is they have all their permits lined up and then they've constructed their pad sites, and so it's a matter of keeping that rig on site. So I know they drilled 10 wells on one pad site. They're currently drilling, I think, another dozen wells on another pad site. So we see some -- there's some foreseeability into 20 -- between 20 and 35 wells on that. And so that's kind of the -- that's the range on that because it is a high-margin opportunity for us. Joakim By: The other question was around water assets. If you have seen water prices starting to creep up, and I think that's the general trend. And what's the pricing on water assets right now? And what would be the kind of the worth of the water if you marked it to market, so to say? Mark Harding: Yes. Great question. And there's 2 benchmarks for that. We continue to see strength and appreciation in the tap fees. So our tap fees over the last, say, 3 or 4 years have increased around 6%, 7% per year. So we're up north of around $42,000 a year in our water and wastewater connections. And then when taking a look at just the straight cost per acre foot, we bought some water in a strategic location. Our first farm that we bought in that location was about 4 years ago -- 4 or 5 years ago. We paid about $9,700 per acre foot for that. And most recent transactions are north of $20,000 an acre foot. So that gives you kind of 2 different benchmarks, actual acre foot purchases as well as the strength of the service model that we have and providing service on those 60,000 connections. Unknown Executive: Maybe I'll just take a second, too. I know you got -- I don't know if you were asking specifically about our guidance in fiscal 2028 and kind of where that's coming from. But a lot of what we're projecting after the interchange in 2027 is the ability to sell some of that commercial along with Phase 3. So when we add the capacity to Sky Ranch, our lot revenue will really be able to scale as long as the market holds it with some commercial lots as additional to some home lots. So in 2025, 2026, we're just selling residential lots in subphases and 2 to kind of stay within our capacity limits of the interchange. What we kind of see in 2028 and beyond is the ability to do residential as well as commercial. I don't know if that was kind of specifically what your question was related to. But that's really the big change that you see in some of the guidance that we're expecting in the future. So I don't know if you want to comment on that. Mark Harding: Yes, that's a good clarification. Operator: [Operator Instructions] Elliot Knight: In the meantime, if nobody has a question, would you talk a little bit, Mark, about what's going on at the Lowry Ranch. Your comments suggested again that building is right up to it. I know you don't speak for the landlord nor do you want to. But do you have any sense at all as to whether they are giving thought to starting to develop that land commercially because we have an exclusive there, and it's 20x the size of Sky Ranch. Mark Harding: Those are the correct stats. So you're right. We continue to believe that's our most valuable asset, right? How do you monetize water? It's nice to buy water right, but it's very hard to kind of monetize water rights other than providing service. And our model of providing service, we are investing in infrastructure. We have a franchise service area at the Lowry Ranch. It is one of the most unique properties in the country, right? There's no property like having 27,000 acres of continuous land right next to a metropolitan area. And when we got into this 30 years ago, and I see my good friend, Dick Guido on the call, who is one of our -- it dates back to 1990. And Elliot, you were around in 1990 as likely Tucker was very closely after that. But it was so far away from Denver area, right? You take a look at the migration of the Denver area over that period of time and surrounding Lowry and where the landlord was looking at kind of monetizing and generating revenue for those assets back in 1990 and where that opportunity is 30 years later, it just has tremendous value. And it's really an asset for the public education, the K-12 public education system here. It's -- I can't help but be excited about all of the activity surrounding it and really the significant opportunities that the state has with it. But it is their asset. It is an asset that they look at holistically and saying we want to do everything we can and everything possible with that, that some of those lands are going to be conserved. Some of those lands are going to be for a multi-revenue use purpose. Some of those lands are going to be developed. And so the magnitude of the challenge for them on that is really just to figure out what the best way to use it. And it's hard when you're taking a look at how am I going to eat this elephant. And it's one bite at a time. You can't look at it holistically. It's 27,000 acres, you've got to scale it back and look at what am I going to -- what are the opportunities with some of the most in-demand parcels and how do we look at that and how do we want to continue to participate with that. One of the things that we've done and increased our portfolio is we have the ability to help them develop it. Whereas in 30 years ago, we were just looking at the water utility side. And now our portfolio looks that we can help develop the land, we can develop the infrastructure, we can develop the open space, we can develop recreational uses. We can develop a whole bunch of things that would check all the boxes that they're looking for on that. And so how do we match those up with their needs, their wishes and their time line. And we're very active on that. but we're not trying to get over our skis ahead of them on that either. So we want to be partners. We want to be a catalyst in it, and we also want to make sure that we are a strong advocate for their wishes and their desires for the property. Unknown Analyst: Mark, can you hear me? Mark Harding: I can. Unknown Analyst: I was interested in that -- the slide that had commercial development on it, I think it was the first time, wasn't it? Mark Harding: Yes. Yes. I just kind of wanted to kind of give you 2 things because we talk about that interchange all the time and to give you a relative perspective of the importance of that relative to the overall project. Unknown Analyst: From a practical perspective, is the commercial development dependent on the new interchange? Mark Harding: It is, yes. Unknown Analyst: And what's the timing on the interchange, realistic timing? Mark Harding: So I think we get that -- we've been working on that permit for the last 3 years with the county and CDOT. We're fairly close to getting that submittal. And, you know, it -- the submittal on it is going to be like 2,000 pages of -- you name it, engineering, rights of ways, designs, permitting, traffic control, everything associated with it. And then they -- each stage of that over the last 3 years, they've reviewed, they've commented, they've kind of set the parameters on that. And then -- so we'll get that into them sort of this spring. They'll review it in its completeness. Then we move forward to final design concurrently with that and the bonding of that later in the year. And then we look to go to bid for the interchange sometime end of the year and be under contract for construction in 2027. And it will only take probably 6, 9 months -- probably 9 months to construct. It's not a -- as you saw, it's not a hugely complex one, and we're able to take advantage of existing on, off-ramps. So we're just really constructing a new bridge -- wider bridge, longer ramps to the new one. Unknown Analyst: So if things went according to that plan, it would be completed construction beginning of 2028 calendar? Mark Harding: Yes, yes. Unknown Analyst: Okay. You didn't talk any -- mention public comments and opportunities for the public to delay or stop. Is that going to be an issue? Mark Harding: That's a good question. I'm not sure that there is a comment period to that because it's just replacing an existing interchange. So if it were a new interchange, it might be a little bit different process, but because we're just -- it's an existing interchange replacement upgrade. Unknown Analyst: Mark, yes, so I just wanted to ask on the data center potential. A lot of people don't like living near data centers. And so how are you thinking about where this location would be within Sky Ranch? And then also, obviously, a good way to unlock some of that water capacity, but would you be able to monetize it at the same rate as like a single-family home. So if there's -- if the data center is 500 single-family homes, would you be able to charge them a similar rate for that? Mark Harding: Good questions, both of them. On the first one, location, we're sort of talking -- if we look at the site that we're currently evaluating, it would be tucked up into kind of that top corner of the commercial parcel. So nobody would be living next to it. Next to it being a relative term, what is next to it, is -- next to it is being a few hundred feet, is next to it being 0.25 of a mile. So that's kind of the separation that we would see between that land use and our residential land use. So I do think we've got a good spacing and a good buffering opportunity for that. We're not just looking at that one site. We're looking at other sites that are going to be more remote where we could get water to them on a more remote basis and maybe it's where power is more accessible in a more remote location. These data centers are not site-specific. And quite frankly, being next to the interstate isn't what they would otherwise need. They don't need that kind of access. That we have that site, that site is zoned, permitted, ready to go with all of the water out there is super attractive, right? So a lot of these are -- what's the availability? What's your time line? Can we jump into a site sooner rather than later? And so all those things are attractive for Sky Ranch because it's already ready to go. As it relates to what that water supply might look like, that's a little bit -- there's a lot of nuances in that because they don't need full potable water, right? They don't need that same level of service that -- they're not going to be drinking that water supply. So we've had conversations with them about water quality, raw water service that might have a little bit of a price incentive for them where we don't have the same level of cost. We don't have the same level of water quality monitoring, those sorts of things. So that one is TBD. We do want to capitalize on the value of our water supply, but we also are cognizant of the fact that we're very long on water supply and maybe we have a supply agreement with them for a period of time that would be look one way and maybe get that water back in another way to give them some incentives so that we're not losing 60,000 units worth of capacity, but then we're also using that water in the interim. So there's all of those opportunities with that type of customer. Well, if there's no other thoughts on the quarter, don't hesitate if you listen to this on rebroadcast or your technology didn't work or you had a -- you get distracted and to run up something else, don't hesitate to give me a hello. We're continuing to really accelerate the company, and we're very excited about where we're at. We're excited about execution, and we're excited about how things are going to look for the coming quarters and coming years. So thank you all for your continued support, and we wish you very best in the new year. Unknown Analyst: Thank you, Mark. Mark Harding: Thanks all.
Operator: We'll now begin the LY Corporation financial results briefing for the second quarter of fiscal year 2025. Thank you very much for joining us today. We will be referring to the financial results presentation available on the LINE and Yahoo! LY Corporation website. During today's session, we kindly ask you to follow along with the material. Joining us today from LY Corporation are Mr. Takeshi Idezawa, President and CEO; Mr. Ryosuke Sakaue, Executive Corporate Officer, CFO; Mr. Yuki Ikehata, Corporate -- Executive Corporate Officer, Corporate Business Domain Lead; Mr. Makoto Hide, Executive Corporate Officer, Commerce Domain lead; Mr. Hiroshi Kataoka, Executive Corporate Officer, Media and Search Domain lead. First, Mr. Idezawa will provide an overview of our financial results for the second quarter of fiscal year 2025. Following his presentation, we will hold a Q&A session. The entire briefing is scheduled to take approximately 1 hour. We will be live and streaming this session. If there is any distortion or inconvenience in the video or audio, please try alternate server link. Takeshi Idezawa: This is Idezawa of LY Corporation. First, before explaining our financial results, I would like to comment on the system failure caused by a ransomware attack that occurred at our group company, ASKUL Corporation on October 19 and the partial leakage of information held by the company. We sincerely apologize for the significant concern and inconvenience caused to our customers who use our services as well as to our business partners. The details regarding the damage potential information leakage and recovery status have already been communicated by ASKUL. The company is continuing to work closely with external experts prioritizing a safe and prompt restoration of systems while investigating the cause and confirming the scope of impact including any personal data. LY Corporation is fully cooperating with all recovery and investigation efforts. As the parent company, we take this matter seriously, and are committed to restoring the situation and preventing recurrence and strengthen the information security framework across the entire group. Now let me explain our second quarter financial results. Please turn to the next page. First, here is an overview of the second quarter results. Consolidated revenue was JPY 505.7 billion, up 9.4% Y-o-Y. Consolidated adjusted EBITDA grew 11.3% Y-o-Y to JPY 125.4 billion showing solid profit growth. Additionally, progress in AI agentization and the expansion of LINE Official Account and Mini apps are progressing smoothly, preparations for the LINE renew are also steadily progressing. Home tab refresh scheduled within the year. We will now proceed with the explanations in the order of the agenda you see here. First, the consolidated company-wide results. Next page, please. These are the results for the second quarter. Although consolidated revenue was slightly behind the guidance due to the decline in search advertising revenue, adjusted EBITDA and EPS are on track with the guidance. Next page, please. These are the consolidated performance trends, driven by the growth of PayPay consolidated and progress in efficiency improvements at LY Corporation, adjusted EBITDA grew 11.3% Y-o-Y, achieving double-digit profit growth. The margin also improved year-on-year. Next page, please. These are factors of change in consolidated adjusted EBITDA. Although expenses increased, revenue growth in the Strategic Business and Commerce Business outpaced the expense increase, resulting in a year-on-year increase of JPY 11.7 billion in adjusted EBITDA. BEENOS and LINE Bank Taiwan have been fully consolidated since the second quarter with the 2 companies contributing JPY 900 million to adjusted EBITDA. Next page, please. This is consolidated total advertising-related revenue. This quarter, commerce advertising achieved double-digit growth driven by increased transaction value and the total ad revenue grew by 2.4%. Next page, please. This is consolidated e-commerce transaction value. Domestic shopping transaction value grew 13.1% year-over-year, supported by last-minute demand ahead of the discontinuation for awarding points for hometown tax donation program. Reuse saw year-on-year growth of 15.7%, driven by Yahoo!'s lead market growth and BEENOS contribution. Next page, please. Regarding the upward revision of the dividend forecast, we conducted share repurchase during the first half of the current fiscal year and the cancellation of these shares was completed on September 3. Consequently, as the number of shares eligible for dividends has decreased, the annual dividend has been revised upward from JPY 7 to JPY 7.3. Next page, please. This is on progress on the LINE app revamp. The renewals of the talk, shopping and wallet tabs have been rolled out in phases since September. Home tab renewal is scheduled to make a test release this year. Next page, please. This is on optimization of management resources. Firstly, on human resources, we are reallocating to growth areas such as AI agents, which will be explained later, Official Accounts and MINI Apps. We will reallocate our human resources so that by FY 2028, 50% will be allocated to growth areas. We will reduce the fixed cost by JPY 15 billion by the end of fiscal year by 2026 and build a leaner financial structure. Next page, please. From here, I will explain the financial results by segment. Next page, please. First, the Media Business. Although both revenue and adjusted EBITDA declined, continuous cost-saving efforts are yielding results, leading to improvement of adjusted EBITDA margin on Q-on-Q basis. This is performance analysis of the Media Business. While search advertising revenue contracted, growth in account advertising drove an increase in total advertising revenue. Next page, please. Account advertising continues to perform strongly in both the number of paid LINE Official Accounts and pay-as-you-go revenue. As this is an area we are strengthening alongside MINI Apps, we will provide a more detailed explanation of future strategies and initiatives later. Next page, please. Next, the performance trends for the Commerce Business. Second quarter revenue reached JPY 216.6 billion, a year-on-year increase of 7.2%. Adjusted EBITDA was JPY 33.3 billion, although profit declined due to increased promotional expenses related to the hometown tax donation program, the decline narrowed compared to the previous quarter. Next page, please. Performance analysis of the Commerce Business. The business as a whole is expanding steadily. In addition to the full consolidation of BEENOS, Yahoo! Shopping and subsidiary growth contributed to increased revenue. Next page, please. performance trends for strategic businesses such as payment and financial services. Revenue continued to be driven by PayPay consolidated, reaching JPY 109.7 billion, a year-on-year increase of 35%. Adjusted EBITDA also continued to grow, reaching JPY 22.9 billion, an year-on-year increase of 52.1% with margin remaining at a high level. Next page, please. Performance analysis of strategic businesses. Payments and financial services are both growing steadily. Furthermore, the full consolidation of LINE Bank Taiwan contributed to increased revenue. PayPay consolidated business overview. Each service is growing smoothly. Our number of payment per user and unit price, those KPIs are progressing smoothly. As a result, consolidated sales has increased Y-o-Y, plus 30.4%. Consolidated EBITDA was more than doubled. So the second quarter showed a significant strong growth. Next, from here, I will explain our key strategy going forward. Next page, please. As our company-wide key strategy, we will advance as 2 wheels that agentization of all services and the enhancement of Official Account and MINI Apps. In agentization for the 100 million users using our services, we will provide services like search, media, finance and commerce more conveniently via AI agents. And for corporate clients such as businesses, companies, stores and brands, we will provide customer contact points and business support function through our function enhances Official Accounts and MINI Apps by improving the value provided to both users and clients and by seamlessly connecting both via AI agents, we will realize new service experiences and expansion of revenue opportunities. Please turn to the next page. First, regarding our initiatives for AI agentization. First, our goal is daily AI agent used by our 100 million users in Japan, aiming for 100 million DAU. Currently, in October, DAU for AI services is 8.6 million, especially AI answers on Yahoo! JAPAN search and LINE AI Talk Suggestions are used frequently and user numbers have begun to expand. Also for AI Talk Suggest, user billing has started and monetization efforts has also begun. Going forward, we will promote AI agentization of each service and aim to expand users. Next page, please. Next, regarding the enhancement of OA, Official Account and MINI Apps. But before talking about the specific initiatives, I'd like to explain the structural transformation of the Media Business. Earlier, I explained the revenue decline in search advertisement in the Media Business, while steadily bolstering the conventional search and display advertising businesses, we will achieve sales and profit growth by further growing OA and MINI Apps where we can provide our original value. Over the next 3 years, we will increase the share of high gross margin OA and MINI Apps to about 40% and aim for an adjusted EBITDA margin of 40% to 45%. First, regarding the performance of OA, Official Accounts in Japan over the last 3 years, our track record, the number of paid OAs improved by a CAGR of 14% and ARPA also improved. And as a result, OA revenue also grew 16% annually on average and sales have grown to the scale of JPY 100 billion in Japan and JPY 140 billion, including global. Please turn to the next page. On top of this OA growth foundation by further building a MINI App platform and adding a SaaS-like store support solutions, will create a multilayered revenue structure and aim to double sales in 3 years. This fiscal year, as I mentioned, doubling the JPY 140 billion to JPY 280 billion. In this fiscal year, we will first focus on expanding MINI Apps based on OA and launching the SaaS business. Important KPIs for the revenue models of each areas are shown in the lower section of this page. MINI Apps are -- our scale expansion is very important for KPIs in the growth phase. In OA SaaS, we set ARPA improvement as KPIs. But we think these KPIs as leading indicators to monitor our business goals. Next page. Let me explain structurally. First, there is an OA, Official Account as a base. Currently, there are 1.3 million active Official Accounts used in Japan, in which number of paid Official Accounts are 310,000. We see the target accounts for future expansion such as businesses, companies, stores and brands at about 5 million. So we can still grow the number of OA accounts, and we will also further increase the ratio of paid accounts. The second layer, MINI Apps to OA using companies and stores, we will propose a customer contact point via MINI Apps, expanding MINI Apps numbers, growing users and creating businesses like payments and ads within them. The third layer is SaaS solutions, developing specialized support for high affinity industries like Store DX or reservations, aiming to raise ARPA. Service launch planned for 2026 first half. And we'll have more new solutions at the right timing when we can introduce them to you, we will. We will provide services more broadly and deeply and provide a deeper solution via SaaS by industry to expand our sales. Finally, regarding the recent growth of MINI Apps, as you can see on the left-hand side graph, number of apps has increased by 1.5x and the number of users has increased by 1.6x, steady growth. And we are strengthening our sales structures. We are enhancing proposal to bigger companies and installation at large enterprises like these are beginning. As you can see, and as a measure to strengthen inflow, we are leveraging LINE touch, which allows users to instantly launch MINI Apps at stores and the LINE apps revamp focusing MINI Apps will also begin. So we will further expand both the number of apps and the users and build a situation where businesses like advertising payments that can be provided. Let's turn to the next page. And finally, a summary of the Q2 financial results. Sales and profit expanded steadily. Our company performance was -- experienced a solid growth. Going forward, centered on AI agentization and Official Accounts and MINI Apps, we will accelerate the growth. We will promote AI agentization across all services, offer AI services to 100 million users and create new value. Also, we will enhance OA and MINI Apps. And while transforming the media portfolio, we will achieve growth and improved profitability. This concludes our Q2 financial results explanation. Thank you very much. Operator: We would like to now begin the Q&A session. [Operator Instructions] First from Goldman Sachs Securities, Munakata-san. Minami Munakata: I'm Munakata from Goldman Sachs. I have 2 questions. My first question is on search ads. In the first quarter and also in the second quarter, the impression I got is this business is quite tough. The degree of toughness, is it correct to understand that it's the extension of the first quarter? Or are there any additional reasons? And on search ad, what would be the realistic guidance towards the second half? That's my first question. Ryosuke Sakaue: Thank you for the question. I am Sakaue. I'm the CFO. Let me reply to your question. Second quarter year-on-year is worse compared to Q1. One of the factor is one major client budget allocation was weak, and that continued into the second quarter. And in addition, in other clients, the budget reduction happened. This I'm referring to large EC companies in Japan and vertical companies declined, and that can be called additional from Q1. So that was the additional factor for Q-on-Q deterioration. And Q3, Q4, I think the degree of negative -- negativity is same as Q2. For Q3 and Q4 as well, that is our forecast. Minami Munakata: I have a follow-up question. There are other clients with quite reduction. Is there any structural reason such as shifting in-house or revisiting ROI of advertising? Is it more of an economic trend? What is the nuance? Yuki Ikehata: This is Ikehata. Let me reply to your question. This is Ikehata. I would like to add some more comments. In addition, there were some industry -- well, in addition to prior quarter's reduction trend in other industry, partially, that is -- there was a reduction in ad spend for search ad. The concept of ad placement, I don't think that is such a reason. But overall, LINE Yahoo! search ad performance is being monitored and the advertisers operate. So based on that, there is -- there was a decline in ad placement. We will continue to work on the performance improvement of search ad, and that would lead to getting these customers back. So rather than any unique circumstances, we are to continuously work on performance improvement of search ad. Minami Munakata: I understood fully. Another question is on MINI App. This time, various figures were presented and outline was explained, and I was able to learn. Thank you very much for that. The portfolio shift -- this chart has been shown. Just to reconfirm display and search, basically, it's very difficult to grow these areas. Is that the assumption you are setting? And JPY 140 billion to be expanded to JPY 280 billion, that has been rather difficult. And what is the pathway you envision? For example, from the first half of 2026, you're going to start SaaS service. So from the second half of next year, do you expect the sales to accelerate? Takeshi Idezawa: This is Idezawa. Let me answer your question. Display, search, naturally, the measures to revamp or to boost them, we are taking measures. And also thanks to the organizational change that we have implemented, we are able to implement activities to work on recovery. But structurally speaking, I don't think this is an area where we can expect high growth rate. So from that perspective, we will support the baseline for the display, search. And then apps will drive the growth. And we have the target of Official Account doubling and CAGR-wise, it has been 16%. And so we have this growth of OA, Official Account as a basis. And to add on top of that, we are going to provide MINI Apps and SaaS services. So we will be pursuing the target by having breakdowns or compositions in mind. On MINI App, it's not a linear growth, but when we have a certain number of clients, then we can expect a significant activation. So the MINI App platform will be stronger in the later half. And then that would be the overall picture. Operator: Next question from SMBC Nikko, Mr. Maeda, please. Eiji Maeda: This is Maeda from SMBC Nikko. I have 2 questions as well, please. I'll be recapping the previous comments regarding search linked ad. Together with popularization of GenAI, the negative impact to queries. And when I look at the performance, some of the clients looks like ad placements are declining in numbers. So because of this GenAI, the performance is having a negative hit on the flip side. If you could please share more on the recent trend? And also for the market, we -- there is still a concern that GenAI rise can be a negative for a search-linked ad. If you could please share your outlook, that would be great. Ryosuke Sakaue: Thank you, Mr. Maeda. Sakaue, I will start, then possibly Kataoka will follow up. At the moment, Yahoo! Search, 10% of query comes from AI search. And at the same time, the answers from AI search are business query where there is no opportunity for search-linked ad, like questions and answers. Those are the search keywords that we get. So it doesn't have much impact to our revenue and profit making. But at the same time, mid- to long term, regarding those business query, I would think that the there will be more use on use of GenAI. So media and search, we expect the next 3 years to be flat plus extra. Hiroshi Kataoka: This is Kataoka speaking. As Sakaue mentioned, number of queries for search have not resulted in significant decline in the number of queries. There is no major time shift in the search trend. And ad performance itself hasn't deteriorated. So within this big global trend, there's more use cases from GenAI are increasing. And I'm sure more of our clients companies are considering to further use GenAI. We believe that there will be opportunity, the monetization business opportunity when it comes to GenAI-led search as well. So we are considering various different means to monetize. Eiji Maeda: Second question, regarding Commerce Business. In second quarter, each services growth on the Page 8. Regarding Yahoo! Shopping, the hometown tax, I wonder how much of that impact is included. I wonder in the second half, there can be a significant decline in the growth as a reversal factor. And if you exclude the BEENOS impact, what is your true growth opportunity? So the growth in the cruising pace and growth from a one-off reason, if you could please share for the results in the first half and what you expect for the second half, please? Unknown Executive: Okay. Sakaue would share some figurative indication then -- and I'll have my colleague, Hide to provide additional information. And regarding Yahoo! Search -- sorry, Yahoo! Shopping, for second quarter, the growth was about 19%, 1-9, so quite significant. And hometown tax, late high single digits, mid-single digit to high single-digit growth. And for Reuse, this includes Yahoo! Auction, Yahoo! Flea Market and BEENOS as to be about 15% growth. So excluding BEENOS, we do have mid-single-digit growth. Second quarter has this last-minute demands for hometown tax. So that led to this significant growth rate. Makoto Hide: This is Hide to provide additional information. Regarding Yahoo! Shopping, a significant impact from hometown tax. This is something that was happening at the end of the year in December time. So it's a front-loading of that demand now. Compared to the last year, Q3 growth rate will be stagnant, will slow down. For Reuse, excluding BEENOS, I do see the trend continuing. In other words, Yahoo! Auction growth is quite steady and Flea Market is growing significantly. So when you take the weighted average, our growth is mid-single digit. I would think that for the second half, we can expect a similar growth, and we'll have a synergy, as you can see on the right-hand side, to have a more significant growth in the midterm. Operator: Next, Okumura-san from Okasan Securities. Yusuke Okumura: This is Okumura from Okasan Securities. Can you hear my voice? Unknown Executive: Yes. Yusuke Okumura: I have 2 questions. On Page 26, you have been explaining on the account ad and MINI App expansion and double the sales from this, I would like to reconfirm Official Account, the platform part based part, the assumption is the current growth rate. And through MINI App several dozen billion will be added on top. Is that the assumption? If this becomes a reality, it's wonderful. But what is the background for being so bullish at the time of launch, the assumption of the MINI App or MAU in order to achieve your assumption, what kind of measures and scale of investment you're going to make in order to achieve your strategy? That is my first question. Unknown Executive: Firstly, the growth image of official apps, I would like to explain and the strategy to grow will be replied by Idezawa-san and Ikehata-san. The existing OA part, the current level of growth can be maintained. To be more specific, 10% to 15%. Currently, it is growing at nearly 15%. So maintaining the same growth level. The paid accounts can be expanded in this pace, but that will not bring us to double. So the gap will be compensated by MINI App and SaaS. The strategy will be explained by Ikehata. Yuki Ikehata: Thank you for your question. Let me just add some more comments. In your question, you said that it's still the starting phase and this forecast may be bullish at the starting phase. But right now, we already have Official Accounts and MINI Apps, although partially we are not monetizing yet to many customers, similar solutions are offered and being used, and it's been -- the customers are satisfied. So for MINI Apps, we will increase the number. And at the same time, we will focus on monetization. That is for next year and beyond. Official Account SaaS solution already, including third-party solutions, we are collaborating with various companies and various solutions are already being utilized. So our strategy is to monetize them from next year and onward. We haven't been able to try or something that does not fit the market to start from scratch. Well, that is not the case. We already have existing foundation of Official Accounts, and we are offering various services, and we will expand and further monetize. So that is the basis of our assumption to achieve these targets. Yusuke Okumura: What about the scale of investment? JPY 10 billion was the media investment for this year. What about the investment going forward? Unknown Executive: The details will be discussed, but we are working on the awareness strengthening through advertising for MINI Apps and we are going to focus on promotion and PR. And regarding manufacturing or production, as shown on the slide, we are to reassign human resources to these growth domains to speed up the launch of products. Yusuke Okumura: My second question, on LINE, you are going to implement AI agents. I would like to ask about that. ChatGPT has instant checkout and strengthening the functionalities, and they are expanding partners, the user side rather than ChatGPT, why do they use LINE's chat or AI agents? What is the value that you offer in the future? The relationship is that parent company is -- has strong ties with OpenAI. And what kind of positive influence will that relationship with OpenAI has with your company? Takeshi Idezawa: This is Idezawa. Let me reply to your question. Our company does not have our own LLM. So we use OpenAI solutions or other solutions. We pick and choose. It's not just LINE, but within our company, we have a variety of services, news, commerce, finance, auto, so each service will be agentized. That is what we are working on right now. And like Yahoo! and LINE or integrated agent will be created. So that is the perspective of our user interface. We do not have LLM ourselves. But on the other hand, we have a lot of touch points with so many users and services. So within one ID, ours can be used in a seamless manner. That is the value we offer. So that is why we are working on agentization of various services. Operator: Next from Mizuho Securities, Mr. Kishimoto, please. Akitomo Kishimoto: My name is Kishimoto from Mizuho. I have 2 questions too. Both are about LINE Ads. The first is commerce functions of LINE SHOPPING functions. I would think that it will be launched quite soon as a new platform. I know you've done some testing. So I wonder what is lacking in order to have a full launch? That's my first question. Makoto Hide: This is Hide speaking. We are providing bucket test. We have already launched the test launch for this within the LINE SHOPPING tab. We are not offering any service actively or making a big sales promotion. We are testing system stable operations. Then within this test bucket, we are trying to expand our product and services or to enhance sales promotion activities so that we'll be able to have 100% full launch. We have been working together with various internal stakeholders. The situation is a bit different from the users of shopping -- Yahoo! Shopping, where they already know what they want to buy or they want to buy certain things. LINE, we need to propose what is appropriate and right that would resonate to the LINE users. Once we know that right business model solutions, then we will be able to launch under such use case and sell products as well. So there's a great opportunity, and we've been testing at the moment. Akitomo Kishimoto: On Page 27, please, you mentioned about second tier, third tier. I'd like to ask you a question about the capability for the third tier. I understand that you have been reallocating your staff together with AI agents. I wonder whether you'll be able to run all these initiatives under the current manpower? Or are you going to strengthen your perhaps sales capabilities with more new recruits? Is this something you can do with the current resource? Unknown Executive: I'm sure it's based on the selection criteria, but thank you for your question. Your point, recently, we do have a certain amount of resource that we had to allocate that we had to secure from other departments to this department. So as mentioned on this page, we are going to have 50% of this existing business to new domain or the focus domains. So we will be shifting our business focus as well as resource allocation as well. And we also are considering more partnership, leveraging outside resources as well. We have many different ideas. Operator: Next, Nagao-san of BofA Securities. Yoshitaka Nagao: Can you hear? Unknown Executive: Yes. Yoshitaka Nagao: This is Nagao speaking. My first question is on MINI App MAU is to be increased from 25 million to 75 million and from 35,000, the KPI direction is being presented, the price charging per app or how you consider retention. What are the methods you're going to take? 60% comes from OA and 40% comes from MINI Apps. So proactive monetization will be necessary. So can you explain concrete ways you have in mind for monetization of MINI Apps. Yuki Ikehata: Thank you for the question. This is Ikehata speaking. Let me answer your question. Right now, well, MINI App numbers are to be increased, and we are to increase the number of users significantly. That is the plan. So on MINI Apps themselves from LINE application, there will be a lot of touch point from the users. So we are increasing touch points by linking with LINE app and LINE media to increase the opportunity for as many people as possible to touch MINI App. On the monetization of MINI App, the payment function and also advertising within MINI App and receive ad placement fee. So those are 2 monetization sources. The application that can generate fruits in terms of profitability is what we are planning to build. The sales force, we are strengthening right now so that as many people as possible will utilize MINI App and open Official Accounts. From next fiscal year and beyond, we expect monetization of revenue. We already are seeing the account openings by many on Official Account. So we have confidence. Yoshitaka Nagao: My second question is related to Page 24 of the material, the target of EBITDA margin, 40% to 45%. Right now, 37% or 38% is the Media Business margin. Official Account and MINI App domain overlaps SaaS domain. So when you expand the scale, the sales staff or development cost will be heavier upfront. And I have a concern that the profitability may decline. The existing search and display ad by the sales of that part decline will affect the overall margin. So what is the overall ad margin? And in achieving 40% to 45%, what would be the contribution of OA and MINI Apps? If possible, could you disclose those information? Unknown Executive: Rather than speaking on the concrete number, it's more of a guide, the search, the basis is that profitability is not that high, and we have been communicating that from before. There's a certain fee that we pay to Google. So the search margin originally is low. And adding with display, it's shown as flat, but the search will be down trend and display, we achieved certain growth in Q2. So the ratio of display will likely to expand. So the margin on the lower part will increase -- will improve. And on display, as you know, there is a commission with the agents that is included in the COGS. So it's -- that is the margin structure. OA the margin will be similar to display. The SaaS part, it will be dependent on the pricing structure, but vertical MINI App or SaaS peers, when we look at them, the profitability is quite high. Compared to ad business, it's low, but still, it's high enough to be able to support. On top of that, MINI Apps, the ad on MINI Apps and within MINI Apps, we will place ads in a network style. So that's the type of ad business that we would like to deploy within apps. So we expect that we can secure profitability on a certain extent. Yoshitaka Nagao: One quick question on Page 11, the JPY 15 billion reduction plan is shown in the medium term, the Media Business ad expense, in some part will increase, in some part it can decline, but the fixed cost of the Media Business will it be unchanged? Unknown Executive: This slide is the company-wide figure. This fiscal year, JPY 10 billion for LLM cost will be incurred. And next year and beyond, LLM expense will continue to rise. But through various programming, we can expect improvement of operational efficiency. So JPY 15 billion, even LLM commission rises next year, we intend to reduce the fixed cost, even including that JPY 15 billion, the promotion expense and advertising for commerce, it is linked with GMV. So that is not included in this figure. And on Media segment, there are subcontractors and some of the human resources cost through use of AI, we can create a leaner structure. So those are combined to set the target margin at 40%. Operator: Next, from Nomura Securities. Mr. Masuno. Daisaku Masuno: This is Masuno speaking from Nomura. Can you hear me? Unknown Executive: Yes, we can. Daisaku Masuno: I just have one question, please. Renewal of LINE apps, you are -- been talking about adding a commerce tab. And I know you have been trying various scenarios under beta. Fundamentally, are you trying to transition the info traffic to service like LINE GIFTS? Or are you going to provide a brand-new shopping experience to LINE users. So I wonder what kind of inflow -- what kind of user experience are you trying to create through this commerce tab? Unknown Executive: What we are testing right now under the current version, all the products that's on LINE tabs are LINE GIFT products. Going forward, in addition to the LINE GIFT products, the stores that are present in Yahoo! Shopping, some of their merchandises we would like to post there. So not just for gift needs, LINE SHOPPING, Commerce products, we would like to offer through that tab. So comprehensive portal shopping corner is how we like this service to grow to be. So what type of stores, what type of products from Yahoo! Shopping really has to do with the previous questions and answers that we had. What kind of products will be the right fit, best resonate to the LINE user. It really depends on that. That's what we are testing right now. So we have to have a right product mix on top of the GIFT products, we've been carefully studying what would be the type of product group that is worth promoting heavily behind it on this new effort. Daisaku Masuno: Okay. So this is not a purchase intent visit. I can understand LINE GIFT. I wonder for those users who are not thinking of purchasing anything would ever be a real customer, whether they would convert by visiting the site? Unknown Executive: Other than Yahoo! Shopping, our customers right now are searching for what they want out of tens of thousands of our products with a certain purpose, compare prices and make decision-making. We have a massive number of products on Yahoo! Shopping. It doesn't make sense to put all of that on LINE tab. I don't think it will drive sales. So out of what's available in Yahoo! Shopping, those stores, we need to focus on products with more uniqueness, originality and some product group with extremely high demand once they release, always sells out. So those will be the right products, we think to be on the LINE tab. Those will be the right products for this casual shopper. Daisaku Masuno: Are you talking about hundreds or thousands? I don't think you're talking about dozens of thousands. So I just have no idea about the scale of the products that would be available through this LINE tab. Unknown Executive: That is exactly what we are trying to get to. That's why we've been repeating the test. So it really depends on the -- we don't know. There's nothing that we can share with you regarding the size or scale of the stores or the type of products or the scale of the product. Operator: Next, Kumazawa-san of Daiwa Securities. Shingo Kumazawa: On Page 11, fixed cost reduction of JPY 15 billion. This is the topic of my question. Currently, what is the fixed cost? And how much is this JPY 15 billion? And from last year, you have been spending on security-related costs. Is that included in this reduction of JPY 15 billion? I believe it's mostly outsourcing that you can reduce. Are there any major items that you expect to reduce significantly? And I believe AI agent is contributing to reduction. So from -- compared to last year, how much reduction is this? Ryosuke Sakaue: This is Sakaue. I will answer your question. LY stand-alone fixed cost is roughly JPY 700 billion. As you stated in your question, security-related costs will come down. On the other hand, LLM commission will almost offset that increase. From April of next year, we will increase the office space to accommodate a 3-day commuting of our employees, and that means the cost increase. And by using AI, we intend to reduce JPY 15 billion in total. If we do not take any action, the fixed cost will likely to go up by JPY 2.5 billion to JPY 2.6 billion. In the areas of reduction, outsourcing part and software license from outside, the system that employees use, we can make progress in the integration of the platform. So double payment can be eliminated. So that is included as the cost reduction on software license. Shingo Kumazawa: The areas you can reduce, I understand it's difficult to name the concrete name or ServiceNow or others or Salesforce. Is it possible to cut them entirely rather than specific ones? Unknown Executive: It's an overall effort, frankly speaking. And for example, there are licenses that are given to all of the employees. But if we identify the staff that really uses, then we can reduce the number of license. And also, there may be redundant functions on the software and cut one of them. Operator: Next from [ SBR. Mr. Jose ], please. Unknown Analyst: I have a question regarding capital structure and security governance. I understand in the past, administrative [ court ] instruction was given from Ministry of Internal Affairs and Communication, administrative guidance pointing out your capital structure. Now that under new administration, any risks that you foresee or any changes to the relationship with the government regarding capital structure, please? Unknown Executive: Regarding the administrative guidance, we've been responding appropriately. And from -- for the 2026 March, we are making progress toward it. And regarding the capital movements, we've been continuing the discussions, reflecting our past track record. No major changes to or the [ FY 2026 ]. Unknown Analyst: I understand. So for 2026 March, you will conclude all the measures to meet the administrative guidance? Unknown Executive: Correct. Yes on track. Unknown Executive: Now, we would like to close because the schedule ending time has arrived. I would like to now have Idezawa to offer a final reading. Before Idezawa's final remarks, I mentioned about the fixed cost of JPY 700 billion, that was a mistake. It's roughly JPY 400 billion to JPY 500 billion. Takeshi Idezawa: This is Idezawa speaking. Thank you very much for raising a lot of questions. The environment surrounding AI is rapidly changing. And our 2 core strategy is AI agents and OA, and we will continuously grow by changing our business structure. That is the message of today's presentation. I will ensure that these plans will be executed steadily, and we would like to ask for your continued support. With this, we would like to close LY Corporation's FY 2025 second quarter earnings call. Thank you for staying with us until the end. [Statements in English on this transcript were spoken by an interpreter present on the live call.]