加载中...
共找到 13,909 条相关资讯
Former U.S. Federal Reserve Governor Larry Lindsey has withdrawn his name from consideration for the position of Fed chair, CNBC's Eamon Javers reported on Thursday. President Trump is considering a list of candidates to replace Federal Reserve Chairman Jerome Powell for when his term expires in May.
CNBC's Eamon Javers joins 'Fast Money' with the latest on potenttial fed chair nominees.
The Dow Jones Industrial Average falls, testing its 21-day moving average on Thursday.
Wall Street's top regulator on Thursday eased the way for companies to proceed with initial public offerings during the federal government's shutdown, according to an announcement on its website.
Asking for a Trend anchor, Josh Lipton breaks down the latest market trends for October 9, 2025. KeyBanc Capital Markets Managing Director, Brad Thomas, discusses the strength of the consumer heading into the holiday shopping season and the best-positioned retail stocks.
The Bureau of Labor Statistics is calling back some employees to produce the Consumer Price Index for September. That data is needed to calculate the annual cost-of-living adjustment for Social Security beneficiaries.
The Federal Reserve is starting to appear divided on whether or not to cut interest rates after Fed governor Michael Barr said he favors a more cautious approach around tariff risks. New York Fed President John Williams, on the other hand, is in favor of further rate cuts in 2025 as labor market momentum begins to slow down.
Jeremy Siegel, Wharton professor emeritus and WisdomTree chief economist, joins 'Closing Bell' to discuss Siegel's thoughts on market comparisons, how Siegel views equity markets and much more.
Nuveen Asset Management LLC's chief investment officer Saira Malik says strong corporate earnings are likely to drive a US stock rally into year-end. For equities, the fourth quarter “is normally a strong quarter, especially when we're up substantially year to date,” she said on "Bloomberg Open Interest.
The JPMorgan Chase CEO isn't afraid of making predictions.
Operator: Thank you for joining today's conference call to discuss Tilray Brands' financial results for the first quarter fiscal year 2026 ended August 31, 2025. [Operator Instructions] I'll now turn the call over to Ms. Berrin Noorata, Tilray Brands' Chief Corporate Officer. Thank you. You may now begin. Berrin Noorata: Thank you, operator, and good morning, 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 first 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, Berrin, and good morning, everyone, and thank you for being here for our Q1 results. Q1 of fiscal 2026 was a testament to the significant momentum Tilray has built across our businesses over the years. I'm proud to report that our strategic focus is continuing to strengthen our profitability, our balance sheet and leveraging our global platform to drive innovation in Cannabis, Beverage and Wellness and continue to deliver solid results for our shareholders. I want to extend my sincere gratitude to our shareholders for their ongoing support and belief in Tilray's vision. It is encouraging to see our stock [ regaining ] strength this quarter and return to full NASDAQ compliance. Notably, in the months of August and September, Tilray traded well over 1 billion shares each month, highlighting the tremendous interest in our company and not a lot of companies have 1 billion shares trading on a monthly basis. We sincerely thank our shareholders for their continued confidence in our strategy and their commitment to investing in our company, your belief in our long-term vision and what drives us forward. Now go out there and buy some of our products. Notably, during the quarter, we achieved net income of $1.5 million and earnings per share of 0, highlighting our commitment to sustainable growth and operational efficiency. We achieved revenue growth across all our business segments with the exception of the Beverage segment, which we remain flat because of deliberate decisions to optimize our craft beer SKU portfolio under Project 420. Overall, total revenue increased by 5% year-over-year to a Q1 record net revenue of $210 million, fueled by double-digit growth in our Canadian Adult-Use and our International Cannabis business, which delivered 12% and 10% growth respectively. We also continue to strengthen our balance sheet by reducing our outstanding debt by $7.7 million this quarter, bringing our net debt-to-EBITDA ratio of 0.7x (sic) [ 0.07x ] cash to and our cash equivalent to $265 million. Our results are underpinned by our deep understanding of product innovation and evolving what consumers prefer. This expertise allows us to shape innovative offerings and not only meet current demand, but anticipate future needs, keeping Tilray at the forefront of the cannabis, beverage and wellness markets. Today, Tilray owns and operates more than 40 unique brands in over 20 countries, and we are the predominant global cannabis leader trusted by patients, medical professionals and governments in over 20 countries and #1 Canadian cannabis producer by revenue, the fourth largest craft beer producer in the United States and a market leader in branded hemp products across North America with our portfolio of high-protein hemp snacks and better-for-you products, holding nearly a 60% market share and now a leader in the new exciting hemp-derived Delta-9 THC beverages across the U.S. We have built a diversified global platform that is a leader in every industry which we compete. Let me briefly review each business. Our Cannabis business, as I said, grew 5% year-over-year to $65 million. Globally, the cannabis industry continues to evolve, and Tilray has the cultivation and manufacturing agility at the right cost to compete and lead in any commercial markets around the world. Recent developments in the U.S. have strengthened our optimism around rescheduling of medical cannabis, and we've seen in other countries -- as we've seen in other countries around the world. We believe rescheduling would enhance our patient access and improve the quality of patient care, promote scientific research and support responsible regulatory framework. The medical cannabis industry in the U.S. currently estimated to be at least a $10 billion market, which would create a potential opportunity for Tilray to capture at least a 3% to 5% market share, representing a significant $300 million to $500 million business opportunity. We've identified multiple pathways to participate in the U.S. medical cannabis industry, positioning ourselves to take advantage of the substantial growth potential when it happens. In Q1, our Canadian cannabis business delivered strong results. Tilray reinforced its position as Canada's largest legal cannabis company by revenue with Q1 revenue up 4% year-over-year to $51 million. In the adult-use channel, Tilray was the top 5 licensed producer. We grew in market share, closing the gap to the #1 LP in market share by 53 basis points. We held the #1 position in key categories such as pre-rolls, beverages, oils, chocolate edibles. And by the end of the quarter, we also reached the #1 spot in flower while maintaining our top 10 positions across all categories. Congratulations to Blair and his team. We believe our extensive scale represents a significant competitive advantage within the Canadian market, where we manage approximately 5 million square feet of cultivation space and currently maintain 210 metric tons of cannabis in production with additional capacity readily available. This position us to effectively meet future demand. Furthermore, Tilray is well prepared to supply both European and U.S. markets as regulatory framework develops these markets and it continues to expand. In Canada, we also foresee substantial potential as regulatory reforms may lead to transformative developments such as expanding cannabis in health care, unlocking new opportunities through proposed cannabis health products and broader insurance coverage, making medical cannabis more accessible to patients. On-premise consumption for THC beverages, which I believe is big, a rollout of on-site consumption to drive responsible use and create a vibrant experimental cannabis beverage market. And of course, regulatory modernization, which we've been talking about, updating the outdated policies that restrict competitiveness and paving the way for innovation and growth in Canadian cannabis industry. Turning to our International business. Our international cannabis revenue grew 10% year-over-year to $13.4 million. And this is with not being able to obtain permits in Portugal to allow us to ship around the rest of the countries. And we remain uniquely positioned to gain market share as the global consumer preferences and the regulations evolve. In Germany, we continue to expand our commercial medical cannabis portfolio and are actively leveraging our Tilray Medical and CC Pharma distribution network across pharmacies throughout the country to drive further growth. Looking ahead, we expect to increase our medical cannabis distribution footprint by threefold in fiscal 2026, significantly enhancing our reach and impact within the German pharmaceutical market, and we have that access through CC Pharma. In Italy, our Italian subsidiary, FL Group received the first license from the Italian Ministry of Health to distribute medical cannabis flower for therapeutic use. We also partner with Molteni, a leading Italian pharmaceutical company, to expand access to medical cannabis extracts and provide targeted education through their national network of medical and scientific professionals. We continue to expand our growing capabilities in both Portugal and Germany, strengthening our EU GMP certified cultivation infrastructure and to meet evolving global demand. Currently, we produce 21 metric tons of medical cannabis flower in Europe and have the capacity to significantly increase the amount as demand continues to grow. Our expanded growing operations not only supports our leadership in established markets, but also positions us to rapidly respond to the regulatory environments open across Europe and way beyond. European cannabis reform continues to progress, and we're seeing that. And we're excited to witness important developments like the European Union's [ CATAPULT ] project and Spain's recent approval of medical cannabis. Tilray is proud already to be involved in medical cannabis research in Spain through a partnership with the University of Madrid, supporting advancements in patient care and responsible regulations across Europe. Now on to our distribution. Our European medical distribution business, CC Pharma continues to grow with revenue increasing 9% year-over-year to $74 million. This segment remains a significant driver of our European cannabis operations and our infrastructure provides a strategic advantage that enable us to capture increased market share as both the regulatory environment and industry landscape evolves across Europe. And as I said before, we have access to over 13,000 drug stores within the German market. We remain confident in our global expansion strategy with Tilray well positioned to drive international growth and leveraging emerging opportunities across Cannabis, Beverage and our Wellness business. International beverage, which is a new business for us, building on our international footprint, our infrastructure, our growth strategy, we will be accelerating the expansion of our nonalcoholic beverages portfolio across multiple international markets. We expect our brands, HiBall, Liquid Love, Runner's High to gain traction with consumer opportunities. We built a dedicated team focused exclusively on servicing our international customers. This specialized team will ensure that our portfolio of leading craft brands is tailored to the taste and expectations of our global consumers while also supporting our long-term growth in high potential markets worldwide. By leveraging our established distribution networks and brand-building expertise, we are well positioned to capture growth opportunities in this fast emerging category and delivering exciting new products to the international markets, and the demand for them is high. Notably, we've already secured a distribution partner in the U.K. for HiBall, ensuring rapid market entry and strong support for the brand in this key region. Additionally, on the beer side, we recognize the growing demand for American craft beers in the international market. To further capitalize on this momentum, we're actively exploring all opportunities to grow this business, including international manufacturing opportunities, potential acquisitions to expand our reach and better serve our global customers. In our U.S. Beverage business, we continue to make progress against our beer integration, optimizing our strategy and our Project 420. We see long-term potential for the beverage category based on the diversification of our offerings and the superior products we produce. We've improved operations, leveraged acquired brands, supporting positive performance. Notably, many of these brands Tilray acquired were previously in decline and are now showing promising results with healthier growth trends and improved overall performance as we move to regain sales authorizations at retail that were lost. This turnaround underscores the success of our focused strategy and our commitment to revitalizing and growing our beverage beer portfolio. Through Project 420, we've realized $25 million in annual savings, moving closer to our goal of $33 million. We continue to work closely with our distributors to concentrate on promoting strong brands in each of our markets. In the quarter, we experienced growth across key brands and regions. Shock Top, the company's third largest brand, was among the fastest-growing craft brand with notable increase in both dollar sales and market share, driven in part by the successful launch of its [ Ryde ] pack, which has grown to be the #8 most popular new craft beer nationally. Trends continue to improve for Shock Top with a 30-point dollar trend improvement since Tilray acquired the brand in 2023. In the Southeast, Shock Top excelled with a 49% jump in dollar sales. SweetWater Daytrip IPA stood out as one of the top new items in the region. In Northeast, Montauk maintained its leading position in Metro New York and gained market share nationally with continued demand for its Wave Chaser IPA. Breckenridge Brewery led craft share gains in Colorado with its top Avalanche seasonal and Juice Drop and brands positioning double-digit growth. And last but not least, Redhook outperformed regional craft beer brands propelled by Big Ballard Imperial IPA strong volumes and our velocity gains, while 10-barrel pub beer 18-packs dominated craft sales in Oregon and 5% of all craft volumes. We also expanded our partnerships, including co-brand craft beer with the Oregon Ducks, perfect for college football season and a new partnership with [indiscernible] for the launch of Shock Top Twisted Pretzel Wheat beer. You got to try it. It's great. We are making beer fun again, and these partnerships and co-branding opportunities offer significant runway for us to widen our markets. In spirits category, which has been tough. We have introduced several world-class innovation, including Mock One, our new line of nonalcohol spirits and Casa Breck in the tequila space. We've also introduced Mountain Shot, a unique beverage blend, which may take mushrooms available in pouches, which is a unique packaging format to enhance the shot experience and capture the free spirit essence of the Rocky Mountains just in time for ski season. We also kicked off our fifth year partnership with the Denver Broncos with a new line of spirits, including limited editions, Broncos Honey Whiskey and Broncos Orange Creamscle ready-to-drink cocktail. In the non-alc category, we're proud that our non-alc beer brand, Runner's High, which we only launched in fiscal 2025 is now recognized as one of the top 15 brands in non-alc beer and ranks the fourth fastest-growing non-alc beer in a hot category in the Southeast, selling across 4,500 distribution points. Following the success of our hemp-derived Delta-9 THC beverages, we've expanded Fizzy Jane and Happy Flower product lines to include 10-milligram formats, complementing the existing 5-milligram offerings and the consumers want these products. The innovative [ HD9 ] category, leveraging our craft beer infrastructure and distribution networks, enabling us to deliver high-quality products to consumers across 14 states, whether they're new to the category or seeking enhanced experience. We have established partnership with retailers nationwide for HDD9 brands and now offer distribution to prominent wine, liquor outlets such as Total Wine & More, ABC Fine Wine & Spirits. In addition, in Q1, we saw further growth in regional grocery channels, including ShopRite, Stew Leonard's and Winn-Dixie. We continue on building on this positive trajectory as we move into Q2 and the rest of the year. Today, our Beverage business operates more than 20 brands, including 15 American craft beer brands across 7 network manufacturing facilities and 16 brewpubs. We're well diversified across craft beer, spirits, non-alc and now HD9 and energy drinks, we know that there is plenty of opportunity for growth in the beverage category. We have the right leadership, and we're pursuing the right growth strategy, and I'm tremendously excited about the future and the opportunities in the large beverage category. Last but not least, now turning to our Wellness business, which is near and dear to my heart. Our Wellness business had a strong quarter, growing revenues to over $15 million. We continue to expand our Wellness portfolio with many launches of new offerings, new crackers, new hemp portfolio, new other products that are available at Whole Foods and other retailers. We are now in over 17,000 retailers across the U.S. These offerings are also launched in Amazon and many other online retailers. I'm highly confident in Tilray's outlook for the remainder of 2026 and beyond with regulatory environments in our industry poised for meaningful evolution. I fully expect positive change ahead, and I'm certain in our ability to adapt swiftly and we will strategically. Our proven approach, robust product portfolio and exceptional team position us to seize every single opportunity, especially in Wellness, where we see us with significant expansive opportunities, and we're committed to unlocking new possibilities through continuous innovation, portfolio expansion, targeted investments, including the opportunities when strategic acquisitions happen. While we've made considerable progress, we recognize we have not yet reached our full potential, and we're far from it in the Wellness space. And that is the same with our Cannabis business and our Beverage business. There's lots of room and lots of white space for us. With that, I will now turn the call over to Carl for an in-depth look at our financials. Carl? Carl Merton: Thank you, Irwin. 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. Now looking at our results, we are reporting record first quarter net revenue, net income and a significantly improved adjusted free cash flow for the period. Further, we are reaffirming our 2026 guidance for adjusted EBITDA. Net revenue for the first quarter was a record $210 million, a 5% increase year-over-year. This growth was driven primarily by increased cannabis sales in both Canada and our international markets and increased revenue in our distribution segment. Cannabis revenue increased 5% year-over-year to $64.5 million, driven by 12% growth of adult-use gross revenue and 10% growth in international cannabis. Higher excise taxes and declines in wholesale cannabis offset those double-digit results. We see material potential for the International segment and expect continued growth once we receive several permits that are currently backlogged in a few European countries. Beverage revenue reached $55.7 million, driven by innovation and impacted by continued SKU rationalization. We advanced Project 420 and integrated acquired brands. Although craft brands and spirits faced challenges, new products contributed 2% to Q1 revenue, supporting our belief in the beverage category's long-term growth. Wellness revenue increased 3% year-over-year to $15.2 million because of our strategic focus on continued innovations with HiBall energy, our natural energy drink, high-protein super seeds and better-for-you breakfast and snacking, including the launch of 2 new offerings from Manitoba Harvest at Whole Foods. Distribution revenue increased 9% year-over-year to $74 million in the quarter, primarily as a result of the stronger euro. From a contribution perspective, 31% of net revenue was generated by our Cannabis business, 27% was generated by our Beverage business, 7% was generated by our Wellness business and 35% was generated by our Distribution business. This compares to contributions of approximately 31% for Cannabis, 28% for Beverage, 7% for Wellness and 34% for Distribution in the last fiscal quarter. As our International Cannabis business continues to expand, we expect to see higher contributions from our Cannabis segment over the remainder of the year. Gross profit for the quarter was $57.5 million compared to $59.7 million in the prior year period. Gross margin was 27% as compared to 30% last year. This decline was driven by lower margins in our Beverage and Cannabis businesses. Looking at gross margin by segment. Cannabis gross margin was 36% compared to 40% last year as a result of a higher mix of sales in lower-margin categories such as infused pre-rolls and vapes, where we reentered some previously margin-prohibitive categories. We believe the decline this quarter is temporary and the actions we have taken to drive profitability and improve margins will be effective in the long term. Beverage gross margin was 38% compared to 41% last year. The decrease in gross margin is due to the inclusion of [ craft acquisition to ] sales, which have generally been lower margin. Wellness gross margin was flat year-over-year at 32%. Distribution gross margin was 11% compared to 12% last year based on changes in product mix. Net income was $1.5 million or $0.00 per share compared to a net loss of $34.7 million or negative 4% per share in the prior year period. Adjusted net income improved to $3.9 million or $0.00 per share compared to an adjusted net loss of $6 million or negative $0.01 per share in the prior year. Improvements in both metrics were a function of reduced SG&A costs, including amortization. Adjusted EBITDA for the quarter was $10.2 million compared to $9.3 million last year. Cash flow used in operations improved significantly to negative $1.3 million for the quarter from negative $35.3 million last year, representing a positive change of almost $35 million. We continue to strengthen our balance sheet this quarter in terms of debt and cash positions. During the quarter, we raised $22.5 million under our ATM program, primarily after our stock increased to over $1 per share. Further, we exchanged $5 million of our convertible notes for equity early in the quarter, as we already discussed during our last earnings call. During the quarter, we reduced our outstanding debt by $7.7 million, bringing our net debt position down to $3.9 million and our net debt to trailing 12 months adjusted EBITDA ratio to 0.07x, all while ending the quarter with $265 million in cash plus another $1 million in digital assets. These stronger debt and cash positions provide Tilray with greater flexibility for strategic opportunities, and we intend to continue reducing our debt and further strengthening our balance sheet as the year progresses. As already discussed, our confidence in our business, our strategy and our team has never been higher, and we are pleased to reaffirm our 2026 guidance, anticipating adjusted EBITDA between $62 million and $72 million. We can now open the line for Q&A. Operator: [Operator Instructions] Our first question comes from Aaron Grey with Alliance Global Partners. Aaron Grey: First question for me. I just want to talk a little bit about international growth opportunities in the near term. You offered some commentary in your prepared remarks. I just want to make sure I was understanding them correctly. So first of all, just further understanding in terms of where we stand today in terms of the impact on some of the permit delays that you've been having. And then some commentary you provided in terms of the growth, specifically, I think you're referring to medical cannabis business up 3x in fiscal year 2026 and talks about leveraging CC Pharma potential. I just want to make sure I was understanding that correctly. Were there some things that you're looking to leverage with CC Pharma business that you were not historically? So just any additional commentary on that would be helpful. Irwin Simon: Great. So a couple of your questions. Number one, in regards to permits, we spent a lot of time with the Portuguese government. We've spent a lot of time in Portugal. We're finally seeing permits coming through. And I feel good about that. Where the next big issue that we run into is the quota in Germany and just Germany opening up and increasing more imports into the German market, which we think ultimately, that will happen. But it's not business going away. It just may shift from second quarter into third quarter, as the new quotas move into place in 2026. So with that, I feel we've made a lot of headway into the Portuguese permit situation. And we got more permits in the last 2 weeks than we've probably got in the last 2 months or so. In regards to a couple of things, the demand in Europe is there. And with that, it's the availability and the growth. And with the team, and now we have moved some of the Canadian team into international. We look to grow and our facility today in Portugal is running about 50%. We have the opportunity to double that at 40 metric tons, and that's something we're working on. The other thing is to really increase our growth to probably 6 or 8 metric tons in our German facility. And also where the opportunity is in regards to bringing product, EU GMP product in from the Canadian market. In regards to Germany, what I've said and what I was working through, CC Pharma, when we acquired it, it was a big part of our license and it was something that there was an opportunity. And what we're seeing is some great expansion with CC Pharma. CC Pharma delivers to 13,000 drug stores today, and that is regular medicines, and the good thing is we're also seeing some good price increase and some good opportunities on the CC Pharma Distribution business. But more importantly, as we integrate these businesses, whether it is on the sales side and the Distribution side, we see CC Pharma being vertically integrated and distributing our medical cannabis to a lot more of these drug stores in the German market, and that's a big opportunity for us. Unknown Analyst: That's helpful color there. Second question for me, just in terms of rescheduling opportunities in the U.S. You offered some commentary talking about seeing a number of different avenues that you guys are evaluating. Just curious, could you provide some color there? If things were to open up and cannabis was rescheduled to Schedule III. Do you feel like you already have the infrastructure within the existing business to be able to capture some of the opportunity organically? Or do you like some things that might need to be done vis-a-vis acquisition, to capture on that opportunity? I know there's a lot influx in terms of how that could actually look in a Schedule III scenario, but just any commentary on that would be greatly appreciated. Irwin Simon: Well, listen, as I've said before, we have 5 million square feet. We have today over 200-plus million metric tons of cannabis grow in Canada. We have a great Canadian medical infrastructure in Canada already servicing the Canadian market. Canadian market is 40 million people. So we service clinics up there. We have a group and an infrastructure that sells to the Canadian market today. Talking about Europe, as we look to sell and our objective is to sell close to $100 million of medical cannabis in Europe, which is all medical cannabis, and there's plenty of research that we're doing over there for anxiety, for sleep, for cancer, for epilepsy. So taking that know-how and transferring into the U.S. is something that's readily available. And last but not least, if there was an opportunity to partner with pharma company or there was something an opportunity for us to buy, we'd be ready and willing to enable to do that as we have the balance sheet potentially -- as we have the balance sheet to do that. So whether it's taking our current infrastructure, our current people, our current know-how, our current growth, our current research, our current genetics for medicine or partnering with a pharma company or buying something is something we're open and ready to do. Operator: Our next question comes from the line of Bill Kirk with ROTH Capital Partners. William Kirk: On the balance sheet, I see the $1 million in digital assets. I guess, were those investments you made? Or was it crypto that came in from customer payments? And then taking a step back on the topic, I guess, which coins, tokens, currencies do you prefer? And what are your cash allocation plans to the strategy given your cash generation and your equity issuance history? Irwin Simon: So that is acquisition of a Bitcoin that we acquired 3, 4 months ago. And with that, I'm going to let Lloyd Brathwaite just take you through some of our strategies that we're looking at from Bitcoin today as we see relevance with our current investors. Our current users are also Bitcoin users, and we see opportunities, as I've said in previous -- as I said in previous meetings and previous releases that we see opportunities with Bitcoin in purchasing our products, in purchasing our beer products and we see opportunities with our current investors. Lloyd? Lloyd Brathwaite: Hi, everyone. So yes, we actually invested in Bitcoin, and we're also looking at some other assets such as Ethereum and Solana. One of the things part of our strategy that's core is enabling our websites so that we can actually accept Bitcoin. So that's going to be part of our strategy later this year. Additionally, we're looking at some investment opportunities from a marketing perspective as well as looking at tokenizing potentially some stock. Irwin Simon: And with that, I just want to make sure, listen, we're -- we see the opportunities, we see the synergies with our products, with our investors, and we're not becoming that crypto company out there, but we see tremendous synergies as we expand Tilray into many new markets and many opportunities from that. And we're working with a lot of partners out there and making sure we have the right people that understand crypto and how to do it. William Kirk: And going back to Germany and Europe. I guess when you're servicing those markets, how much of the product has grown today in Portugal? How much is coming from your Broken Coast GMP facility in Canada? And how much that ends up in being sold in Germany and Europe is coming from a non-GMP facility of yours in Canada? And then I guess the bigger question, what are the risks that Germany changes the way they treat product conversion or product coming from Portugal? Irwin Simon: So listen, number one, the majority of our product today that is sold in Europe is coming from our facilities in Europe, okay? And when product does come from Canada, it goes into Portugal, it then goes to an EU GMP certified facility. So everything sold there is EU GMP certified, okay? With that, again, there's lots of possibilities. We do have a good-sized German facility that can grow cannabis. We're one of the few, and I'm not sure why in the EU, that Germany would not allow European products to be shipped into the German marketplace. So that ultimately is something we're continuously talking to the German government about. And if they did that, there's not enough grow in German market today to be able to supply the market. So it's something that it'd be very difficult if the German authorities change the market -- change the way products come into Germany. Operator: Our next question comes from the line of Robert Moskow with TD Cowen. Xin Ma: This is Victor on for Rob Moskow. Two questions for me, please. First, can you give us a state [indiscernible] for the Canadian adult-use market. Curious on your thoughts on market maturity and your pricing power in the context of the [ 12% ] growth you saw this quarter. How much of that maybe looks like volume versus price? William Kirk: Blair, you're on the line. Blair NacNeil, Head of our Canadian market. Blair, do you want to jump in and take that and I can add to it? Blair MacNeil: Yes, absolutely. Thanks, everyone. Yes, so in the quarter, we saw overall market pricing down 1.3% and volume was up 6.5%. For us, our pricing was actually up 2%, and our volume was ahead of the market. So it was a really strong quarter for us, both on the pricing side and on the volume side. As you saw, we were the only LP in the top 5 to grow share in the quarter. So very, very strong results. In terms of market maturity, what I would tell you is, in the current regulatory environment, yes, volume has slowed in terms of growth rate, but still very healthy growth rates in the market. And I think what you'll see is over the next few quarters is that -- and Irwin kind of referenced this, is that you will see the regulatory environment improve, and I think you'll see growth continue to go. Overall household penetration on cannabis in Canada is still at a very low number. So we see tremendous runway for growth in Canada within the regulatory framework. Irwin Simon: I think I'll jump -- just jump on that for a second. The Canadian market was the first. And as we go into our sixth year, with that, again, from a regulatory standpoint, and what are we still sitting with, we're still sitting with a high excise tax. We're still sitting with lots of regulation. We've been through price compression. We've been through COVID. We've been through an illicit market. We've been through over 1,800 LPs that are out there, a lot of them have gone away, a lot of growth facilities. And we've gone through educating the Canadian consumer on the benefits of cannabis, and the legality of cannabis without in actuality being able to advertise. And we have built our good supply today, Blair, which is at retail about a $250 million brand. Blair MacNeil: Correct. Irwin Simon: And from that, that's what we've built over the last 5, 6 years. We have over 5 million square feet to grow. We have the largest growth facility in Canada with 237 metric tons and maybe even more. So the Canadian market has been a great pivotal point for us. Now what we're hoping for is on excise tax, there are some concessions. We're hoping that the Canadian provincial governments allow us to sell our drinks into other retail outlets like restaurants that need help or independent retailers or liquor stores. We're looking for changes in regards to where medical cannabis is sold, where it's sold directly through drugstores. And that would change a lot for our Canadian market. So we look now for some big opportunities coming to the Canadian market. And Blair and his team have really put us in a good space there to really move beyond and a good grow in regards to our products. Xin Ma: Got it. And then my second question is, so beverage gross margin was about 50 bps lighter than kind of we expected. Can you remind us of your plan on improving profitability in that segment? And also, where are you on that path, that 420 path? And what still needs to be done? Irwin Simon: So as you saw, we've taken $25 million of cost out, I mean, there's more to go. We've gone through and I think SKU rationalization, $20 million of SKU rationalization and there's more to go. We've closed three facilities so far. So come back in acquisitions, we have acquired close to 12 -- we closed 12 brands. We have closed -- we had 10 facilities. We've had 18 brewpubs, and also, we have over 900-plus distributors out there. So bringing this all together under one management, one infrastructure, and we're seeing progress, but there's a lot of wood to chop there yet to get those margins to where we need to do. And whether it's the procurement of cans, the procurement of hops, and one of the biggest things, which you heard me mention in my remarks, a lot of these brands, as we were buying them and decisions were made by the previous owners, we were delisted in a lot of retailers out there. So with that, you saw major declines in these businesses, and we missed the windows of getting these products in the stores. Now these windows have opened up, and getting these products now relisted in these retailers is something that we've been doing. And that's why whether it's Shock Top, whether it's Redhook, whether it's some of our other brands you're seeing the growth there. And that's what's going to happen to get our gross margins up here. And listen, let's all face it, the beer category is not one of the easiest categories out there right now. And we're fighting through it, both on growth side, innovation side. And I've said it from the beginning, how do I make beer fun again. And that's something we're trying to do. Along the way, make money with it too. Operator: Ladies and gentlemen, our final question comes from the line of Frederico Gomes with ATB Capital Markets. Frederico Yokota Gomes: First question, just thinking about the issues in Portugal. I'm curious how do you see that in terms of managing future risk in terms of your international strategy, whether you're taking steps to diversify your supply chain there? And how would you go about doing that? Irwin Simon: So number one, we've got 1.5 million square foot facility in Portugal. We're not picking up and moving it, okay? I mean over a couple of hundred million dollars of built and it's a state-of-the-art facility. So I'm in Portugal, I got to stay there. So I got to figure out how to work within those confinements. And I must tell you, I've had some great meetings with two Ministers in Portugal at the highest levels, and they're very open. There's a new government in Portugal, and they want business. They don't want us leaving. They want to build upon our business there, and they've been very, very supportive of working with us. And since my meetings with our people, we've seen lots of changes and been getting our permits. So I feel good. On the other hand, listen, we do have a facility in Germany, nowhere near what we have in Portugal. We do have the ability to ship from Canada, and where we would ship it directly into the U.K. and directly into other markets to ensure EU GMP. So we have options. But first and foremost, we are far from giving up on the Portuguese market. Frederico Yokota Gomes: And other question here, just on Germany. Could you talk about the proposed change there in legislation in terms of prescriptions and how the market works? How do you think that could impact that market? And whether you think that draft that's going there may be approved or not as is? Or you expect changes to that draft? And in terms of timing as well, when do you think the market there could change in terms of the legislation? Irwin Simon: Listen, we're supportive of change. But again, I don't want to go there and speculate until I know what the change is, okay. And I think so far, the good news is what we're seeing is the continuous demand and online prescription has not been one of the biggest drivers here. So if there is change, I think patients will find other ways to go out there and purchase cannabis. And it's interesting because Germany has a strong independent drug chains out there. There's no CVS, there's no Wallgreens. Individuals are allowed to own like 6 drug stores, are all independent. So like I said, there is multiple stores out there, it's not online. So I see even if it did change and you can't buy it online, there's still the retail outlets to go to out there. And I'd like to see some of the change. There's lots of changes that we continuously talked about that didn't happen. And we, with our lobby groups are out there working with the German government on what's the right thing for the patients because this here is important, too. The difference in medical cannabis is like medicine. If you didn't give patients access to get medicine, that's a problem. If you could not your medicine and didn't have access, patients that are sick are dependent on, that's an issue. So this is being sold as medicine, from a medical standpoint, not from a recreational if you don't get your cannabis from a recreational standpoint that may not be as an issue, but you're not getting your medicine and the government has to take that into view when they're deciding what they're going to do here. Great. Let me just say this here. I know a lot of have joined now. Unfortunately, not us, there was a technical problem with our provider. And those that were online, did not hear my comments. Sorry about that, guys. You missed some great comments and Carl's comments, okay? If you want to hear me again say it, you can go online and listen, and I encourage you to do that because there's some really good information that both Carl and I delivered today. And I apologize and the carrier, they'll hear from us and definitely disappointed. I know you heard music. So we had a lot more to say than the music. But please, it has been recorded. It is online, and you'll get every bit of it. And for some reason, there's an issue, let Berrin know and we'll make sure you get it, and I'm really sorry about that. In regards to the analyst questions, I think you heard most of those. So you'll be able to get those, the analysts that were here, we're able to hear Carl in our remarks. So I apologize profusely for that. With that, thank you very much for your time today. I hope some of it wasn't wasted by not hearing our comment. But now you'll have to go online and listen to it. It's only Q1 in 2026. One of our smaller quarters. There's a lot to do. And as you can see, we have a lot of good things in place and trust me, there has been times like you look at and sort of say, what the heck are we doing here, when you look at your stock price, you look at different things. But this team in over 5 years really have brought a lot together here, in rebuilding a Canadian cannabis business basically from scratch, building facilities, building brands, building products, building different strains, genetics, new innovation and some of the new innovation that's coming out of there, building infrastructure and sales and marketing teams. And again, going through price compression, going through COVID, going through the illicit market as one of your biggest competitor out there, and I really want to commend in the Canadian team and what they've been able to do. In regards to our International Cannabis business. Same thing. It has come together basically with the acquisition of Tilray, and it is really a business that I see tremendous opportunities. And we now are getting requests in different countries, whether India, Middle East and places like that in regards to medical cannabis and the opportunities there, and there's a lot of countries and there are a lot of different countries out there that are realizing the benefits of that and also realizing the benefits of medical cannabis versus medicines and cost of drugs in that out there today, and what the benefits will be. So I see big opportunities for us today. Rajnish Ohri has joined us as new Head of Europe, and is bringing the teams together. And we've done a lot with our Canadian teams to integrate these businesses to get synergies and savings and to get a lot of the know-how because one of the things -- cannabis is agriculture. It's growing, it's yield, it's the size of the flower, it's the potency, and that is something that's important out there. And this is not an industry that -- it's an industry that's spread around the illicit market for many, many years, but it's not an industry that's been around from a legalized market. It's not an industry that's been around from a growth, from a research and development that's all coming together. And countries are realizing the opportunities and what they're doing, not allowing their citizens and patients to be able to buy these products. The other thing they're realizing is there's tax dollars, that they're missing and if tax dollars are being sold through an illicit market. In regards to rescheduling, President Trump with his different tweets and his different comments, I think, realizes that something has to happen here in rescheduling. Last week with his tweet or 2 weeks ago in regards to CBD, in regards to senior citizens, and I can't tell you how many people tell me in using CBD and THC products in regards to pain and anxiety and that and the benefits for it. What we're seeing today on our Delta-9 products and being sold in limited states and the demand for it. Again, what Blair has seen in the Canadian market with building a $40-plus million business and today, just being sold within cannabis stores. And again, at prices that are not the cheapest prices out there. So we see tremendous opportunity in the Beverage business. In regards to our Beverage business, it's work we got to do. And again, we got into it in 2020 with the acquisition of SweetWater, acquired Montauk, acquired other brands and the businesses from ABI and then the business from Molson. We got some great brands, but bringing it all together is a lot of work, bringing the facilities together, getting the cost out, getting the margins out, getting the right facilities. And that's something that Tilray is doing and the team is doing out of Atlanta to bring all this together. And as I said before, not an easy business today with changes happening, but we will be in the Beverage business, not just the beer business. And with that, there's a lot of interest in products we're working on. In regards to our Spirits business. The team is working with our distributor, RNDC. And we've really put a plan in place with RNDC to be in our major markets. Yes, the bourbon category is a tougher category today than it was, but Breckenridge Bourbon is a great tasting product out there, and there's great demand in certain markets. At the same time, our Vodka has great demand and our Gin and some of our new products that we've come out with are really, really good products and some of the first timer innovation. And last but not least, you hear me talk about our Wellness business. What Jared and team have done on Wellness where we acquired this, there was a negative EBITDA of about $5 million, $6 million and where it's turned around to today, and somebody that's been part of the Wellness category since 1992, '93 and see the growth. And it's all we talk about Wellness. Wellness and Food in regards to the Trump Administration and taking colorings out of food today, higher protein, protein, protein, protein and some of the highest protein is in hemp foods because it's a plant that's grown. So we're in a lot of different categories. We're in a lot of unique places. You look at our balance sheet in regards to our debt-to-equity. It's in a great place. We ended the quarter with $260 million of cash. So there's a lot of good things happening, but there's a lot of work to do. I really want to thank our team that really makes this happen and roll up our sleeves. Even though there's 2,500 employees around the world here, not a lot for a lot we got to get done. So with that, I want to thank everybody for listening. Please go back and re-listen to our comments. There's a lot of good comments that come out of today. Thank you to our shareholders for your support and get out there and vote as we have our AGM coming up. With that, have a great Thursday, and look forward to speaking to you in the new year with our Q2 results. Thank you. Operator: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and welcome to the Bassett Furniture Industries Third Quarter 2025 Earnings Call. [Operator Instructions]. As a reminder, this call may be recorded. I would now like to turn the call over to Mike Daniel, CFO. Please go ahead. John Daniel: Thank you, Michelle, for the introduction. Welcome to Bassett Furniture's Earnings Call for the Third Quarter of Fiscal 2025 ended August 30, 2025. Joining me today is our Chairman and CEO, Rob Spilman. We issued our news release and filed our Form 10-Q yesterday after the market closed and is available on our website. After today's remarks, we will open up the call for a Q&A session. We will also post a transcript of the call on Bassett's investor website following the call. During today's call, certain statements we make may be considered forward-looking and inherently involve risks and uncertainties that could cause actual results to differ materially from management's present view. These statements are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. The company cannot agree to or cannot guarantee the accuracy of any forecast or estimate nor does it undertake any obligation to update such forward-looking statements. For more information, including important cautionary notes, please see the company's annual report on Form 10-K for the fiscal year ended November 30, 2024. Other filings with the SEC describing risks related to our business are available on our corporate website under the Investor tab. Now I'll turn things over to Rob. Rob? Robert Spilman: Okay. Thank you, Mike. Good morning, everyone, and thank you for joining us today. I'm pleased for the third quarter despite the continuing challenges -- challenging environment in the industry, Bassett reported increases in revenue, operating income and gross margin. We also continue to look for ways to lower operating expenses, which continues the work that began in the summer of 2024 last year. We plan that this year would remain impacted by the slow housing market, and that is very much the reality. We remain nimble in managing our business and are focused on driving innovation into our product lines, becoming more aggressive in our marketing initiatives, leveraging technology and adjusting to the challenges affecting the industry in general. In short, we've adjusted to the new normal of furniture demand. We're pleased with our progress so far this fiscal year as we strive to be resilient in this environment. Mortgage rates have come down slightly from last quarter, and we've all seen the recent news about rate decreases. While it's moving -- slowly moving in the right direction for the housing market, we don't expect our industry to feel a more robust change until we can point to a sustained pickup in home sales. Many consumers are still cautious about making significant investments in home furnishings, and they remain concerned about the price of houses and the lack of inventory. We're recognized as one of the premier quality brands for furniture, and we concentrate on creating custom design solutions for our customers that align with their personal style. The decisions and the investment we've made in creating new lines, refreshing existing products, expanding e-commerce capabilities and modifying our marketing activities are making a difference in our results. That said, we cannot -- while we can't control these areas, we have been adjusting to the impact that tariffs have on our supply chain in some respects on consumer confidence in general. We have a competitive advantage with approximately 80% of our wholesale shipments manufactured or assembled in our U.S. factories. However, we are still being impacted by tariffs, particularly from Vietnam and India on imported fabrics, plywood, componentry and finished goods, and we pass along those surcharges for these materials during the third quarter. We made the difficult decision to raise retail prices slightly in July to cover the tariff impact. Our teams continue to intently monitor the gossip and the reality about tariff activity daily, and I'm sure this will be the #1 topic at the upcoming High Point furniture market later this month. Now let's move on to a discussion about our third quarter results. And let me remind you that the third quarter is generally our weakest reporting period of the year. We grew consolidated sales 5.9% with August the strongest month for orders in the quarter. Excluding sales from Noa Home, which closed in late 2024 as part of our restructuring plan, consolidated revenues increased 7.3%. Ongoing operating efficiencies produced $600,000 of consolidated operating profit due primarily to the wholesale business compared to a loss of $6.4 million this time last year. Recall that in last year's third quarter, we had a cyber incident that suspended our manufacturing financial system for 7 days, resulting in negative impacts on operating income, gross margin and expenses. Gross margin this quarter improved 320 basis points due to better wholesale margins, slightly offset by a decrease in retail margins at company-owned stores as well as the comparison of last year's impact of wages paid during the cyber shutdown. Orders from our combined network of corporate and licensed stores grew by 5.9%, driven by a 9.8% increase in company-owned retail stores. Wholesale sales to the open market were up approximately 1%. True custom upholstery offers more than 450 fabrics and 40 leathers and drove the majority of our wholesale improvement. We had a double-digit increase in case goods, which offset a slight decrease in our domestic custom wood lines. We continue to be pleased with the response to our new whole home product collections. Copenhagen is doing well across the board. The Newbury line has arrived in stores and based on initial feedback, we believe it has great potential. Our U.S. manufactured Benchmade Hideaway dining line is also off to a good start in both retail and wholesale. Outdoor sales were up 18%. Written retail sales increased by 2.4% in the quarter. I mentioned that retail gross margins were down slightly, and this was due to lower margins for both in-line and clearance goods. We continue to be aggressive this year on moving through discontinued as is inventory. Ongoing operating expense efficiencies implemented this year, coupled with higher sales, delivered a decrease of 590 basis points on SG&A expenses as a percentage of retail sales. We were able to do more with less in the quarter, and we must continue to challenge ourselves to improve. We're integrating new ideas and changes into our marketing mix without adding to our budget. We shifted slightly away from digital in the third quarter and produced a high-quality 52-page catalog and several smaller mailers for our fall promotions. We featured true custom motion and Benchmade. Customers are coming in at retail with the mailers and the response has been very positive. We also added spot TV placements in key markets with new professional quality ads. The stores in these markets outperformed those without the TV campaign. We will continue to test and learn from these approaches and use those that are delivering the highest return on investment. The marketing changes have enhanced our omnichannel experience as more of our target customers are integrated with their experience -- their online experience and our in-person visits. We are now lapping the double-digit e-commerce sales growth numbers from last year. Sales are still up now with single-digit increases. Website traffic declined slightly in the third quarter, but conversion rates continue to rise and were up 18%, driven by improvements in our website experience to our shoppers. We remain pleased with the progress of our Bassett Custom Studio program and now have 57 locations open. Orders were up in Bassett Custom Studio 35% in Q3 and growth is coming from new and existing stores. Shipments were up 38%. We will be focused on emphasizing the value of Custom Studio and High Point and are optimistic that we will bring on additional locations to the program. This plan leverages our core competency of providing custom upholstery over a broader range of the United States. We reopened our Concord, North Carolina corporate store in the last few weeks, which has been closed since April for remodeling. We are also in the architectural planning phase of 2 new Bassett stores set to open in 2026. Our Board of Directors approved our regular quarterly cash dividend of $0.20 per share, and our balance sheet remains strong. Now I'll turn things back over to Mike for more details on our financial results. John Daniel: Thanks, Rob. In my commentary, the comparisons I'll discuss will be the third quarter of fiscal 2025 compared to the third quarter of fiscal 2024, unless otherwise noted. As Rob previously noted, total consolidated revenue increased $4.5 million or 5.9%. Excluding sales from Noa Home, which closed late in 2024, consolidated revenues increased 7.3%. Gross margin at 56.2% represented a 320 basis point improvement over the prior year, driven by improved wholesale margins, partially offset by slightly lower retail margins. Selling, general and administrative expenses were 55.4% of sales, 440 basis points lower than the prior year, reflecting the benefits from last year's restructuring plan, ongoing cost optimization activities and greater leverage of fixed costs due to higher sales levels. Operating income was $600,000 or 0.7% of sales as compared to a prior year loss of $6.4 million, which included a $1.2 million loss on the abandonment of a logistical services contract. Diluted earnings per share were $0.09 versus a loss of $0.52 in the last year quarter. So let me cover a little more detail on our wholesale operations. Net sales increased $3 million or 6.2% over the prior year, consisting of a 9.2% increase in shipments to our retail store network, approximate 1% increase in shipments to the open market and a 9.6% increase in Lane Venture shipments. Gross margins increased 440 basis points over the prior year. Excluding $600,000 of unproductive labor costs incurred during the temporary shutdown for the cyber incident last year, gross margins would have increased by 310 basis points. This margin increase was driven by improved pricing strategies in both the upholstery and wood operations, coupled with greater leverage of fixed costs from higher sales levels. SG&A expenses as a percentage of sales decreased 210 basis points, primarily due to the benefit of cost reductions implemented during the second half of fiscal 2024, again, greater leverage of fixed costs from higher sales. Wholesale backlog was $16.6 million compared to $21.8 million on November 30, 2024, and $18.5 million at August 31, 2024. Now moving on to the retail store operations. Net sales increased $4.6 million or 9.8%. Gross margin declined 40 basis points due to the lower margins on both in-line and clearance goods. As Rob said, we've been more aggressive in cycling through the as is inventory and also coupled with increased promotional activity. SG&A expenses as a percentage of sales decreased 590 basis points due to several factors: improved efficiency gains in warehouse and delivery operations, lower advertising and marketing expenditures, overall lower operating costs due to benefits from the cost reductions implemented during the restructuring and, of course, greater leverage of fixed costs due to higher sales levels. Retail backlog was $32.2 million compared to $37.1 million at November 30, 2024, and $33.3 million at August 31, 2024. Our liquidity position remains solid, although we generated an operating cash flow deficit for the quarter and ultimately reduced our cash and short-term investments by $5.2 million. We ended the quarter with $54.6 million of cash and short-term investments and no outstanding debt. As Rob mentioned, our third quarter is typically the slowest quarter for business and consequently, our lowest cash generation period. We have reduced our projected range of annual capital investment in our business to between $5 million to $7 million as previously planned build-outs of the 2 new stores Rob previously mentioned have been pushed to early fiscal 2026. Our prior CapEx range was between $7 million and $9 million. We continue to pay our quarterly dividend and repurchase shares optimistically. We spent $1.7 million on dividends and $400,000 on share buybacks in the quarter. We remain committed to delivering shareholder returns through dividends and when appropriate, share buybacks. Now we'll open up the line for questions. Michelle, please provide instructions on how to do so. Operator: [Operator Instructions] Our first question comes from Anthony Lebiedzinski with Sidoti. Anthony Lebiedzinski: Certainly nice to see the improvement in sales and profitability in the quarter. So Rob, I think you said that August was your strongest month for delivered sales. Did you see the same case with your written sales as well? And also maybe if you could just comment on as far as what the trends you saw during the Labor Day holiday season? And any sort of commentary on quarter-to-date trends would be very helpful. Robert Spilman: That didn't take long to ask that question. We were predicting that was coming. So August was the best month of the 3. We had good order momentum, both at wholesale and retail. And I would say that, that trend has continued so far through the Labor Day period and into September. Now by any means, I wouldn't say we're happy with our level of sales, and we're fighting hammer and tong like everyone else for every order we can get our hands on. I wouldn't say the environment is really a lot different. But frankly, it is -- the last couple of months have been a little better than we've been slogging through for -- since the end of the COVID boom. Anthony Lebiedzinski: That's great to hear. And then just in terms of dealing with the tariffs, so you mentioned the increased pricing. Just wondering if you could comment on the extent of the pricing as well as what you've seen as far as unit volumes, whether you've seen a notable change in response to the higher pricing that you put in? Robert Spilman: Well, we -- our primary areas of the world that are affected by this are Vietnam and India. And of course, Vietnam has 20% and India has the eye-popping 50% tariff. And so we have levy surcharges on those products from those countries, and we've had to increase those as they finally figured out what they were going to do on both of those countries. Hopefully, that's -- well, who knows what's going to happen. But that's basically what we're doing. So we still have a surcharge on our imported goods. We -- what's really going to be interesting is 2 weeks down in High Point and how everybody is feeling about this and what everybody else is doing because obviously, we're not the only ones talking about this, and it's going to be the big topic down there. But I think on the new things, what we will do is roll the surcharge into the price of the goods and just not have a surcharge on those. That's what we're thinking about anyway. And then we'll address the rest of the line at the end of the year. But for the short term, right now, we have the tariff surcharges. Anthony Lebiedzinski: Understood. Okay. And then the gross margin was certainly impressive in terms of the year-over-year expansion. So I certainly understand that the environment is still choppy and difficult. But as revenue does eventually come back in a more consistent basis, hopefully sooner rather than later, how should we think about further upside to your gross margins? Robert Spilman: We were talking about this the other day. Honestly, I don't think you're going to see it improve dramatically. I mean that 55%, 56% range is kind of where we think we're going to be. We're going to have to leverage that with expenses and more sales. I'm not saying we can't improve slightly, but I think that's kind of where we're going to be. Anthony Lebiedzinski: Got you. Okay. And then my last question before I pass it on to others. So you talked about the success with your new product introductions, which is great to hear. How does your pipeline look like for additional new products going forward? Robert Spilman: Well, look, we've introduced a lot of stuff this year, particularly on these whole home collections, which we haven't done in a while, and we brought 3 of them out. They're expensive. That's part of our cash flow deficit for the quarter. You see the inventory has gone up on those things. And some of those things just kind of came in at the end of the quarter, we really hadn't been able to ship them out. We've now shipped them out. So we're going to have a little more focused introduction strategy this market, although we still have plenty of new things. But we're going to absorb what we've just done. The good news on that, of course, is -- we're pleased with what's happening so far with that stuff. So -- but we've got a lot of new exciting things, and we're looking forward to showing to you in 2 weeks, Anthony. Operator: Our next question comes from Doug Lane with Water Tower Research. Douglas Lane: Just a housekeeping issue. I noticed -- I noticed that in your segment reporting, you moved some dollars last year out of custom upholstery into custom wood and case goods. And I just wanted to find out maybe what the thought process was there. John Daniel: Frankly, that was fixing an immaterial error. Douglas Lane: Okay. Fair enough. And just -- you've never done that before, so they just kind of stuck out. Getting back to the margins, I think the impressive gain in the margins, particularly in the wholesale gross margins is really this quarter and all year. What has been driving that improvement in the wholesale gross margin and yet you're still cautious on the future outlook for gross margins? Robert Spilman: Well, we've narrowed our focus on our line, and we're selling more of slightly fewer things in some cases, and we're getting some efficiencies that way. We -- the upholstery operation is running extremely well, and that's really been a major contributor. And we've really looked at our pricing strategies, which are hard to do when you've got all these tariffs going on. But I'd say a combination of those things. I just I don't want to publicly state that we can drive a lot past where we are right now because we're pleased with where we've ended up so far with all this. And so that's why I exhibit a little caution on my answer to Anthony's question. John Daniel: Not only that, Rob, where we are in the tariff rollout and the tariff changes and how that gets rolled into the cost and how that's perceived. I think there's still uncertainty around how the consumer -- ultimately, the consumer is going to react to the higher prices that are coming through on everybody's goods. Robert Spilman: That's a good point. And there's just been an incredible amount of stuff going on this year for everybody. And we have half a sentence in there about fabrics, but fabric is a major deal for us. Half of our fabrics were from China. And we've had to discontinue a lot of our fabric line and reintroduce other things. And of course, that's expensive to make all the swatches and get all that stuff out there and go through the inventory that you're having to drop. And so it's been a real chaotic thing. It's kind of hard to really comment on the future as accurately as we hope to until this tariff thing blows over, if it ever was. I don't know where we're going. But I hope that answered your question. Douglas Lane: No, that's all fair. And it certainly has been chaotic and uncertain out there. And while we're on the subject, have you quantified what you expect the net tariff impact to be to your financials this year? John Daniel: I'm not sure that I can. I can tell you that, I guess, the philosophy has been -- and we're still a little bit wrestling with the philosophy about how we price the goods, are we going to price it so that with the tariff in there, we get the same margin or we get the same margin dollars. So I'd say to ultimately say what we think it's going to be, I don't think we can answer it. But that's kind of what we're wrestling with there a little bit. Robert Spilman: And there are so many little nuances to this, as I've just alluded to the fabrics, but the metal, the mechanisms, the componentry, the plywood, a lot -- I mean, it's you really -- to really give an accurate answer to your question, you're going to have to dig through a lot of raw materials, finished goods, different kinds of materials, different country, different tariffs. It's hard to kind of an unprecedented period. And I'm not saying that we have totally realized the effect of all of this. But so far, we're navigating it relatively well. Douglas Lane: No, and it changes every week, it seems. But on the flip side, with 80% of your manufacturing in the U.S., do you see an opportunity for market share gains here? Robert Spilman: We hope so. It depends on the category to a certain extent. I'm going to have a much better answer to that question in 2 weeks from now than I have right now. I -- we have had a couple of instances that I can point to where the guys have said, "Hey, we got this because we're domestic. But I wouldn't say it's a land slide. But it does give us pause to think that we may benefit from this in some perverse way that the other guys won't. But there's still a lot of domestic upholstery out there, and that's the biggest portion of our business. And so and the tariff, maybe it will help the upholstery business in general. It's certainly -- there's plenty of it made in America right within a 10-mile radius of our factories down in North Carolina. Douglas Lane: Okay. Fair enough. And just one last thing. I know your balance sheet is strong and your free cash flow is improving nicely, but still doesn't cover the dividend. When do you think the free cash flow will be able to cover the dividend in the future? Robert Spilman: Well, it has in the past. And it's -- I think it will again soon. But this quarter was a little unusual in the inventory and just the periodic slowness of the third quarter, which we which we experienced. John Daniel: And I would say, Doug, the fourth quarter is typically our -- it's the strongest quarter, both for business and for cash generation. not saying that we -- exactly what we'll do. But typically, the fourth quarter is the best quarter, and we generate usually really good cash flow. Operator: There are no further questions at this time. I'd like to turn the call back over to Rob Spilman for closing remarks. Robert Spilman: All right. Thank you. And again, we've got to remain agile in the environment. The fluctuating tariff rules have made the day-to-day running of the business challenging. We are, as the question alluded to, somewhat insulated by our domestic manufacturing platform, but today's furniture industry is truly a global enterprise. Nevertheless, we are pleased to have posted growth in the quarter. Our new product lines are selling, and we look forward to unveiling new ideas to the marketplace in High Point, North Carolina in 2 weeks. Thank you today for your time and for your interest in Bassett Furniture. All right. Operator: Thank you for your participation. You may now disconnect. Everyone, have a great day.
Operator: Good morning, ladies and gentlemen, and welcome to Neogen Corporation First Quarter FY 2026 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, October 9, 2025. I would now like to turn the conference over to Bill Waelke. Please go ahead. Bill Waelke: Thank you for joining us this morning for the discussion of the first quarter of our 2026 fiscal year. I'll briefly cover the non-GAAP and forward-looking language before passing the call over to our new CEO, Mike Nassif, who will be followed by our CFO, Dave Naemura. Before the market opened today, we published our first quarter results as well as a presentation with both documents available in the Investor Relations section of our website. On our call this morning, we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliations of historical non-GAAP financial measures are included in our earnings release and the presentation. Slide 2 of which provides a reminder that our remarks will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward-looking statements. These risks include, among others, matters that we have described in our most recent annual report on Form 10-K and in other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements. I'd like to extend a special welcome to Mike on his first earnings call at Neogen. I will now turn things over to him. Mikhael Nassif: Thank you, Bill. Good morning, everyone, and thank you for joining the call today. When I was approached about the opportunity to lead Neogen a few months ago. I was drawn by a strong reputation as a leader in both food and animal safety. Few companies have the chance to shape a safer, healthier world through innovations like Petrifilm and comprehensive environmental monitoring. However, I also found a company not yet reaching its full operational and financial potential. I saw an opportunity to make a transformative impact and position Neogen for sustained success. Having led the turnaround of the point-of-care diagnostics business at Siemens Healthineers over 3 years, I drove step changes in performance and I'm confident that experience equips me to deliver similar results at Neogen. In my first 9 weeks, I've prioritized engaging with our talented team, customers, partners and shareholders. Neogen's employees are deeply passionate, and our loyal customer base is equally committed to our mission. We're a leader with unique scale, product depth and global capabilities in a highly attractive market, but execution challenges are holding us back. Moreover, I do not believe a major strategic overhaul is needed. Rather, we can unlock significant growth through disciplined focus prioritization and scaling of effective processes. Part of my comprehensive review of the business includes reexamining our strategic initiatives and aligning them with our targeted improvement plan to drive sustainable growth. In the short term, we are focusing on the critical priorities of driving top line growth, rightsizing our cost base, reinvigorating innovation and deleveraging. To rightsize our cost base, we're acting urgently to streamline our organizational structure, boost agility and scale key processes like sales and operations planning, or S&OP. At the end of September, we took actions to reduce operating expenses by approximately USD 20 million on an annualized basis through a global headcount reduction of approximately 10% of existing and planned positions as well as non-labor cost reductions. These savings include some level of targeted reinvestment we plan to direct towards enhancing our commercial and R&D capabilities, and we do not believe the cost actions will have a negative effect on demand generation. This was not a decision that was taken lightly. But the costs added by the company over the last few years to scale up capabilities and absorb the 3M transaction contemplated higher levels of revenue. This action better aligns our costs with the current revenue of the business. For top line growth, we're empowering our commercial teams to execute with precision targeting higher growth markets, particularly accelerating growth in the United States. We are optimizing our portfolio for market share gains and profitability, including targeted price increases where we are under indexed. Additionally, we will evaluate adding commercial headcount in select markets to capture incremental growth opportunities. The addition of a Chief Commercial Officer, a role we're currently recruiting for, will provide dedicated global commercial leadership as we work to put the company on a trajectory of improving growth. To reinvigorate innovation, we will strengthen our R&D pipeline in core food safety and animal health categories, prioritizing fewer high-impact projects, investing in top talent and enhancing our innovation processes. We are also tackling critical projects with urgency by advancing Petrifilm production integration, addressing sample collection inefficiencies through productivity enhancements and optimizing inventory management with a robust S&OP process to reduce write-offs and streamline our supply chain. With respect to Petrifilm specifically, we recently began initial product testing with the intent of demonstrating that the different steps of production are able to execute processes within the required parameters. The early results have been promising, and we expect the production testing process to be completed within the next couple of months before we begin transitioning individual SKUs to our line for full validation. I've spent a significant amount of time meeting with the team driving this project, and feel comfortable that a solid plan is in place, and we are managing it very closely. In addition, we are anticipating potential challenges on working in tandem with a primary machine builder who has kept the team on site to assist. We have also had a number of our employees spend extended time in Poland over the last year, observing the Petrifilm production there and refining their understanding of the manufacturing through detailed process documentation. We have multiple employees with legacy Petrifilm expertise, including the key manufacturing engineers who set up Petrifilm production in Poland, know the process inside out, and joined Neogen at the time of the 3M transaction. We believe we have a significant amount of knowledge in-house as it relates to both the art and science of Petrifilm manufacturing and are currently tracking to the timeline laid out in April which has us completing the transfer of Petrifilm production during the second quarter of the next fiscal year. Furthermore, we intend to have production available at our manufacturing partner during the transfer process to ensure continuity of supply and a smooth transition. The goal of a focused approach to these priorities in critical projects is to drive EBITDA growth and free cash flow generation, which ultimately result in deleveraging the business. With the rightsizing of the cost base, we anticipate the enhanced commercial and innovation focus will drive future revenue growth that comes through at attractive incremental margins, particularly with respect to Petrifilm. One of the contributing factors to the recent elevated inventory write-offs is simply the fact that we're carrying too much inventory, tying up an unnecessarily large amount of cash. The aim of the work underway to optimize our S&OP process is to release a significant amount of excess inventory over time, further bolstering cash generation. Finally, the integration of sample collection product line has been a meaningful drag on cash over the last several quarters. We are acting with urgency on this issue and expect to see improvement over the balance of the fiscal year. Turning to some brief comments on our Q1 results specifically. Neogen delivered revenue of approximately $209 million, up 0.3% year-over-year on a core basis, which was in line with our expectations. In Food Safety, key product lines in which we've been investing, like food quality and pathogens showed solid growth in the quarter. Petrifilm, which has had a core revenue CAGR in the mid-single-digit range over the last few years, had a mid-single-digit decline in the first quarter. We do not believe this decline reflects an underlying change in the demand for Petrifilm but rather a couple of changes within our distributor base that we believe are temporary in nature. We made a distributor change in Asia and saw what seems to be the normalization of buying patterns at a large distributor in the U.S. We have decent visibility into sales out of Petrifilm from the distribution channel in the U.S., and those numbers continue to indicate solid growth in the quarter. Adjusted EBITDA margin was in line with our expectations and primarily impacted by lower revenue, higher tariff costs and higher operating expenses. The last two items are being addressed with the combination of pricing and resourcing actions as well as the previously mentioned headcount reduction. Free cash flow in the quarter represented a significant improvement compared to the prior year, with lower investment in CapEx and working capital being the biggest drivers. With Q1 behind us and the trend we saw in September, we are confident in reaffirming our full year guidance. Now to share with you more details on our Q1 results, I'd like to pass it to Dave. Dave Naemura: Thank you, Mike, and welcome to everyone on the call today. Jumping into the results. Our first quarter revenues were $209 million. Core revenue, which excludes the impact of foreign currency, divestitures and discontinued product lines was about flat to positive 30 basis points for the quarter, while foreign currency added 50 basis points and divestitures and discontinued products were a headwind of 440 basis points compared to the prior year. The impact from divestitures was attributable to the sale of the cleaners and disinfectants business midway through the quarter. At the segment level, revenues in our Food Safety segment were $152 million in the quarter, down 4.6% compared to the prior year, including a core decline of 1.7%. We saw growth in most of our core food safety categories, other than our indicator testing and culture media product category. We had mid-single-digit growth in pathogens and also grew in allergens and bacterial and general sanitation as well as sample collection, which benefited from an easy prior year compare. As Mike mentioned, Petrifilm core revenue declined in the quarter which we believe is primarily attributable to adjustment of distributor inventory levels in the U.S. as well as changing a large distributor in Asia Pacific. Sales out of the distribution channel in the U.S. showed solid growth in Petrifilm, giving us confidence in the underlying demand profile of the product line. In APAC, we are winding down inventory at a large distributor and expect to see our new channel partner begin to load in inventory in the third quarter. Quarterly revenues in the Animal Safety segment were $57 million, a decline of 0.8%, with the core revenue growth of 5.8%, benefiting in part from an easy compare to Q1 of fiscal 2025. We experienced solid growth in our Animal Care product category, led by higher sales of biologics and wound care products. Growth in the Life Sciences product category was driven by higher sales of substrates and reagents and the biosecurity product category saw strong growth in insect control products. As we've discussed, we believe this end market has been in or around a trough for several quarters now. Our global genomics business had core growth of 4% with solid growth in the bovine market, partially offset by weakness in companion animal testing. This marked the first quarter of growth for the total genomics business since fiscal year 2023, reflecting the move away from certain less attractive end market exposures. From a regional perspective, core revenue growth in the first quarter was mixed. Growth was led by our LatAm region, up mid-single digits, with strong sales of pathogen detection and general sanitation products. The U.S. and Canada region had core growth in the low single-digit range with Food Safety about flat and mid-single-digit growth in Animal Safety. Growth in pathogen detection, sample collection, food quality and general sanitation products was offset by a decline in Petrifilm in the U.S. which, as I noted before, we mostly attribute to some inventory rebalancing in the distribution channel. We declined mid-single digits in EMEA and high single digits in our APAC region. EMEA saw growth in most major food safety product categories outside of sample collection, which was offset by declines in genomics and cleaners and disinfectants during the period when we still owned that business. The APAC region was a mixed story by country. with better-than-anticipated performance in Japan and Korea, more than offset by headwinds in China and the ASEAN countries, where we have seen a greater impact from shifting supply chains in response to global trade policies as well as the switch of a large distributor. Gross margin in the first quarter was 45.4%, a sequential improvement from the fourth quarter of fiscal 2025, which was significantly impacted by inventory write-offs. Although the inventory impact in Q1 improved sequentially, we continue to see an elevated level of sample collection production inefficiencies. Last quarter, we noted our focus on certain core process improvements and driving efficiency in the sample collection product line. These are multi-quarter activities that we've made progress on during Q1, which should continue to improve as we progress through the year. Finally, we also saw a tariff impacts in the quarter as the higher tariff rates in Q4 flowed out of inventory impacting gross margin in Q1. Adjusted EBITDA was $35.5 million in the quarter, representing a margin of 17%. In addition to lower volume, the adjusted EBITDA margin was negatively impacted by the previously noted gross margin headwinds as well as higher operating expenses. As Mike noted, we have executed on a reduction in force to better align spending with the current operating environment which will provide run rate benefit beginning in October through the remainder of the fiscal year. First quarter adjusted net income and adjusted earnings per share were $9 million and $0.04, respectively, compared to $14 million and $0.07 in the prior year quarter due primarily to the lower adjusted EBITDA, which more than offset the lower interest expense. Moving to the balance sheet. We ended the quarter with gross debt of $800 million, 68% of which is at a fixed rate and a total cash position of $139 million. During Q1, we completed the divestiture of our cleaners and disinfectants business, which resulted in approximately $115 million in net proceeds that was used to pay down $100 million in debt in Q1, representing annualized interest savings of roughly $6 million at current rates. Free cash flow in Q1 was an outflow of $13 million, representing an improvement of $43 million compared to the prior year Q1 and included $24 million of CapEx, a high point for the year as we continue to work through our plant-related integration expenditures. In addition to lower CapEx compared to the prior year, free cash flow benefited from improved trade working capital efficiency, which contributed an inflow of about $30 million, a 300 basis point reduction in working capital as a percentage of last 12-month sales compared to the prior year Q1. As Mike noted, we are reaffirming our full year guide for fiscal 2026. The first quarter came in about as anticipated, with margin improvement expected in the balance of the year as we work to improve in certain areas, namely sample collection, productivity and inventory write-down performance. The first quarter is typically our seasonally lowest revenue quarter and this year's first quarter included approximately $6 million of revenue from the divested cleaners and disinfectants business. Based on historical seasonality, we would expect the second quarter to see a modest sequential step-up from the baseline revenue in the first quarter. The actions that we have taken on cost, a portion of which were contemplated in our original guidance will help us protect EBITDA and cash flow as the remainder of the year continues to develop. Elaborating briefly on the actions that Mike referred to, we implemented a reduction in force that impacted about 10% of headcount planned for the year. These actions, net of some level of reinvestment and a few targeted growth priorities are anticipated to have an annualized impact of about $20 million from which we expect to see a benefit of about $12 million this fiscal year, more than half of which was contemplated in our initial guide for the year. As we noted last quarter, the guide for fiscal 2026 includes our genomics business, which, as you know, we are involved in the process to sell. We are not providing details on that process, but we will share that it continues to progress well. At the time there is a sale of that business, we will adjust our guidance accordingly for the remaining post sale portion of the year. I'll now hand the call back to Mike for some final thoughts. Mikhael Nassif: Thanks, Dave. I believe that Neogen is a great company with a leading product portfolio of consumables in the attractive food safety end market that should benefit from long-term tailwinds and a broad portfolio of animal safety products that provide value to farm and ranch operators. With respect to food safety, there is still significant opportunity to improve the quality of food safety testing programs within the overall industry. Despite an increase in the level of testing over the past 20-plus years, the CDC estimates there has not been a significant reduction in the number of infections from food-borne pathogens. Last year, the FDA estimated that the U.S. and Canada had a record 300 food safety incidents with a cost of $2 billion in direct expense alone. And just last week, we had a reminder of why our mission matters, with another high-profile incident of Listeria contamination. These issues have contributed to a recent drop in consumer confidence in food safety in the U.S. to a 13-year low. The fact that our Food Safety core revenue has grown only modestly over the last few years and even declined in certain quarters, means that we have not maintained our market share in certain product lines. This appears to primarily be the result of execution challenges related to the 3M integration and some resulting inconsistencies in supply. When I've spoken directly with customers and also heard objective feedback from them indirectly, the majority still seem to have a favorable view of our company and our products. This has been encouraging to hear not only because it speaks to the long-standing reputation of Neogen, but also because it means to me that we have the opportunity to gain back market share with improved execution. I expect that a relentless focus on the priorities we've laid out, including successfully executing on our critical projects will propel Neogen to a more predictable and consistent execution and higher levels of service and delivery. I'm confident we can deliver world-leading innovation for our customers, significantly improved financial performance and a fulfilling experience to our engaged workforce. My team and I are looking forward to transparent and constructive engagement with the investment community, customers and all stakeholders with a more in-depth update planned to be shared in early 2026. I would like to thank the Neogen team for welcoming me to the company and for the thoughtful dialogue that has taken place since I joined. The effort and commitment around the world are refreshing to see as we embark on a journey of realizing the potential we believe lies ahead of us. I'll now turn things over to the operator to begin the Q&A. Operator: [Operator Instructions] And your first question comes from the line of Brandon Vazquez with William Blair. Brandon Vazquez: Can Mike, maybe to start us off, can you talk a little bit about the time period during the interview process and thinking about taking this job? Just reflect a little bit on what were you hearing out in the field that gave you comfort that Neogen is a differentiated asset. I think this is something that a lot of us in the investor community have done expert calls and we've kind of heard pockets that there are good products here and there, but it's been hard to kind of grasp that given kind of the execution that we've seen. And frankly, now competitors have been a little aggressive in terms of what they're saying about share taking from you all. So just spend a little bit of time on like where are the pockets of strength? What were the things that you were really encouraging that you were hearing that gave you confidence to take the role? Mikhael Nassif: Yes. Thanks for the question, Brandon. Listen, when I was looking at this opportunity, certainly, I had my questions as well when you look at the performance and the company itself. But now being here 2 months, what I can say is I've confirmed what attracted me in the first place, which is growing market, strong portfolio, significant opportunity to unlock shareholder value. Neogen has got a broad portfolio that I think is really well positioned in an attractive end market. What stood out to me is being here 2 months is really the genuine and dedication nature of our employees. They want to win. They're so frustrated with the challenges that we've had, but they want to win, which is a great foundation to start with. I think with that in place, we have a clear opportunity to build core processes and really become experts in the fundamentals of managing the business. You've heard us speak to S&OP as an example, but we have to scale that and we have to do a better job at how we collaborate and manage the business to be able to see around the corner and prevent surprises. So looking ahead, my focus is really around organizing in a way that supports our food safety and animal safety businesses. We want to align the functions appropriately. We want to strip out complexity and really focus on driving those key processes that I think are going to help us unlock the value. With regards to your question on share loss, I think it's true. I think we've lost share in sample collection, in allergens, natural toxins. I think those are related to supply challenges that we've had. When we look at pathogens, I think that we're growing with market, we've got a strong portfolio there. I feel the same way about Petrifilm, putting aside performance in Q1, but Petrifilm, we're seeing sellout data that's very strong. And so to summarize what I'm saying, Brandon, the opportunity is ours and we are focused on maximizing that opportunity. Brandon Vazquez: Got it. Maybe as a follow-up to that, Mike, one question that I think a lot of us have tried to grasp with over time is products like Petrifilm are unique, and there are some other product lines within Neogen that are pretty unique within the market. How do you take share with those products, right? Like talk to us a little bit in your view what the commercial organization needs to do to actually take share in this market? I mean maybe step one is growing in line with the market, but then ideally with those unique products take a little share. And as a side follow-up note, maybe for Dave, I'll ask my second other follow-up real quick. Dave, can you walk us through a little bit what -- how we should expect kind of EBITDA margins and EBITDA to progress through the year? What's contemplated in that guidance. There's a lot of moving pieces here with OpEx reductions and improvements in sales, things like that. How do you think on our math, you need kind of like a north of 20% margin number exiting this year. Is that kind of fair as how you guys are thinking about it? And talk us through what gets you there? Mikhael Nassif: Thanks, Brandon. Yes, let me answer your first question, and then I'll hand it over to Dave. How do we take share? I think it's more than product portfolio. So there's three things that I think give us an opportunity to regain growth through share gain. I think, first and foremost, Neogen is by far the most broad portfolio, specifically in food safety. Our customers look to us not only for our products, but for also to partner with them on testing and how to go about doing what they need to do. So we're seen as a trusted partner in addition to having a very broad portfolio. Number two, when you look at our share position around the world, there are markets where we are not -- we are underpenetrated. If you think about Petrifilm, for example, in Europe. There are other areas that I think we need to explore. So that's number two. And then number three, having those two points that I stated earlier, is really that the opportunity in front of us with three being all about execution. So really honing in the commercial excellence around what are those targeted accounts? How are we going and trying to gain share? How do we position our products and position a solution of product partnerships, but also with our analytics platforms, how do we become that partner to deliver on what the customer needs. So all of those things are tailwinds and they're there for us to leverage to share gain. But I just have to say and go back to it, it really comes down to focus and driving the discipline within the commercial organization. And that's going to be the focus since I started and will continue to be in the coming quarters. So I'll hand it over to Dave to answer the second question. Dave Naemura: Yes. Brandon. Yes. Look, I think your view is right around the year. We need to see a progression of EBITDA margin as the year progresses. From a volume standpoint, Q1 usually starts a little low, but we talked about two notable items inventory -- inventory write-off activity as well as our sample collection performance. We think both of those improve as the year progresses. We talked about the restructuring. We'll start to see run rate benefit from that, some in the second quarter, but a full quarter's worth in the second half of the year. We think all of those are contributing factors. And obviously, volumes matter here given our kind of robust fall through. But I think you're thinking about it right, and we'll continue to provide a little more clarity as we work our way into the year. Thanks for the question, Brandon. Operator: And your next question comes from the line of Subbu Nambi with Guggenheim. Subhalaxmi Nambi: The transition to a new CEO can always be an exciting time for a company. However, in this instance, we have to acknowledge there are a lot of idiosyncratic challenges and a leadership transition that goes well beyond the CEO across the C-suite. Recognizing all of these variables, what is a reasonable and fair timeline for investors to expect you to outline your vision and a possible timeline to where the company can be playing offense. Mikhael Nassif: Thank you for that question, Subbu. I think 2 months in, I can say -- had a chance to sit with the team and look at our strategy and our focus areas. I think from a strategic perspective, where we need to play and what we need to do, that does not need to change. I think how we leverage that to drive growth and how we organize ourselves around that is something that we're currently focused on. and we're looking to take specific actions, one being the headcount reduction we took last week to streamline some of our activities. And so I think that as we -- as I get more time under my belt in the coming months, I think probably early 2026 calendar year when we start to lay out more of the vision of what we're doing and have a bit more time under my belt to kind of share with you here's the things that are going well, here's what we need to do, I'll have more to share with you then. But right now, it's really around how can we monopolize on quick wins to drive top line, to manage our costs and deliver on the critical projects that you expect us to deliver on. Subhalaxmi Nambi: Then two specific questions. Given you beat revenue estimates -- consensus, but didn't raise revenue guidance, were there any one-timers or pull forward mainly in Animal Safety that we need to be aware of? Dave Naemura: No, Subbu, I don't think there was any one-timers. It's early in the year, and it came in a little better than expected. I think there's still some uncertainty in the year around sample collection volumes as we continue to ramp back there. So we felt things came in close enough to what we expected, and we want to get further into the year. But no one-timers, if you will, to call out. Subhalaxmi Nambi: And then revenue improved, but might be a repetitive question to what Brandon asked, but margins and cash flow continue to be pressured. Can you talk about the underlying business as it sits today on margins and cash generation potential outside of short-term headwinds? And then why are you still comfortable with expansion opportunities from here? And also a follow-up, what gives you the confidence around the $15 million Petrifilm duplicative cost guide? Dave Naemura: Yes, Subbu, thanks for the questions. I'll jump in here and see if Mike wants to add any color. But look, there are some big variables that we've called out that kind of building on the earlier question as well, that we know we have some execution on. I mean inventory is taking core process development and sample collection is well documented as being a difficult area for us. Having said that, when we think margin expansion kind of from a financial model standpoint, we have very robust fall-through on incremental margins. That incremental gets better as we continue to work on improving the end market exposures of the portfolio as well. So we think those things work in our favor. As far as the $15 million of duplicate costs, we accomplished a key milestone in the Petrifilm plant standup, and so we're working into that now. Based on our current estimates, we still feel good about the $15 million cash impact this year, but we'll continue to update folks as we get into the year. And then finally, cash flow was negative -- free cash flow is negative for the first quarter, but it also included the largest CapEx outflow as we continue to work through the plant stand up, and we anticipate seeing that improve as the year progresses. Our working capital performance was at least on a year-over-year basis as compared to Q1 of last year has been strong from a payables and from a receivables standpoint, but inventory remains a challenge, one that we would be the first to acknowledge, and it's really seeing improvement there that's going to improvement going forward. I don't know if Mike, do you want to add anything? Mikhael Nassif: Maybe just a little bit more. Thanks for that, Dave. I think certainly, what's in our control within OpEx, capital expenditures and managing cash flow, managing our inventory better is all going to show an improvement. But really what's going to drive cash flow is revenue conversion. So when we think about maximizing the opportunity we have in front of us, we're prioritizing sort of high-margin, high-growth product lines across Food Safety and Animal Safety. We're looking to sharpen sort of the pencil, I can say, from a commercial perspective on how we drive these globally in the various regions. And it's all about accelerating growth, especially in really profitable, important product lines like Petrifilm. So as we continue to push that and at the same time, identify opportunities to run leaner, smarter, manage our capital expenditures in a better way, all of that is going to result in higher cash flow, but it's going to be revenue conversion, and that's where we're spending a significant amount of time trying to drive top line growth. Operator: And your next question comes from the line of Bob Labick with CJS Securities. Bob Labick: So Mike, in your introductory remarks, you mentioned why you joined Neogen, market-leading positions, the strong secular growth in the industry. But then you very candidly said also execution challenges are holding us back. You've discussed the market share kind of losses portion of that, so I'll skip that to my question. But oftentimes when companies are going through some execution challenges, they take their eyes off the future growth potential and can impact years beyond. Can you discuss how Neogen has gone through this? And the new product pipeline, if that's been impacted at all. New products that are coming out -- have come out recently. And those opportunities and if they've been impacted and how you feel about the pipeline for new growth? Mikhael Nassif: Yes. That's a great question, Bob, and you're absolutely right. That does happen. I have experienced it in prior organizations. I think what's a little bit different here is listen, the challenges within Neogen are you all know them. They are very public, and we're all well aware of them. But we are tackling them head on. I think the -- these execution challenges, having been here 2 months and just from prior turnarounds, Really, it's just about an organization that's had misaligned priorities. The stretch trying to get an integration up and running that's had some of its challenges. And so we're addressing these. But we really need to streamline how we operate. We need to clarify roles. We need to enhance accountability across the teams to make sure that we're delivering on the things that we need to deliver. And I think if we do that consistently, we're going to start to be more predictable and consistent in our performance. Now we are going to drive our portfolio because we've got a broad portfolio, a very healthy product line, and we've got a lot of great products within that we want to drive. But you're absolutely right, we can't lose our vision towards innovation, which innovation is extremely important. Now as we think about that, this is where, in my remarks, I talked about we want to look at reinvigorating innovation. So what does reinvigorating innovation mean? I think that our R&D team has done solid work in integrating the 3M portfolio and driving incremental innovation. I think that lays a very strong foundation for us. However, I think that's limited our capacity to build robust needs-based pipeline or pursue transformational breakthroughs. So I really believe that now is the time for us to focus on this, to build an innovation strategy that's externally informed to drive the substantial market-shaping innovation. So along with sort of refining how we think about innovation, focusing on a few high-impact opportunities I think will position us really well for in the future. And I'm looking forward to -- in the future calls, I'm going to give you a bit more around what do I mean by that. But we are very willing to invest in innovation. And certainly, the work we're doing right now and is going to help us prepare to do that. But we've got to drive top line and get the business healthy enough that we can invest in innovation. So we're trying to do both at the same time. I don't know, Dave, if you want to add anything? Dave Naemura: No, I think that's great. That's a great question, Bob. Bob Labick: Okay. Great. Yes. And then just one quick follow-up for Dave. I think the midpoint of EBITDA guidance is about 20.5% EBITDA margins or so. But obviously, we've talked about inventory write-offs and sample handling issues short term and things like that. If we were to kind of back it out and those impacts are short-term impacts, can you give us a ballpark of what the kind of core margin operating level might be this year? I know it's not exactly precise, and then the opportunities for margin kind of recovery over the next few years. Dave Naemura: Look, I don't want to sharpen the pencil too sharp here. Bob. But I mean, clearly, we had easily a few hundred basis points of headwinds from these items in the first quarter, which tends to be a little bit light, particularly from a volume perspective. So as we're able to make improvements and see volumes improve in the second half. And frankly, the benefits of the cost structure flow through, that's going to help a lot. The $20 million annualized OpEx savings that's obviously $5 million a quarter. So starting to see that impact partially in Q2 and then seeing it read-through in Q3 and Q4 is another helpful item relative to the current run rate. So -- but look, we've got to execute some of these core process improvement, things that we're working on in both inventory and sample collection. I'd say they're both very much kind of a little bit of a back-to-basics and fundamentals approach, but those should see improvement as the year progresses from some of those headwinds we experienced in the first. Operator: Your next question comes from the line of David Westenberg with Piper Sandler. David Westenberg: All right. Welcome, Mike. Dave, been great. I'll start actually with Dave since you're transitioning, I'll give you a little tougher one. Can you talk about the $6 million in sample collection costs? What exactly is that? And I mean, we did see it in non-GAAP. Does that imply that this won't be going on maybe into the next quarter? And then you just kind of remind us what this is? I mean, I know we've had some spoilage, is this kind of just purely spoilage or just help us out with what exactly is going on there because sample collection is an important part of the business. Dave Naemura: Yes. Look, we -- for the first year or so, standing out sample collection consider part of the start-up costs that we have pretty good disclosure around. But what it is, is scrap and kind of quality flags, which results in finished goods scrap as well as excess production costs, which implies that in total, yes, we're selling the product at a loss currently. So as we talk sample collection improvement, what we're talking about, David, is, first and foremost, getting our labor cost down, reducing scrap and there's a pricing component here as well, where we've had to make some concessions because the customers that buy sample collection buy other products as well that are very important. So it's a multifaceted approach to getting back to where we need it to be. The first thing that's going to help a lot is getting our back orders under control. And when we look at what our back orders were 6 and even 3 months ago, we've made significant improvement to that. And basically, we've got it down to kind of almost a normal level. Well, as we do that, we're able to take out high-priced temp labor. So we're reducing the overall labor. We're reducing the cost of that labor but it's also high turnover. And high turnover is one of the contributing factors to scrap and machine uptime because operator consistency on machine matters a lot. So there's a reasonable kind of number of aspects to this to get back in kind of the positive here, which we hope to be and we have a plan that says we can do as we kind of come through the second and into the third. So we've got the performance to demonstrate, but we need to see that here in the sequential quarters. So a good question. David Westenberg: And actually, maybe, Mike, sorry, I'm going to ask you a hard one, I guess, you're CEO, so you kind of deserve it, right? So stabilizing... Mikhael Nassif: Bring it on. David Westenberg: Just dealing with this headcount reduction, but then also kind of like working on this lack of turnover. How do you -- how are you thinking about headcount and getting the right employees and stable employees here in face of stabilizing this headcount or rightsizing the business. And I'll stop after this one. Mikhael Nassif: Yes, certainly, any time we're having a conversation about colleagues and friends. It's a very tough one. So it's not a decision we take lightly at all. But there are certain times in a business where you have to look at that. And I am not a believer of a onetime correction. I think that as a business, you constantly need to relook at how you are operating and make sure that you're allocating your limited resources to maximize your overall growth all the time, okay? So I know this may seem like a onetime event. But I think moving forward, you're going to see us starting to challenge every part of the business to make sure that we are as optimized as we need to be and where we need to invest, we will invest to drive higher growth. But that is something that we're going to continue to evaluate. Now with regards to the turnover, you guys know this as well as I do in any turnaround situation or businesses have some challenges, you're going to have turnover. Those things happen at different levels. And I see this as an opportunity to reengage with the organization with a fresh vision. I already shared earlier, we've got a workforce that wants to win. They come in every single day, working very, very hard. So it's a great -- I've been very -- I've been pleasantly surprised by that because that's a great foundation for us to move forward. And so as we realign the organization to make sure that everything we're doing is on the priorities that I said, which is driving top line growth, improving operational excellence, making sure that we deliver on these critical projects with Petrifilm and sample collection, fixing our inventory challenges and really reinvigorating innovation. And that's going to be the focus, and we will continue to improve our processes, bring in talent, upgrade roles to really build a best-in-class organization. Operator: And your next question comes from the line of Thomas DeBourcy with Nephron Research. Tom DeBourcy: So my main question is really around, I guess, the assessment of Neogen's portfolio overall, which has been ongoing, and I think, has resulted in the divestitures of disinfectants and cleaners and ongoing potential sale of genomics. I think there's been a clear shift -- focus towards food safety, and obviously, lower margin product lines, reevaluating whether those make sense in the portfolio. So I was curious whether that work still continues and whether we could still see additional divestitures beyond obviously, the genomics process that's ongoing? Mikhael Nassif: Yes. Thanks, Tom. Maybe I'll say a few words and then I'll pass it on to Dave. Coming in 2 months, I've had a chance to sit down with the team and really look at the broad portfolio of Food Safety and Animal Safety and our plans. And I have to say that I'm very aligned with the approach that we're taking. I think I agree with the rationale. I want to thank the team that's worked really hard on C&D and the other things that we are planning to do because there's been a lot of work on top of sort of the day-to-day. As for the remaining portfolio, our focus is how do we optimize the remaining product lines and position ourselves for return to predictable profitable growth. I think we have a very strong, healthy animal safety portfolio. We have even a stronger food safety that we need to continue to drive and execute on. And so as we position ourselves for growth, improving our processes, improving our focus, and we anticipate improving end markets in the coming quarters and years, we'll start to see that accelerate. But Dave, I don't know if you want to add a few comments. Dave Naemura: Look, I think that's great. And Tom, if we went back 1.5 years or so, when we started talking about portfolio, we talked about looking at end market exposures, the growth profile and the financial profile of some of the product lines, and that was kind of our filtering process that we've followed. I think we've been effective here. But it will always be an ongoing thing, right, that we'll continue to look at the current market environment. But I think we like where we're at. And I think Mike said it right, right? I mean I think we've got a really good portfolio, but of course, we're always in kind of portfolio review mode. But I think we did what we said we'd do a few years ago, and we'll see what the coming years hold, but I think we like where we're at. Operator: And we have a follow-up question coming from the line of Subbu Nambi with Guggenheim. Subhalaxmi Nambi: Just a follow-up and clarification and maybe these operate in different lanes, but you say you've reduced your back orders over the last few months, yet you have excess spoiling inventory. Could you give us more color? Maybe it is completely different product lines, but just what are these inefficiencies to call out? And how can execution fix it? Dave Naemura: So Subbu, the back order comment was specific to sample collection, where we had an elevated level of back orders because we had kind of a pause last year in our ability to get production ramped in a timely manner. I think when we talk about kind of excess spoilage and inventory, that really has more to do with getting the right products, frankly, that have shelf life to the right places and the right amounts. And that goes to the core S&OP process improvement actions that Mike talked about that there's a lot of energy on in the company right now. So just trying to reconcile those two statements. Operator: And I'm showing no further questions at this time. I would like to turn it back to Mike Nassif for some closing remarks. Mikhael Nassif: Yes. Thank you very much. This has been a great first earnings call. Thank you so much for your questions. I look forward to future conversations with you. Have a great rest of your day. Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for attending. You may now disconnect.
Operator: Good morning, everyone, and welcome to the Delta Airlines September Quarter 2025 Financial Results Conference Call. My name is Matthew, and I will be your coordinator. [Operator Instructions] As a reminder, today's call is being recorded. [Operator Instructions] I would now like to turn the conference over to Julie Stewart, Vice President of Investor Relations and Corporate Development. Please go ahead. Julie Stewart: Thank you, Matthew. Good morning, and thank you for joining us for our September quarter 2025 earnings call. Joining us today from Atlanta are CEO, Ed Bastian; our President, Glen Hauenstein; and our CFO, Dan Janki. Ed will open the call with an overview of Delta's performance and strategy. Glen will provide an update on the revenue environment, and Dan will discuss costs and our balance sheet. After the prepared remarks, we'll take analyst questions. We ask you to please limit yourself to one question and a brief follow-up so we can get to as many of you as possible. After the analyst Q&A, we will move to our media questions. As a reminder, today's discussion contains forward-looking statements that represent our beliefs or expectations about future events. All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from the forward-looking statements. Some of the factors that may cause such differences are described in Delta's SEC filings. We'll also discuss non-GAAP financial measures, and all results exclude special items unless otherwise noted. And with that, I'll turn it over to Ed. Ed Bastian: Thank you, Julie. Good morning, everyone. We appreciate you joining us today. This quarter's results reinforce that Delta's competitive advantages and differentiation have never been more evident. In the September quarter, Delta's revenue growth and earnings came in at the top end of our expectations, delivering performance that we anticipate will lead the industry across all key financial measures. Revenue grew 4%, led by premium, corporate and loyalty, reflecting the power of Delta's brand, the financial strength of our customer base and improving industry fundamentals. We reported pretax income of $1.5 billion and earnings of $1.71 per share with an 11.2% operating margin. Free cash was $830 million, bringing our year-to-date free cash flow to $2.8 billion. We generated a return on invested capital of 13%, 5 points above our cost of capital and in the top half of the S&P 500. Operationally, Delta once again led the industry on reliability and customer experience. Through a busy summer, our teams delivered for our customers, and I want to thank them for their outstanding work and dedication. Their professionalism and care create the trust that consumers have in the Delta brand. Sharing success with our people is core to our culture. We've accrued nearly $1 billion year-to-date towards next February's profit sharing because when Delta succeeds, so should our people. I also want to recognize the essential aviation workers, the controllers, TSA officers, Federal Air Marshals and many others who are keeping our systems safe and secure during the ongoing government shutdown. Thank you for your professionalism and your commitment to the traveling public. We're hopeful that Congress will act to reopen the government as soon as possible. Now turning to our outlook. Our fundamentals are improving and the positive momentum is continuing. Since July, travel demand has strengthened, led by a rebound in business travel, which was up high single digits in the quarter. The U.S. economy remains on solid footing, and our customer base is financially strong with rising preference for premium products and services. SkyMiles membership is expanding, particularly among younger consumers and engagement is strong across all cohorts. Consumer spending on the Delta Amex co-brand card is up double digits year-to-date with a recent acceleration in travel and entertainment that mirrors the improvement that we're seeing in bookings. Premium revenue growth remains robust and Main Cabin trends are improving. Structural change is taking hold across the industry as unprofitable flying is rationalized and carriers not earning their cost of capital adjust strategies to prioritize returns. Against this backdrop, we expect to deliver a double-digit operating margin again in the December quarter with earnings comparable to what we earned in the September quarter. This would be at or above our all-time fourth quarter earnings performance. This brings our outlook for full year earnings to approximately $6 per share, which is in the upper half of our July guidance range. Free cash generation remains a key differentiator for Delta, and we are updating our full year outlook to $3.5 billion to $4 billion, growing our cash generation over last year and consistent with our long-term framework as we build a fortress balance sheet. At the heart of our position of industry leadership is a relentless focus on elevating the customer experience. We're investing across every phase of the journey to make travel with Delta more seamless, personalized and premium, growing our value proposition to customers. On the ground, we're harvesting the benefits of generational investments in our airport infrastructure. This includes upgraded airport facilities, modernized Sky Clubs, the launch of Delta One Lounges in JFK, LAX, Boston and Seattle. By year-end, Delta One check-in will be available across all of our hubs. We've also partnered with Uber to begin streamlining the airport pickup and drop-off experiences, enhancing convenience from curb to gate. In the air, we're continuing to expand premium seating and enhance service offerings, ensuring more customers can experience our most elevated products. Digitally, we're delivering a connected experience for SkyMiles members with nearly 1,000 aircraft equipped with fast free WiFi, well more than all of our U.S. competitors combined, our integrated platform is setting the standard for in-flight connectivity and personalization. Exclusive partnerships with American Express, Uber and most recently, YouTube extend SkyMiles further into our members' daily activities, deepening engagement and preference for the Delta brand beyond the flight. And it's all powered by our people, delivering welcomed, elevated and caring service that reinforces our industry leadership, sustains our durable revenue premium and underpins our strong financial foundation. In closing, our financial focus remains on profitable growth, margin expansion and disciplined capital allocation, all aligned with the 3- to 5-year framework that we shared last November. As we enter the final stretch of our Centennial year, I'm more optimistic than ever about Delta's future. Thank you for joining us today. And with that, I'll hand it over to Glen to discuss our commercial trends and demand, followed by Dan with the financial details. Glen W. Hauenstein: Thank you, Ed, and good morning. I want to begin by thanking the Delta team for their outstanding commitment throughout the busy summer season and to our customers for their continued loyalty to Delta. For the September quarter, revenue increased 4.1% year-over-year to $15.2 billion, a third quarter record and ahead of our guidance as momentum built through the quarter. Trends across our business are improving and customer preference for the Delta brand is showing up in our results. Total unit revenue improved by 0.3% over last year. Importantly, domestic unit revenue turned positive with sequential improvement as the quarter progressed. This was supported by a Main Cabin inflection as industry supply moderated and demand improved materializing earlier than our initial expectations. Internationally, profitability across all entities was strong with premium continuing to bolster results. Corporate sales trended positively throughout the quarter, up 8% over prior year with sequential improvement across all sectors. Domestic corporate sales grew double digits, including mid-teens growth in our coastal hubs. We see opportunities for further growth as corporate confidence rebuilds, reinforced by 90% of our most recent corporate survey respondents anticipating that their 2026 travel volumes will increase or remain steady year-over-year. Diverse high-margin revenue streams grew double digits year-over-year and contributed 60% of total revenue. Within that, premium revenue grew 9% with improvement across all products driven by a strong demand and consistent investment in premium offerings. Loyalty revenue improved 9% and travel adjacent products grew mid-teens as SkyMiles members engage beyond the flight and throughout our loyalty ecosystem. Cargo revenues increased 19%, driven by the Pacific. Maintenance, repair and overhaul revenue grew more than 60% on higher volumes and timing of shipments. Delta's loyalty ecosystem continues to be a powerful driver of enterprise value, anchored by the attractiveness of the SkyMiles program, a financially healthy, highly engaged member base and our exclusive co-brand partnership with American Express. Co-brand holders are among our most valuable customers, traveling more often and spending more on Delta. While roughly 1/3 of active SkyMiles members hold a co-brand card today, we have further runway as both engagement and member penetration continue to rise. A key proof point is the sustained momentum on spend growth, which has outpaced other consumer credit cards by 2x over the last few years. During the quarter, spend grew at double-digit pace with new card acquisitions up year-over-year and a record mix of customers choosing the premium cards. With that, remuneration from American Express increased 12% over prior year to $2 billion in the quarter, keeping us on track to deliver over $8 billion this year and advancing towards our long-term goal of $10 billion within the next few years. Turning to the outlook. The environment continues to improve. Over the past 6 weeks, sales trends have accelerated across all geographies and in every advanced purchase window, positioning Delta to close the year from a position of strength. While we are monitoring potential impacts from the U.S. government shutdown, we have not seen a material effect to date. For the December quarter, we expect total revenue to grow 2% to 4% year-over-year on top of last year's record performance with solidly profitable unit revenues. Passenger RASM is showing healthy improvement sequentially, reflecting continued strength in domestic and a step change improvement in the transatlantic on firmer Main Cabin trends and corporate demand. At the same time, financial divergence across the industry has never been greater. As carriers prioritize earnings, their cost of capital and eliminate unprofitable flying, competitive capacity in our hubs is down year-over-year, and we expect a very healthy supply-demand balance across the industry into 2026. In closing, I'm very optimistic as we enter the final quarter, building our momentum and positioning Delta for continued top line growth and margin expansion into 2026. And with that, I'll turn it over to Dan to cover the financials. Daniel Janki: Thank you, Glen, and good morning to everyone. Delta's competitive advantages drove another strong quarter as we continue to set the pace for the industry. Our teams are delivering operationally for our customers and driving efficiency. Year-to-date, we are outperforming the industry across on-time performance, completion factor and Net Promoter Score. Our premium offerings, industry-leading loyalty programs and elevated experiences we provide across the entire travel journey is driving increased customer preference for flying Delta and underpins our differentiated financial results. In the September quarter, we delivered record third quarter revenue of $15.2 billion, with an operating margin of 11.2% and earnings of $1.71 per share. Nonfuel unit cost growth was approximately flat to prior year, bringing the year-to-date nonfuel unit cost growth to less than 2%, consistent with our low single-digit guidance at the start of the year, even as we've reduced capacity after the summer peak to align to demand. I want to thank the entire Delta team for their hard work to achieve these results. Delta generated third quarter operating cash flow of $1.8 billion. And after reinvesting $1.1 billion into the business, we generated free cash flow of $830 million. On our capital structure, we continue to take an opportunistic approach. Last month, we successfully repriced our SkyMiles term loan, reducing the rate by 225 basis points. This demonstrating the strength of our balance sheet and the attractiveness of Delta Credit. Strong cash generation is able debt paydown of nearly $2 billion year-to-date with gross leverage ending the quarter at 2.4x. Now turning to the outlook. For the December quarter, as Glen shared, we expect revenue growth of 2% to 4% year-over-year with positive unit revenue. On the cost side, disciplined execution supports nonfuel unit cost growth in low single digits, in line with our full year guidance. With that, we expect fourth quarter earnings of $1.60 to $1.90 per share and an operating margin of 10.5% to 12%. For the full year, this brings earnings per share of approximately $6, in the upper half of our guidance range we provided in July. On free cash flow, we are updating our guidance to $3.5 billion to $4 billion. This outlook is within our long-term target range, enables us to pay down debt while returning cash to shareholders. Our capital allocation priorities remain unchanged, reinvesting where returns are strong, reducing debt and maintaining our fortress investment-grade balance sheet, which was recently recognized by Fitch with a revised outlook from stable to positive during the quarter. Our investments are focused on the customer experience, as Ed and Glen spoke about, and on driving efficiency through technology and our fleet. We continue to advance our fleet renewal strategy with approximately 40 aircraft deliveries this year and next. These additions drive meaningful value for our customers through expanded premium seating and for our shareholders through increased efficiency and greater scale among our key fleets. Looking into 2026 and beyond, our focus is on profitable growth and delivering long-term financial targets outlined at our Investor Day last November, including earnings growth, durable free cash flow, debt repayment to drive sustained value for our shareholders. In closing, I want to extend my sincere thanks to the entire Delta team for their commitment to one another and to our customers. And with that, I'll turn it back to Julie for Q&A. Julie Stewart: Thank you, Dan. Matthew, can you please remind the analysts how to enter the call queue and go to our first question from Duane Pfennigwerth of Evercore ISI. Operator: [Operator Instructions] Your first question is coming from Duane Pfennigwerth from Evercore ISI. Duane Pfennigwerth: With respect to the strong improvement in cash flow year-over-year and operating cash flow, can you just expand on the drivers of that improvement? How much of that is just the working capital benefit of maybe the booking curve normalizing versus earlier in the year? Maybe there are some dynamics around MRO. Any thoughts you have would be helpful. Daniel Janki: Yes. Certainly, Duane, thank you for the question. Year-to-date, we're on track to where we were last year on similar earnings. And that's even with actually a headwind as it relates to the booking curve. As we talked about over the summer that spring and summer that compressed. It's starting to expand. We haven't yet gotten all that back. We expect more of that to materialize here in the fourth quarter. And the underlying improvement to offset that is coming out of working capital. We built up a lot of just, I won't call it inefficiencies, but excess as we are rebuilding the airline. And now is our time as we drive efficiency to work that off, and you're seeing that in working capital. Duane Pfennigwerth: And then maybe, Glen, for my follow-up, one of the questions we got from a generalist this morning was, can you put the corporate recovery in context, excluding any benefit from a CrowdStrike comp? In other words, are we fully back? How would you put this corporate recovery in context? Glen W. Hauenstein: Yes. I think we're well beyond where the CrowdStrike impact was from last year, and we're seeing similar results to what we disclosed in the third quarter earnings moving into the 4Q. And I'd just remind you and other people on the call that while corporate revenues have recovered to 2019 levels and are actually slightly above those now, that the number of passengers that are booking because fares are higher are still in the high 70s. So we think as business continues to normalize, we have a lot of runway to continue to expand the corporate demand. Operator: Your next question is coming from Tom Fitzgerald from TD Cowen. Thomas Fitzgerald: I was wondering if you could unpack the improvements you're seeing in the domestic market and how much that might be unique to you just given your exposure to higher income households. Glen W. Hauenstein: Well, certainly, I think our exposure to higher household income cohort has enhanced our relative position versus carriers that are catering to a more stressed lower to middle income environment. So we'll see as everybody else reports. I can only speak for Delta and the strength that we've seen and continuing to accelerate as we head into the fourth quarter. Thomas Fitzgerald: Okay. That's really helpful. And then just kind of on the same topic, I was wondering if you could unpack some of the mix shift benefit that you might see as we move into 2026 and 2027 as you take on delivery of new aircraft. Glen W. Hauenstein: Well, we continue to invest in the higher-end products, whether or not that's opening up new Delta One lounges or check-in areas, and so as we continue to take delivery, they come with a higher mix of premium products, and if you look next year, well, we haven't given any guidance, but most of our growth, if not almost all of it, will be in the premium sectors. Operator: Your next question is coming from Catie O'Brien from Goldman Sachs. Catherine O'Brien: Maybe one for Dan. Not asking for 2026 guidance, but this year, your unit cost performance benefited from efficiency gains from growing into your workforce and your fleet and your airport assets. I guess what inning are we in, in that efficiency growth? And are there further tailwinds from this into next year? Daniel Janki: Yes. We talked a bunch about this at the Investor Day last November, and those -- all those trends are intact. We certainly are still in the early to middle innings where we believe over the long term, we can continue to drive efficiency by growing into that workforce, continuing to get growth in the generational airports that we've built that are actually in our run rate. The investment that we've made in fleet as we get scale and efficiency as we continue on the fleet renewal. And then the other element that we talked about is just the role of technology and that it will have in regards to enabling our workforce and giving them tools and transparency to just be more efficient. And we think that is certainly in the very, very early innings of the unlock, and we have years of that in front of us. Catherine O'Brien: Okay. That's great. And then my second one is actually a bit of a follow-up to Tom's. I wanted to dig in a bit on domestic Main Cabin turning positive specifically. Can you give a little more color there? I know one driver of that is that domestic Main Cabin seats for Delta are down year-over-year. Can you tell us by how much? And then maybe the converse of that, I know back in August, when I was in Atlanta, we spoke about how you're adding, you're doing some retrofits to add incremental Delta Comfort seats this year. What does this year's retrofits do for premium seat mix into next year? I know you said most of next year's growth driven by premium seats, but just wondering specifically how the retrofits contribute to that as well. Glen W. Hauenstein: Right. Certainly, as we continue to -- the premiumization, if you will, of the Delta ecosystem is really dependent on 2 things. One is the retrofits, which you mentioned, which accounts for probably about 25% to 30% of the incremental premium seats and then new aircraft deliveries that are continuing to come with a higher mix of premium as they roll out of the factory. So both those contributing to the continuation of improving the experience for our customers. And then lastly, on Main Cabin demand, we have seen an inflection. Our Main Cabin seats are down slightly. They're not down significantly from last year. So relatively flat. But what we have seen is the rationalization of capacity in many of our hubs. As a matter of fact, if you look forward through November, capacity in almost all of our hubs is down year-over-year from competitive sets, which is allowing us to rationalize the seats that are there and continue to drive unit revenues up. Operator: Your next question is coming from Jamie Baker from JPMorgan. Jamie Baker: So for Glen, premium revenue growth exceeded that of Main Cabin by 13 points. That's obviously a new record. And I guess my question is a bit of a follow-up to Catie's. I mean, obviously, part of the outcome is driven by weakness in the low-end consumer. But can you drill down a bit deeper into actual changes in consumer behavior? So for example, if you looked at SkyMiles member behavior, how much premium growth is driven by your more affluent members taking more trips versus maybe less affluent flyers trading up to a better experience. There seems to be so many moving pieces to explain the 9% rise in premium, the 4% contraction in Main. We obviously know the outcome is great, but any further comment on the specific building blocks would be helpful. Glen W. Hauenstein: Well, Jamie, I think we've been outlining this for many years that we think that premium still has a long runway. And we -- as you know, following this industry for a long time, we were not selling premium seats 10 or 15 years ago. We were giving them away, and the reengineering of the whole purchase process where we made them much more affordable and much more attainable has allowed people to buy up into those categories, and we've always said that we aren't really at the end state in terms of getting the distribution systems where we need them to be to make sure that those products are being displayed to end consumers or agencies the way that they need to be, and that's been a long journey, too. So yes, it's been a transformation. And yes, all of the above are true that people are attaching to these products and then the repeat rate on them is incredibly high. And I think in previous calls, I've equated it to the car that you drive today, is it better than the first car you had? The answer is probably yes, and you don't see many people going back to cars that are worse, and I think once people get used to traveling in a certain product, whether it's Comfort+, Delta Premium Select or Delta One, they tend not to go back. Their retention rates in the mid-80s. And so the intent to repurchase very high, continuing to expand the availability of the products, the price points on the products. And this is a journey, a long journey we're on. So I think it's a great question. And I think we see that there are many, many more opportunities in premium in the coming years. Ed Bastian: Jamie, if I could add to that, a couple of things. There's also -- you need to look at the geographies, right? Look at the investment we've made in L.A. and Boston and New York and the coastal investment in Seattle, that's where a considerable amount of premium lives, and Delta historically wasn't as big in those markets as we are now, and not only have we moved in there, we've built generational experiences through the airports, the Delta One lounges. Corporate travel is our bread and butter. We are the very best at it, very best serving it. Corporate travel is premium, right? And so all of these things go in, as you said in your question, there's a lot to that, but we see a considerable amount of continued momentum forward in premium, and the question we get from customers all the time is when can we get more? Jamie Baker: And that actually leads to my follow-up. What does the Venn diagram look like between premium and corporate? So if JPMorgan buys me a Main Cabin ticket to Miami, that's clearly going to show up as corporate for you. It's going to be on our discount. But if JPMorgan buys me Delta One to Los Angeles, I guess that counts as both corporate and premium. Glen W. Hauenstein: Yes. Jamie Baker: So could you quantify sort of what that overlap?. Glen W. Hauenstein: What percentage of premium is corporate? Jamie Baker: Yes. Glen W. Hauenstein: It's probably 30% to 40%. We can get the exact number, more and more, and I think this is the exciting part for us. If you think about one of the issues we had many years back, the difference between yields on corporate and high-yield leisure were very, very different, and so it was a steep cliff if you weren't filling your planes with corporate on what you had to fill them with. And now those have diverted. And in some cases, corporate -- personal leisure is higher than corporate these days. So it's given us a really nice ability to manage, and one of the issues we've had with our team that we've been working on is sometimes we run out of seats for corporate, and we have to go and put more seats in market because corporate was getting squeezed out by higher-yielding leisure. Jamie Baker: Excellent, and if I could just squeeze in a third follow-up just because you brought that point up. You had said 2027 was the year in which premium would overtake Main Cabin. Any reason we wouldn't see that occur in a quarter or 2 next year? Glen W. Hauenstein: I think you will. Operator: Your next question is coming from Conor Cunningham from Melius Research. Conor Cunningham: Glen, you had a chance to talk about your first car. I think it was the Rambler. I think you referenced that a couple of months ago. Glen W. Hauenstein: Rambler Classic. Conor Cunningham: Maybe we can stick with the premium discussion because there still seems to be a fair underappreciation for what's going on here, I think, out there. So like obviously, the revenue growth on premium versus Main Cabin has been very, very strong for quite some time. But I was hoping you could talk about the profitability of the segments of the cabin. I think that -- I mean, should we look at the gap in just in terms of the growth overall as a good benchmark for the differences in overall contribution? It just -- there seems to be another step function change coming on seat mix. So it just seems like there's a further step function change coming on profitability as well. So if you could just talk about the segments on a profitability standpoint, that would be helpful. Glen W. Hauenstein: I just think that when you think about what's different and what's changed over the last 10 or 15 years, the premium products used to be loss leaders and now they're the highest margin products. That's really the headline. And really in descending order of the premiumness is their margin. So the best margins are in the most premium products and you just work your way down. Now we've had some convergence on Delta Premiums like, which has actually been so popular as we've introduced it that the margins are starting to converge with Delta One, and we're working on separating those back out again, but really exciting opportunities. These are relatively new products for the airlines. We've only had them and we've only been selling them, and we've only been selling them in widely available distribution for less than 10 years. Conor Cunningham: Interesting. Great. Maybe on corporate, just a follow-up to Duane's question in general. I got a similar question as well. Like -- so I know that there's some CrowdStrike noise within it, but the 8% number is obviously a lot. And if you look at some of the other travel industries out there, they're not calling out a game like that. So to me, kind of it seems like you're driving additional share gains. Or maybe you could just talk about how the overall market is expanding in general and how you're continuing to drive share within it. Glen W. Hauenstein: Well, first of all, I'd like to call out our sales team there, the best sales team in the industry, do an amazing job for us. And clearly, we are continuing to take share on the margin. So we monitor our share and then we reconcile it later. But I think we're seeing mild gains in total share and certainly higher gains in revenue share. But yes, there's a lot of opportunity as we look forward here is that corporations are still not traveling in the volumes they did pre-pandemic. And so as that travel continues to come back, and I think we could look at third quarter sales and take the CrowdStrike out of it, we're still in the double digits. Daniel Janki: I think what I'd add on corporate because I've heard it a couple of times that somehow it might be driven by CrowdStrike. Actually, that 8% September was higher than 8%. It was 9% and that didn't have CrowdStrike in it. So I think that's -- there's real momentum here with corporate. It's across all the segments. This hasn't anything to do with the technology outage. Ed Bastian: Yes. One other thing, Conor, I'd add is corporate suspended travel in the early part of the year. So there is also -- was some level of pent-up demand to get back out. And I don't think you can underestimate that. I don't see that stopping, by the way, because our outlook when we ask the corporates, they're going to continue to grow. But there was clearly for 4 or 5 months this spring, we were not seeing any corporate growth, and then they all got back on the road together at the same time. Conor Cunningham: Awesome. Ed Bastian: Up into this week are staying at or above the numbers we disclosed. Operator: Your next question is coming from Andrew Didora from Bank of America. Andrew Didora: Maybe, Glen, maybe switching gears a little bit and speaking about Atlantic here. Obviously, RASM down 7% in 3Q. I know you spoke about a step function change happening here, but I kind of doubt you're expecting to get back to flat in 4Q. But maybe could you speak to how Atlantic performed throughout 3Q and kind of what you need to see in order for that entity to climb back to flat unit revenue? Glen W. Hauenstein: Well, yes, I think third quarter was clearly disappointing, and I think it was a host of things. Some of it might have been our fault in terms of where we thought the booking curves would be and how we held out for higher fares. And so next year, we're going to be much more aggressive in building a solid book earlier in the year. I think the other thing was the booking, as Ed refers to it as the spring swoon. When the spring swoon was happening and everybody got a little nervous when tariffs were introduced, that was the booking window for the latter part of the summer. So that had some impact on Main Cabin as well. And then finally, I think we've discussed earlier is that given that the cohort on the premium products is really -- it's in their 60s, the fall has become a relatively more attractive period than the summer in terms of high-yield leisure. So it's a combination of all three. So we're going to attack it multifaceted next year. I think we're going to hopefully not have any kind of swoon in the whole demand set. We're going to be a little bit more aggressive in terms of Main Cabin and filling up those cabins earlier in the booking curve, and then we're going to adjust our capacity to make sure that we're not creating the church for Easter Sunday in July and August. We're going to flatten that out more for the summer season to have a better distribution of capacity. Andrew Didora: That's interesting. And then, Glenn, since you spoke about kind of margins within the cabin, curious if you'd be willing to rank your geographies by margin performance thus far in 2025 and maybe how you expect that to change, if at all, heading into 4Q and 2026? Glen W. Hauenstein: Historically, we had a domestic premium and an international, and I'm not going to go beyond the international as a whole. But this year, they're relatively similar. They've converged on each other. And we're going to have a race. We've got our domestic for '26, our domestic improvement versus our international improvement, and we're going to compete them against each other and see which one can generate the higher returns next year. Operator: Your next question is coming from Mike Linenberg from Deutsche Bank. Michael Linenberg: Glen, back to the government shutdown, if you sort of think back to 2018, 2019, when did it start to bite? I mean we're day 9 in? And what -- can you recall what that financial impact was to Delta? Glen W. Hauenstein: We said at the time, it was a little bit less than -- it was about $1 million a day. And now it's less than $1 million a day for various reasons. One is that DCA travel was off even before. So DCA has not been a real driver in terms of revenue improvement this year. So less than $1 million a day now, and it was about $1 million a day previously. Michael Linenberg: Great. And then just a second quick one here. I thought it was interesting you called out Austin in your release. Clearly, non-hub flying historically, non-hub flying tended to be lower margin, RASM dilutive. What's changed? What makes the Delta product -- or maybe I'm answering the question, I'll leave it to you. Why is it different this time? Glen W. Hauenstein: I think we used to look at the airline at a route level, but that wasn't really thinking about what's inside the minds of customers, and what makes customers choose Delta over a different carrier, and I think the answer is relevance, right? If we don't -- if we're not relevant, we cannot acquire the SkyMiles. We cannot acquire the frequent flyer, the credit cards, and so the ecosystem, you have to have relevance, and that's why it's important for us to have focus cities, and those focus cities have been quite profitable for us, sometimes exceeding that of the hubs, and so we're continuing to invest in focus cities. We don't have a lot of them, but the ones we do have, we've chosen for specific reasons. And let's say, Austin, we've chosen because we don't have a Texas hub. Everybody else has a Texas hub except Delta. As you know, Texas is a -- in and of itself is a huge revenue market. So seeing those opportunities, looking at the demographics, looking at the GDP generation for these cities and saying where do we need to have a relevant offer so that people will join our SkyMiles program, they will join our -- and get our credit cards, and we can produce a relevance. Operator: Your next question is coming from Sheila Kahyaoglu from Jefferies. Sheila Kahyaoglu: I want to maybe follow up on the Atlantic comments. So two questions there. How do we think about Atlantic capacity next year, Glen, you mentioned more evenly dispersed. I guess how are you thinking about that? And maybe secondly, given your competitor just announced some new additions, how are you thinking about competitive capacity, your own network planning as well as the A330, 350 product? Glen W. Hauenstein: Well, I think our product is best-in-class in the transatlantic. We continue to monitor our relative performance in terms of Net Promoter Scores. And I think it's got -- it's leading right now, and it's going to get much better as we continue to deliver new airplanes with the Delta One suites and with the enhanced Delta Premium Select and larger Delta C+ cabins. So I'm really excited about the product that we're putting in market. We've chosen not to fly narrow-bodies in the transatlantic because of product and brand issues, and so we're not going to go in that direction, and -- but next year's capacity, I don't know. I mean I think it's early in the game. Not everybody has announced what they're going to fly, and usually, everybody announces what they're going to fly, not what they're not going to fly, and so that usually follows after what we're going to fly next year. So we'll see how it all shakes out. I think it's going to be probably low single digits, and as far as our summer, we'll be probably in the very, very low single digits if growth at all in the very peak months of July and August, with a slightly higher shoulder season, which is becoming more peaky. Operator: Your next question is coming from Savi Syth from Raymond James. Savanthi Syth: I wonder if you could share what you're seeing on the Latin America side, perhaps kind of broken out by international and long haul? Ed Bastian: Latin America, long haul, short haul. Glen W. Hauenstein: Yes. Long haul has been very solid for us. It comes into season in the winter. It's looking for a very good strong winter season. Short haul has been a mixed bag. Caribbean doing well. Mexican beach is under a little pressure, but all still very profitable for us. So continuing to make investments in those regions. Savanthi Syth: That's helpful. And if I might, on the maintenance side, Dan, do you expect 2026 to be kind of above or below in terms of heavy maintenance events? And setting that aside, like what are you seeing in terms of inflation on maintenance and parts? Is that getting better? Daniel Janki: Savi, I apologize, we weren't able to hear you clearly on this side. I know it's related to 2026, but I couldn't hear the context of the question. Could you repeat it? Savanthi Syth: Yes. Sorry about that. Just on the maintenance side, do you expect 2026 to have kind of more or less heavy maintenance events? And beyond the events, just on inflation, just what are you seeing on the maintenance and parts? And is that improving from kind of high level? Daniel Janki: Yes. We're still -- we're in the early stages of our planning for 2026. So we haven't worked through all our capacity and maintenance. So more to come on that as we work through the fall here. As it relates to inflation, yes, I think that's still one part of the supply chain, both as it relates to material availability, to repair, components, all those have had inflation above the normal. They're coming more in line as the industry continues to get better, but it's got a long ways to go. We've kind of said that, that part of the supply chain is multiyear in nature as it relates to the opportunities in front of it to any aspect of it, you can look at. The turn times and performance are still not at levels that we experienced in that '17, '18, '19 perspective. And as those come more in line and get healthier, you're going to see greater efficiency out of that. Operator: Your next question is coming from Scott Group from Wolfe Research. Scott Group: So the fourth quarter earnings guidance is basically the same as Q3 earnings, and we've never really seen that before, I guess, if you exclude CrowdStrike last year. I guess I'm trying to understand, do you think this is just the new seasonality that makes Q4 a lot stronger? Or would you say maybe that you under-earned in Q3 and maybe it's some of both. I think the implications for how to think about next year would be different based on how you think about that dynamic. Glen W. Hauenstein: Yes. Fourth quarter, it's actually at or slightly better than third quarter, and I think it's being driven by strong premium demands and corporate travel in season. So we have a nice long season. If you remember, last year, we had the election, and in the October period, we had -- the country kind of froze right before the election and unlocked a little bit after the election, but we had that period. We also have some favorability in terms of the calendar. So I think fourth quarter is as long as business is traveling is a very strong quarter for us, and I think in third quarter, particularly in the transatlantic, we are going to strive to do better than next year's third quarter because we think we have some opportunity should we -- if we had to replay that to improve our results on the margin. Scott Group: Okay. So maybe some of both. And then about 1 point of the revenue growth in Q3 was from MRO, maybe a little help from cargo. Is that sort of sustainable into Q4 and going forward that MRO strength? Daniel Janki: The MRO over the long term, yes, you're going to see it. You won't see it every quarter at 60% plus. I'd say both the second and third quarter were quite strong as it related to MRO for the year, think of it more in that 20% to 30% range, but we would like to see many years of MRO growth well above the growth of the core airline and being double digit. But you won't see it at those levels. You'll see much -- actually, I think as you -- fourth quarter, it's probably closer to flat year-over-year. Glen W. Hauenstein: And on cargo, great third quarter and a shout out to our cargo team. I think they did a fabulous job. We have seen some, I'd say, choppiness as we enter the fourth quarter, and we'll see how that -- what the final result is. But I wouldn't expect that the 19% would be sustainable into 4Q. It's probably going to come down from there. And we'll see, but still probably growth in cargo. Operator: Your next question is coming from Ravi Shanker from Morgan Stanley. Ravi Shanker: Glen, maybe a couple of follow-ups to your earlier comments kind of specifically focused on 1Q. Can you help us understand how you're thinking about 1Q network planning, just given all the continual noise that continues to be out there and also what happened last year with the kind of close-in weakness and corporate and everything else. Are you treating last year as a one-off? Or are you kind of being more cautious going into next year because of that? Glen W. Hauenstein: I think we're going to head into 1Q the same way we're exiting 4Q, which is with a very strong backdrop, and the quarter we know the most about is the quarter we're in and the quarter we know the least about is the fourth quarter of next year. But as the first quarter comes into focus, the demand is looking quite robust. And so let's hope that, that spring swoon doesn't occur again next year. Ravi Shanker: Understood. And just kind of on that topic of 1Q and kind of focusing on transatlantic, you guys have been talking about that shoulder season strength for some time now clearly manifesting right now. Last year in December, you said that 1Q of '25 in transatlantic was setting up for one of the strongest years you've ever seen. And part of that was driven by a favorable U.S. dollar. The dollar is not as favorable right now. But are you -- from what you can see right now, do you see European strength continuing into 1Q '26 similar to what you saw coming into this year? Glen W. Hauenstein: Yes. Operator: Your next question is coming from Brandon Oglenski from Barclays. Brandon Oglenski: Maybe this one is for Ed or Dan, but you guys, I think, in your prepared comments, talked about your long-term goals of margin improvement. And I think everyone would agree on this call that airline stocks could be pretty cheap, but maybe margin growth would really be welcomed for investors. So I guess in that context, what is in your control here as you look into 2026? I'm not necessarily looking for guidance, but does it just have to be a market that's growing capacity a lot less than we have in the past few years? Or is it all these things that we're talking about on the commercial side that just gain more momentum? And what can you do on the cost side as well? I think Dan was just hinting at efficiencies there, too. Daniel Janki: Yes. No, I think I'd point you back, and thanks for the question to a lot that we talked about last November. There were a lot of things in there that we talked about that were Delta specific as it related to things that are in our control as we look forward, and we want to drive -- we run the company for margins. We want to drive margins up into the mid-teens as we laid out, and we feel that the playbook and the strategies and priorities in front of us enable us to do that. It starts with those growing the high-margin revenue streams faster than the core. Premium is at the core of that. We talked about premium seats growing, Main Cabin -- outpacing Main Cabin. So you have more product out there, continue to grow the Amex relationship and loyalty faster. So those are things that help you as it relates to the top line. The fleet renewal supports that. And then you look at the things that we want to do that and still drive good cost performance of low single digit, and again, it goes back to the growing into the airports that are already in our run rate. It goes into the fleet actions that we've been growing of simplifying the fleet and getting scale out of it associated with it. And then long term, continue to grow and get more efficiency out of not only our workforce, but the entire supply base, but also the benefits that technology bring to it. So we want a steady march over time of doing that. Now certainly, the industry backdrop could be beneficial to that supply and demand stay in balance, there's real opportunity for that also to support additional margin growth in excess of the things that are Delta-specific and controlled. Brandon Oglenski: And just maybe as a really quick follow-up. I think you guys said co-brand spend was up 12%. I might be off on that, but can you talk to some of the loyalty drivers right now and how sustainable that is looking into next year? Glen W. Hauenstein: Well, I think it's been driven by two things. One is the premiumization of the card itself. So we've been acquiring a record number of premium card holders and their spend is a multiple of what our base member card spend is. So while you look at the total acquisition numbers and say, I think this is our seventh year of 1 million or more acquisitions, that the mix of those acquisitions is skewing higher and higher in terms of getting -- reaching a more premium audience. And those customers have better credit scores, so they get approved more often and they spend more on their cards. So that's been really one of the key drivers for us is not only in the total volume, but the number of premium cards that we've been able to acquire. And that's driven versus the -- our 2x versus growth versus total card spend. And that's been year after year that we've been able to do that and looking to continue to do that through '26. And as the more attractive and the more -- if you think about the question that was preceded about why Austin or why Raleigh, well, these are high-income growth areas. These are places that we've acquired a lot of cards in and trying to understand the interaction between the airline and the card and how to maximize both of those together as opposed to just looking at an individual route. Operator: Your next question is coming from Tom Wadewitz from UBS. Thomas Wadewitz: Wanted to see if you could give maybe a little bit of additional sense of the -- looking at '26, you're saying that you'll be in line with the multiyear view, so let's say, 10% earnings growth, something like that. Do you assume that you get to revenue growth, low single-digit revenue growth, some kind of revenue growth in Main Cabin? Or should we think about this where you really get there with the good visibility you have on the premium and card and other things and that you kind of get to that multiyear growth without a meaningful swing up in Main Cabin. Glen W. Hauenstein: Well, I think we've already seen an inflection in Main Cabin, which is very exciting to us. And the trends that we see today are probably the trends that are going to carry us at least through the beginning part of 2026. So I would expect that Main Cabin does have improvement as part of our base -- as part of our base revenue assumptions for '26. And on top of that, the continued growth of the premium products and the card spend as well. So yes, I'm excited about the fact that we have finally inflected in the Main Cabin. Thomas Wadewitz: Okay. But you wouldn't necessarily see that as upside that's kind of assumed within getting to what the multiyear is? Glen W. Hauenstein: We haven't given any guidance on that yet. So... Thomas Wadewitz: Okay. I appreciate that. That's fair enough. The improvement in Main Cabin, do you think that, that's like -- I think the consumer and especially kind of lower-end consumer is -- it's unclear whether -- how optimistic you should be. So do you think that what you've seen in the sales trend that's been favorable is that consumer slime? Or do you think it's just Delta share and kind of industry capacity rationalization that's been beneficial? Or what do you think the kind of bigger driver would be of that improvement you see in 4Q and carrying into '26? Glen W. Hauenstein: At the low end of the industry, there's been a lot of seats removed, and that's allowed us to get a footing on fares. I think when you think about the financial performance of the carriers that are catering to the lower income customers, they have not been good, and some have had to declare bankruptcy. And it's the restructurings that they're going through and having to get higher fares. They can't -- they need more money to survive. And so we had one of our competitors say something, but it's just math. Well, it is just math is that they have to get their fares higher in terms of -- and that helps us get a footing on our Main Cabin as well. Julie Stewart: Matthew, we'll now go to our final analyst question. Operator: Certainly. Your last question is coming from David Vernon from Bernstein. David Vernon: So Glen, maybe just a micro question for you in terms of the competitive capacity being down in Delta hubs year-over-year. I'm wondering if you're seeing any kind of difference in domestic revenue trends in your hubs versus some of the point-to-point leisure markets. I'm trying to get a lot of questions about whether kind of what you're seeing in Main Cabin is going to be an industry-wide thing or more of a Delta-specific thing. Glen W. Hauenstein: Well we have 3 categories. We have coastal gateways. We have core hubs and then we have focus cities, and they've all been behaving well. I'd say the biggest improvements have been in the coastal cities where we've seen a big uptick, and these are also the biggest and wealthiest cities in the country, the New York, the L.A., the Boston, Seattle, where corporate travel is significantly improving year-over-year and our share is improving. So that's really been a driver -- a big driver of it, and the hubs have been performing very, very well, and our focus cities, the ones that we're investing in are as expected. So yes, I think it's a broad brush improvement from where we were just 90 days ago. David Vernon: Excellent. And then maybe just if we kind of step back for a second, coming back to the commentary around earnings consistent with the long-term financial framework. Given the weakness and the weirdness of, frankly, of 2025 with the second quarter slowdown, some of the regular ops days, I mean if we don't have something like that repeat, is there any reason to think that we shouldn't be at the upper end of the framework you guys have laid out in the past? I'm just thinking just the comps are just going to be so much easier for a big part of next year that maybe we shouldn't be thinking that, I'm wondering if there's a reason we shouldn't be thinking it would be at the higher end of your longer-term financial framework. Ed Bastian: David, this is Ed. I'll take that. We haven't given '26 specific insights yet nor have we completed our planning process. So we'll probably be better equipped to talk about that towards the end of this year or early next year. But no question, we saw some pretty strong headwinds that came quite abruptly, hit us in late January, early February. We had the aircraft incidents, which certainly hurt revenue growth in some important markets. You had a lot of the trade uncertainty, you saw consumer confidence plummeting. And to the point where Delta, as you recall, we wound up pulling our guide, there was so much uncertainty for a short period of time. So no question, we have some tailwinds as we look forward into the new year, and if today's environment projects into '26, I think '26 is going to be a really strong year. Julie Stewart: All right, Matthew, that will wrap up the analyst portion of the call. I'll now turn it over to Tim Mapes to start the media questions. Tim Mapes: Thank you, Julie. Matthew, as we transition from the analysts to members of the media, if you wouldn't mind please describing how best to enter into the call queue and the process for follow-up. Operator: [Operator Instructions] Your first question is coming from Leslie Josephs. Leslie Josephs: We've seen Amex, Chase and some others raise credit card fees. Just wondering if you see any pushback from customers in terms of acquisitions on your end, if you think that credit card annual fees at least can keep going up? And then my second question, also seeing really long upgrade lists, which I guess would be good for you guys because you have a lot of elites, not just on your airline, but others. And curious how you're managing that and if the percentage of paid seats in premium has gone up since the last time you've updated everybody. Glen W. Hauenstein: in card fees, but we also injected a lot of value for customers, and we had a record acquisition in that this year. So we're very pleased with the results. I can't really comment to the results of Amex or Chase. But I would say, as long as you're providing more value to the customers, it seems like a pretty safe bet that there's going to be strong demand for those premium products across the spectrum. And in terms of our standby list, yes, there's a long standby list, and we have a lot of premium customers. And that's one of the reasons we've expanded our Comfort+ offerings because our most elite customers are allowed to upgrade into those products at time of booking, and we didn't have enough of those. If you look across the spectrum, we were generally sold out of Comfort+ early in the booking curve and now being able to increase that so we can accommodate more of our most premium customers with premium offerings at time of booking. Operator: Your next question is coming from Mary Schlangenstein from Bloomberg News. Mary Schlangenstein: In your forecast for transatlantic travel, I'm wondering if you still expect that to be mostly driven by U.S. point of sale? And do you see a rebound from non-U.S.-based customers? Glen W. Hauenstein: It's always been U.S. point-of-sale driven. And so the question is how U.S. point of sale will it be? And our point-of-sale revenue on our revenue, we're approaching 80% U.S. point of origin. So yes, that we hope that there's going to be more. The dollar, of course, has strengthened. That makes coming to America more of a bargain for customers. And so hopefully, we see that translate into a little bit higher European point of sale, but we are mostly a U.S. point of origin driven company. Mary Schlangenstein: And what are some of the other factors that are ongoing that you see constricting non-U.S. point of sale? Is it still some of the like concerns over immigration policies, things like that? Glen W. Hauenstein: There's clearly safety concerns. There's a whole host of concerns of travel to the U.S. But I think we still have a great product here, and we have great cities, and we have people with relatives and friends and family. And so it's going to be -- there's going to be demand. The question is how much demand. And the good news for us is we're not totally dependent on that. It's not our core business. But I would expect, hopefully, that next year is a little bit better than this year for European point of sale. For nothing else is that the appreciation of the euro has made European fares look relatively more attractive. Ed Bastian: And Mary, this is Ed. The conversation, it's also on the margins, right? It isn't as if Europeans have stopped traveling. They're still traveling in large numbers. The numbers may be down 5%, 7% in some of the markets. We're long term, we think our business model is very healthy for global expansion, and you're going to continue to see us pursue that. Tim Mapes: Gratulations. Matthew, let's squeeze one more in, please. Operator: Your last question is coming from Niraj Chokshi from New York Times. Niraj Chokshi: I was just curious, there's some talk about the industry sort of bifurcating Delta and United on one side doing very well and then sort of the rest. And I guess, do you agree with that assessment? And then if so, is it structural? Is it a sort of industry phase? Just sort of curious to get your sort of sense of what's happening. Ed Bastian: It's clearly happening. If you look at the results this quarter, as I mentioned on CNBC this morning, we expect 60% of the overall industry profits to be driven by Delta. I expect the rest of it probably to be driven by United largely. And then you have everybody else. And this is not a new phenomenon. This has been happening really since COVID hit over the last 4 or 5 years. There's a lot about the industry fundamentals that have changed that we at Delta are driving a much higher level of quality experience, whether it's reliability, whether it's the product and services that we offer, whether it's the partners we're bringing to the table, whether it's the expansion internationally. And if you are in a category that is seen as more of a commodity purchase, they're having a very difficult time. Their cost structures have increased as labor costs have gone up. It's been very difficult to get airplanes to get supply growth. Those lower-end models depend on high growth, and there's a lot of congestion in the U.S. marketplace in terms of the sky. So I think the bifurcation you're seeing is going to continue. And eventually, there will need to be rationalization to enable the lower end of the price spectrum to continue to sustain itself to be able to continue to attract capital, and I think we're seeing this all play out right in front of our eyes. Tim Mapes: Matthew, that will wrap us up, please. Operator: Certainly. Ladies and gentlemen, that concludes today's conference. Thank you for your participation today.
Operator: Today's call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Ravi Pamnani, Senior Vice President, Investor Relations. Mr. Pamnani, you may begin. Ravi Pamnani: Thank you, Operator, and good morning, everyone. I hope everyone has had the chance this morning to review our press release and prepared remarks, both of which are available on our website. Before we begin, please take note of our cautionary statement. We may make forward-looking statements on today's call, including about our business plans, guidance, and outlook. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, 10/09/2025, and we are under no obligation to update. When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results. Please refer to our third quarter 2025 earnings release and third quarter 2025 Form 10-Q available on pepsico.com for definitions and reconciliations of non-GAAP measures and additional information regarding our results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements. Joining me today are PepsiCo's Chairman and CEO, Ramon Laguarta, and PepsiCo's Executive Vice President and CFO, Jamie Caulfield. We ask that you please limit yourself to one question. And with that, we will turn it over to the operator for the first question. Operator: Thank you. First question comes from Bonnie Herzog with Goldman Sachs. Your line is open. Bonnie Herzog: Alright. Thank you. Good morning, everyone. I had a question on the volume pressures you continue to face in both your food and beverage businesses. I guess, can you give us a sense of how much this is being impacted by your pivot to smaller pack sizes? You know, maybe versus category trends, soft or potential market share losses. Essentially, how should we think about these volume declines? And then how should we think about volume growth moving forward? Is it realistic to assume that volumes could start to inflect, especially considering the robust innovation pipeline you've highlighted this morning? Ravi Pamnani: Thanks. Morning, Bonnie. Yes. Let me start with beverages. In beverages, the masks are easier when you take out the case pack water kind of divestment or new business model we have. Beverages actually grew volume in the quarter. So we are very happy with the performance on the beverage business. Especially some of the larger brands like Pepsi, grew volume, grew net revenue, grew share. So positive development in beverages. In foods, we changed the promo strategy in the summer, and you know, we went rather than very deep on a particular brand as we did in 2024. We tried to provide everyday low value or better value across all the brands. That impacted the volume, better revenue realization, so probably a more balanced growth of the category and our competitiveness in the category. So that explains a little bit the Q3 volume. Going forward, we're optimistic as you said, both improvement of the basic performance, we had some service level issues early in the year as systems transition now that's behind us, service levels are very high. On both businesses in the '97, '98. That's being well appreciated by our customers. And we're seeing much better fill rates and much better execution point of sale that's driving growth. We're seeing, as you're saying, some of the innovation rolling out and that will give us volume growth. But I think we should think about the top line of the business at a balance between volume growth and price realization going forward. And we'll should see an acceleration in PBNA, continued acceleration of net revenue in PBNA. And the same with the food business, should be very close to flat this quarter in food. Actually, we're very optimistic that the business actually grew in the last four weeks, the last quarter, and the last period that we closed. So optimistic about the top line growth on both businesses and the acceleration. And with regards to international, we had a bit of a weaker summer because of some weather and some other elements in some of our large markets. September was also very good in international, so we see that as the summer a bit of a blip. And international is back to mid-single digit, high mid-single digits performance in the last month that we closed. The other thing I'd add, Bonnie, is as we lap some of these acquisitions, if you look at Asiete, Poppy, the Alani New that's not included in organic. So as we anniversary those, volume and net revenue is going to be reflecting the organic sales growth. Operator: Thank you. One moment for our next question. Our next question comes from Dara Mohsenian with Morgan Stanley. Your line is open. Dara Mohsenian: Hey, good morning. Ravi Pamnani: Hey, there. Dara Mohsenian: The commentary was helpful on top line growth. I guess, just looking out more to 2026 and longer term, obviously, a lot of work's underway to reinvigorate top line growth. Clearly, the heightened innovation focus, focus on permissible or more functional benefits in terms of products. Portfolio reshaping, price back architecture, from home, etcetera, etcetera. So just when you bring it all together, Ramon, which areas do you think are most impactful as we think about potentially accelerating revenue growth in 2026? Can you give us a little more asbestos on when you think we'll start to see material progress on that front? And do you think there's a line of sight to returning potentially the long-term top line growth your long-term algo at some point within 2026, just when you wrap all these efforts together? Thanks. Ramon Laguarta: Yeah. Thank you, Dara, for the question, and it's super critical. Right? We're acting with a lot as you can as you saw and you said, with a lot of sense of urgency on how we reignite top line growth, a growth across the business. And, yes, we see a clear line of sight to going back to algorithm. We'll see. But, clearly, I'll tell you about the why. Throughout '26. Now is it Q3? Is it Q4? We see that happening during the year. The first one is being brilliant at the basics, and that is something that we're focusing on. As I said earlier, the right price points, the right service levels, the right execution, the right service to our customers, the right customer plans, and we feel very good about how, you know, our customer plans are starting to shape up. Know, and we're late. Already quite advanced in the process with our larger customers. So that's being clear at the basics. Then we're making some big interventions in big brands. I said Pepsi is growing globally, and we relaunched Pepsi a year and a half ago. Now we're going after three of our top brands, Lace, Tostitos, and Gatorade. We're relaunching three of our top brands in The US and globally and that is going to drive growth in the core of the business, which is essential to your point on what's going to drive future growth. Now, that is happening as we speak, with Liz and Tostitos, and it's happening with Gatorade a little bit later in the Q1 to Q2 time frame. The other element we're focusing on is really accelerating the platforms that are growing. And you mentioned some, away from home is growing very fast for us in The US and it's gonna be a focus for us. It's growing like, two to three times the retail business. We'll continue to focus its execution of existing products and then some innovation special for away from home more moving towards meals, a more elevated experience. You mentioned permissible snacks. We have a very strong portfolio of permissible snacks. In The US and zero sugar across the world that will continue to be a focus of our innovation, and that will drive growth. And then we have in functional hydration, we have a superior portfolio with Propel and the enhancers and tablets, growing very fast. Those will be platforms of existing parts of the portfolio that will put a lot of investments that will drive growth. Now, innovation is critical for us and we've been working with real sense of urgency on new platforms to capture segments of the market that are you know, disproportionately growing within our, you know, somehow low growth categories. So you mentioned protein. So there are a lot of innovation on protein, the relaunch of muscle milk, a Starbucks and protein. We know in the morning consumers are looking for protein as well. Doritos protein, Quaker protein, We're having a good warrior meat snacks. With our artificials, and then a new development from PROPEL for GLP-one consumers that will have a special type of electrolytes high content of fiber and good levels of protein. So that in the protein space, which, as you know, is driving a lot of growth. Now the move to nonartificial impacting all our brands, Lace and Tostitos now, but the rest of the portfolio throughout 2026. And a new platform, we call it Naked, that will have no colors and no artificial. We'll see how consumers react to their same great flavors with no colors. The customers are really very excited. We're also excited. Let's see if we can take consumers along in which would be a great development for the for the category. We're launching products with higher fiber. I think fiber will be the next protein. Consumers are starting to understand that fiber is the benefit that they need. It's actually a deficiency in US consumers' diet. And that will be elevated. And then we're also innovating in new oils. Some of our platforms, especially in potato, you will see us coming with avocado oil versions, and olive oil. So a very strong innovation pipeline, which we think will help us capture pockets of growth in our categories, that will drive growth. And then the last element as Jamie was saying, we made some acquisitions that are very strategic in how we reshape the portfolio. We divested some, we acquired some, We're very optimistic how Poppy is now in our system and we're already seeing benefits of the physical availability of the product. We're seeing growth with CSA, we're seeing growth with Sabra, and we're going to incorporate Alany new into our portfolio later in the year. So those are new platforms that we'll continue to accelerate the portfolio. Some of that will be organic, some of that will be non-organic. But that's how we see the portfolio moving towards positive growth, in some parts of the portfolio, the total company going towards within our long-term net revenue growth target within next year. And, obviously, we're working to do it as soon as possible. Operator: Thank you. One moment for our next question. Our next question comes from Lauren Lieberman with Barclays. Your line is open. Lauren Lieberman: Great. Thanks so much. Good morning. Wanted to talk a little bit or a little bit about the cost associated with a lot of these innovations and the, you know, plus protein, better for you, cleaner labels, etcetera, that you've run through. Would think that these come at a higher cost of goods. I know you've talked a lot about cost savings as well, but I think you, you know, you're gonna wanna reinvest. So talk a little bit about margin structure or how to think about the cost implications of taking the portfolio and your big core brands. In this direction, and also, you know, what you do to make sure sufficient brand support for these relaunches, particularly as we look into 2026. Thanks. Ramon Laguarta: Yeah. Good. I the overall company we think that we'll continue to improve margins going forward. And we're with, again, with a very high sense of urgency, we are attacking the cost structure in the different businesses with different tools. In particular, you already saw probably today in our remarks how we are attacking the deleveraging Frito Lay with very, you know, would say, intentional and active actions around the supply chain and the go-to-market fixed cost and that's happening. Total company, Lauren, we see we see the margin improvement next year. Again, driven by the continuous acceleration of international, international is accretive to the company and continues to scale and becoming more profitable, that will continue in 2026. We see PV and A continue to expand margins at a good pace. You know, the Q3 was impacted by tariffs which we already in Q4 an expansion of the margin again to complete a positive margin expansion for the full year. And we see Frito Lay or the foods business in North America also starting to bend the curve, after, you know, all the interventions we're making in the fixed cost structure, The truth is that we invested a lot in Frito Lay in the last few years, some of that was under investment, some of that was expanding capacity, The demand signal we had in '23 is different from the demand signal we have in '25, So there's some adjustment we're making to the both the assets and the and the headcount in in the business to make sure that we have the right cost structure to navigate the coming quarter. So think about expansion of the margin for total PepsiCo with the drivers that I said, The portfolio as you mentioned, cost of goods, yes, but also price will be higher. So you should see the innovation as accretive to the business. And the A and M we're making obviously internal reallocations to make sure that the new platforms have the right money. And also some of the costs that were taken out from our fixed cost structure, we will put it back into A and M. To accelerate growth in the coming quarters. Operator: Thank you. One moment for our next question. Our next question comes from Steve Powers with Deutsche Bank. Your line is open. Steve Powers: Great. Thank you, everybody. Ramon, maybe picking up on that thread with respect to productivity. Could you just give a little bit more detail on where the interventions are specifically in and a you're making to right size that kind of fixed cost structure? And how far along you think you'll be at the end of the end of '25? Do you think you'll have rightsized that business relative to the current demand signal, or is there more work to do in '26? If I could, you know, one of the things that I didn't see in today's remarks or release is, is any difference to One North America, which obviously was a big point of focus last quarter. So maybe you could talk about if that omission was intentional or just kinda where we are with 1 North America as well. Thank you. Ramon Laguarta: Yeah. Good. So I'll let me cover both. On Frito, I'll give you yeah. We're clearly, you know, going after some manufacturing nodes that are not needed anymore. These are normally the least efficient older manufacturing nodes that we have in the system, and as we've increased capacity throughout the system in the last few years, those nodes can go away. We're also rationalizing our warehouse infrastructure both in the context of some automation decisions that we're making and also know, some combination with the beverage business in some parts of the country. There is a rightsizing of our go-to-market as we see the labor market stabilizing some of the excess labor that we had in go-to-market. Now we can probably live without those extra coverages. So those are the three main areas. There's the global levers of, you know, we're servicing PepsiCo from global capability centers and some of the changes we're making in how we service the company that it's also a continuation that applies to a free lay. Now the good news in Frito Lay is that when we see the productivity per FTE, is now at the levels of a couple of years ago. So we've been able to get to those metrics with the reduction of fixed cost that we've done in the last six, seven months. There will be a continuation of those interventions in the balance of the year. And I think they will continue, they will have additional productivity interventions in 2026, because we need to invest in affordability and we need to invest as was previously mentioned, in some of the new platforms to drive growth. So you should expect that in the coming months. Now I don't know, Jamie, if you wanna add something to the productivity. Jamie Caulfield: The only other thing I'd add is the pace of productivity built as we went out went through the year and we took some of these incremental cost resizing actions. So as you go into 2026, we're going to have a pretty significant carryover benefit of those actions, particularly in the first half of the year. Ramon Laguarta: Yeah. On North America, we continue to you know, as we look at all the different opportunities to reduce costs, improve margins, drive growth, we're looking at 1 North America as one of the options, we're testing that in Texas, is probably the state where we have the biggest opportunity given our low share in beverages, high share in snacks. When we put those businesses in the same warehouse and we serve the customers from one point of distribution this is giving us a lot of benefits. So we will see. We're testing our learning in Texas and from that, we will make decisions on how we expand it to the rest of the country. The end solution will not be a one size fits all for the whole country. So it will be more of a nuanced solutions depending on the market positions and the market size and the where the population is the different parts of the country. So we'll keep updating you on the decisions in that space. Operator: Thank you. One moment for our next question. Our next question comes from Filippo Falorni with Citi. Your line is open. Filippo Falorni: Want to talk about the international business. Ramon, you mentioned the quarter was negatively impacted by poor weather, but you saw a nice improvement in September, which is pretty encouraging. But some of your peers have talked about, like, some more macro pressures in regions like Latin America, Asia Pacific, including India. Maybe can you give us a sense of the health of the consumer in some of those countries? What are you seeing? And what gives you the confidence in the acceleration? Ramon Laguarta: Yeah. That's great, Filippo. I think listen, when it comes when it know, talking about Q3, I think most of the deceleration are linked to mostly weather Filipino, in some of the large markets. And the good news, as I said, is that September was strong, and we feel good about the balance of the year. Going back to the mid to high single digits for our international business. Now overall, the consumer is you know, I would say is stressed all over the world. We see the consumer making very choiceful decisions in many parts of the world, in China, for sure. And China is a big market. For us. Not so much in India, we're seeing growth in India. India was more impacted by weather, and there's some competitive situation in the beverage category that will impact the growth maybe for a few quarters but coming back strong. We're seeing good growth in The Middle East. Consumer in The Middle East probably feeling good. Eastern Europe, better than Western Europe. I would say. And then, yeah, Mexico is somehow connected to The US. Right? And you know, however The US goes, that impacts Mexico quite a lot. Clearly, the Hispanic cohort in The US is being impacted by all these decisions, and we see remittances impacting Mexico in a way, and that will continue probably for the next few quarters. Brazil continues to be strong for us. Close to double digit in September and a good summer. Their summer. I mean, our summer. And so good I would say, you know, we see the consumer in different parts of the world, different realities. But overall, we're managing to compete well, and we're managing to keep consumers in our brands and developing the per caps, which is a big idea for us internationally. Operator: Thank you. One moment for our next question. Our next question comes from Michael Lavery with Piper Sandler. Your line is open. Michael Lavery: Just wanna come back to brand Pepsi, you know, seeing its better improvement, mean, its better momentum and improvement in The U.S. And even from a share performance perspective, And just curious, maybe some of what's been driving that, how much is it just a changing of the messaging or maybe an increase in marketing? And also, when you talked about optimizing marketing spend as one of the ways to drive better ROIs, is there cuts to the marketing spending that's planned? Do you believe you can be more efficient? Maybe help us understand just how to think about that language there as well. Ramon Laguarta: Yeah. I think, as I mentioned, the Pepsi brand has been a success for us. The relaunch we did think, about a year and a half ago in The U.S., about a year a bit more in international. Has been a great success. And we're seeing momentum in the Pepsi brand in many, many markets. I would say internationally, it is driven by the nonsugar success. I think zero sugar, nonsugar max in Europe. It is driving consumers to the brand. It is keeping consumers in the brand and continue to be very for us from the market share, but also the overall non-sugar segment growth. We're very pleased with that. In The U.S., multiple factors, as I said, there is a focus on away from home and food disorders, Pepsi. I think the meal location is critical for beverages. It's very important for cola. And we are focusing more and more in gaining points of access to the brand and linking the brand to that particular occasion in a culturally relevant way, no different types of foods for different types of consumers and good execution. Thought, investing a bit more in the brand. And that is relevant, as you said, from the marketing point of view. There are two platforms that are growing faster than the rest. One is Zero Sugar. Which is consistent with our international growth. Story. And the second one is flavors. And flavors especially wild cherry and cream, but some others, are bringing new consumers to the brand, younger consumers to the brand, and that is positive news for the development of Pepsi. So we feel good. We'll continue with those drivers. We'll continue to investing in what is our clearly, our most important brand in the beverage portfolio. And for next year, we're assuming that Pepsi will continue to grow, and we'll be able to add some new layers of growth with Mountain Dew and Bajablast is a very solid platform, a billion dollars in retail value when you include both our sales and Taco Bell sales. So it's a very strong consumer platform. We're adding now a new platform with Dirty Do, so kind of a creamy flavors to the Mountain Dew platform. I think that will continue to expand the brand into more consumers. And then as I mentioned, the relaunch of Gatorade, which is critical for us we're leaders in a category that needs to grow faster. So we're working on value for Gatorade. Most importantly, we're working on your point of marketing, on superior hydration. We know we have proven superior electrolyte combinations. That deliver both faster hydration better hydration, longer hydration. And we're working on different parts of the portfolio to convey that message to the consumer. And we're optimistic about how that will play out for us. Operator: Thank you. One moment for our next question. Next question comes from Peter Grom with UBS. Your line is open. Peter Grom: Thank you. Good morning, everyone. So was hoping to follow-up on the prior commentary to I think it was Bonnie's question. So, Ramon, I think you mentioned an expectation for PF and A to get back to kind of flat organic sales performance in the fourth quarter and that you actually saw the business return to growth in the last month. Just as you look at what happened over the last month, is that simply a function of what you were lapping, or is it more related to the actions around innovation and everyday execution? It's just not something we've seen yet. In the data. So just any color on what happened in the last month and how that drives the confidence on the path to work. Thanks. Ramon Laguarta: Let's say, I mean, listen. Clearly, there is sequential improvement in the business. And at this point, I would say it is more related to being brilliant at the basics. So doing better the core things that drive our category. Service, price, execution, customer space, etcetera. So the key drivers of our category. I don't think it's one off. I would see a better customer engagement, customer relation as our service levels became better following the system transition early in the year. And that should be sustainable. Now I don't want to like, things can change, things can evolve, but clearly, the direction of the business it's in the right direction, and we're seeing signs that make us feel optimistic. Operator: Thank you. One moment for our next question. Our next question comes from Andrea Teixeira with JPMorgan. Your line is open. Andrea Teixeira: Thank you, and good morning, everyone. So my question is how to think about the headwinds of the SKU rationalization impacting your organic growth? And two clarifications, Ramon, for PFNA, can you comment on the results of the price reinvestments, in particular in core brands at the entry-level price points? And then second, I think you and Suboni and Peter a bit on the volume inflection. Is that a commentary in the you said volume effected positive in the last four weeks. Is that for a total company or specific to some regions? I'm assuming specific some regions in areas where you're seeing that service level coming back. So where are you seeing if that's the case, where are you seeing the volume inflection? Thank you. Jamie Caulfield: Andrea, pardon me. It's Jamie. On the SKU rationalization, I mean, there's a lot of benefits that come from cutting the long tail. And as we analyze the portfolio, there's a lot of overlap on those very small volume items with some of our larger parts of our portfolio. And as you cut that long tail, you create a lot of operational efficiency that leads to better customer service, and that you know so that you're not losing a lot, and there's a lot to gain through the and improved, improved service. Ramon Laguarta: Yeah. Andrea, on the entry price points, can you just restate your question on that? We didn't quite capture it as you were cutting off there a little bit. Operator: Her line has actually left the queue. So give me one moment. I cannot bring her back. Okay? Ramon Laguarta: K. Not a big deal, operator. Either way. Okay. One moment. Operator: And your line is open again, Andrea. You can repeat the question. Andrea Teixeira: Thank you. So just for the PFNA, if you're thinking like the pricing investments that you made in some of the core brands and entry-level price points, can you comment on how those results have been coming out? Or it's more coming from the permissible area of the business. How we should be thinking about the price reinvestments you've been making for I think, more than three quarters for now. Jamie Caulfield: Yes. So I view them as two fairly separate. The permissible subcategory is doing well. Our permissible portfolio continues to do well. Know, we look at the entire portfolio for price tag architecture. Opportunities. I think the bigger opportunity is in some of what I'll call more of the mainstream, in take-home, and we've been refining as we've moved through the year. We'll continue to refine as we get more and more data on how the brands and the packs are interacting with each other across the competitive set. And, yeah. So that's the priority is to make sure that we've got the pricing very sharp to help drive demand. Operator: Thank you. One moment for our next question. Our next question comes from Peter Galbo with Bank of America. Your line is open. Peter Galbo: Hey, Ramon and Jamie. Good morning. Ramon Laguarta: Hey. Peter Galbo: Ramon, one of the areas where you a lot on in the prepared remarks within PBNA, was on protein. I guess I just want to understand a little bit more on the decision of kind of using the in-house brands like Muscle Milk or Propel to address, you know, protein in a bigger way. Versus other subcategories like energy or prebiotic where you've either bought or partnered. So maybe just if you can expand a little bit on the decision to go more organic versus acquisition or partnership we think about protein and beverages going forward? Thanks very much. Ramon Laguarta: Thank you. Yeah. No. Listen. We always try to leverage as much as we can our existing platform is a cheaper is a better business decision. I think muscle milk you know, is a great brand that as we improve the product and we you know, we're very proud of the product that we've been able to our r and d teams have been able to develop. Will be a great tasting. High levels of protein, good mouthfeel, and no artificial. I think it will clearly serve a lot of consumers that are looking for protein drinkable solutions to replace meals or snacks throughout the day. I think muscle milk can stretch is a brand that has the potential. We'll reposition it. We'll communicate a bit different. The packaging will be very it's very modern. And updated. The same with Propel. Propel is a great platform. He has a high penetration in female and it's been growing at a double-digit CAGR the last five, six years. It has a lot of credibility in hydration. But I think he can expand into more. So this is why we think that we can take it into more of a functional hydration plus platform with Propel, focused on females, but not only. Both in powders and in liquids. And I think that that will have a multiyear innovation opportunity for us as we see consumers looking for more functional solutions in drinks that are not even available right now in the market. So it's always a better ROI for the to develop internally than not. In some of the examples that you put with Poppy and some others, we didn't have the platform to go after those opportunities. And the marketplace had already some scale players that it was a better return for us to go on and acquire. And we'll continue to do both as we go along in innovate internally, take some of our big brands into new spaces, rejuvenate the portfolio under the big brands, at the same time, look outside for tuck-in acquisitions that might give us head start or additional scale in segments that are growing faster. You know? So as you know, we're looking at portfolio transformation with a sense of urgency. And we're making, I think, the right moves as you see from our innovation pipeline some of the m and a's we've made in the last six or seven months. Yeah. Operator: Thank you. One moment for our next question. Our next question comes from Robert Ottenstein with Evercore ISI. Your line is open. Robert Ottenstein: Great. Thank you very much. So Ramon, kind of a two-part question. The first part is, you know, you talk a lot about rightsizing the cost structure, aggressively attacking costs. But at the same time, getting back to algorithm. Suggesting that perhaps the top line isn't the problem, but maybe it's the type of cost that you have. Perhaps too many costs in The U.S. in certain assets and certain brands, but you're gonna make up for that. In growth internationally and then innovation in The U.S. Which may require a more complex cost structure maybe smaller runs, different sorts of supply chains, and a whole different way of looking at the cost structure. So number one, is that assessment roughly right? And then connected to that, very big announcement on the CFO side. Congratulations to everybody. Could you talk a little bit about that decision to go outside of the firm, to a very well-respected leader at your biggest customer. And how you see him driving through that vision. Thank you. Ramon Laguarta: That's good. So listen. I think it's an on It's not an either or. So for us to be fit for the future, we're gonna have to transform the portfolio, and we doing that with the center of urgency. That will drive growth. As we are more on consumer trend and we're more in spaces of the category that are growing. So that I think we spent quite some time. But also, we need to address the cost structure of the business because we need to continue to be extremely competitive and we know consumers are looking for value. And value will be critical going forward. Being at the right price points, competing with competitors, but also private label that will have, you know, their offering. So clearly, there is a need for us to reduce the cost, also change the type of cost. We need to be much more agile. We need to be much more flexible, have optionality, invested a lot in technology in the last five years it is in our P and L, it's been a cause for us for the last five years. Now we can benefit from applying technology to everything we do applying AI, overlaying intelligence, to the infrastructure of data we've created and that will give us optionality, agility, and flexibility, which is probably what the market requires given the continuous pivot from the consumer and from our partners, our customers. So that's how we're thinking. So you'll see us going with a big sense of urgency against portfolio transformation and against cost transformation. With decisions on assets but also applying technology to our business at a very, very fast pace, and we're ready for that probably will become a competitive advantage for us versus other companies given the investments we've made. Now with regards to the CFO transition, press, first let me thank Jamie for all the thirty-five year, Jamie, or thirty-three? Thirty-three year thirty-three years in the company. He's been an amazing partner. We worked together for some periods. I mean, I was in Europe. He was here, but we knew each other for a long time. And we've been doing a lot of work together. Now Jamie expressed his desire to retire some time ago, I started looking for a CFO for the future to help me execute the strategy 2030. Steve is an incredible leader, as you said, the right experience, the right skills, proven record, the right culture fit in the company, and I'm looking forward to welcoming Steve in the next few weeks and, you know, continue to accelerate the transformation of the company to the highs that we know this will achieve. Operator: Thank you. One moment for our next question. Our next question comes from Kaumil Gajrawala with Jefferies. Your line is open. Kaumil Gajrawala: First of all, Jamie, thank you for all your help over the guess, what's now been decades. And, Ramon, a question on asset base and sort of following on with some of the answers to your questions on one, North America maybe being regional. A focus on agility, a focus on being fat. There's a lot going on. Terms of innovation and rightsizing. To what degree are you open to the idea of franchising some of these operations on the beverage side, particularly maybe just from a regional perspective because it feels like many of the intentions of what you're looking to accomplish. Some of it could be moved along by pushing a sort of a refranchising initiative. So curious what you think about that. Thanks. Ramon Laguarta: Yeah. Listen. We're come on. As I said, we're going after growth and margin with high speed and a very strong center of urgency. We are at this point, we're open to all the ideas. And we appreciate all the perspectives to create shareholder value. So you know, we'll listen. We'll do what's best for PepsiCo, but as I'm thinking about this or we think about this space of supply chain go to market, as I said earlier, the solution for this country, talking US, will not be a one size fits all solution. So there'll be Nuance, there will be potential different geographical solutions that will be the best fit for that market given our market position, starting market position, the partners, and everything else that we can do. Now as I'm thinking about this topic, there are three things that we're taking into consideration, and I'd like for you to be aware. One is the we're trying to solve for the demand of the future. Not the demand of the past. And the demand of the future will be much more concentrated in a few retailers or customers. And we need to assume the consumer will be looking for pickup of delivery and digital much more than it is today. It is today very high. It will be even better. So we need to solve for that demand of the future that will be different from the demand of the past. The second is technology and the investment we've made in technology over the five years allows us to do things that were unthinkable five years ago. If you think about a lot of the basic processes of the company from order taking to transportation towers to how we can do, you know, manufacturing or warehousing. Is totally different than the past. So we can manage complexity different. We can eliminate some of the human bottlenecks in ways that we couldn't do before. So technology, demand of the future, and the third point is I'm trying to optimize the full PepsiCo p and l. Not just one or the other. So as we think of that, we will have for sure a Nuance solution. We will be driving different solutions different parts of the country, and we'll be looking for what is the best for PepsiCo long term. We'll listen to every perspective. We'll have constructive dialogues. And I'm sure we'll come up with the best solution for this company going forward. Operator: Thank you. One moment for our next question. Our next question comes from Chris Carey with Wells Fargo Securities. Your line is open. Chris Carey: Hey, everyone. So, yeah, most ground has been covered. So maybe just to take a step back, Ramon, I'd love to get your thoughts on something around cyclical versus structural, but really by geography. I think in North America, there's an ongoing debate about how much of this is the consumer shifting preferences you know, toward, you know, healthier eating, Obviously, there's a cyclical component as well with value seeking. Can you compare you know, the consumer behavior in The U.S. this cyclical versus structural dynamic, versus what you see in the international markets? Is the consumer there behaving in similar ways you know, both from an economic perspective, number one, but also are the preferences for the international consumer outside The U.S. shifting and evolving like they are in the North American business. So I'd love to get any, you know, context or additional color on how you see that interplay. Thanks. Ramon Laguarta: Yeah. So listen. Clearly, it's a very it's a complex topic, but I'll give you my point of view on a couple of areas. There are things that are clearly structural in the way, which is think about consumers all over the world. Think consumers are moving to digital purchasing in a very structural way, and that will change the dynamics of the industry. In both the assortment, what they buy, how they buy, and what they expect the delivery method to be. I think consumers are gonna expect different ways of how goods are delivered to them. So that is a very structural change, and that's happening across the world with different speeds. But I think it's clearly a global trend. The second, I would say, in terms of the consumers are much more informed about the food and the drinks the ingredients in the foods and the drinks, and I think it's a secular trend as well that consumers will be more making choices based on clean labels, based on the ingredients in the food and not only the taste, but also the type of food that is in the brands. And, therefore, some of the relaunches of the brands that we're making whether it's Lay's or Gatorade or Tostitos, take that into consideration because I think they're very relevant going forward. And then affordability is also a reality. I think when you look at low-income households or middle-income households, they're very stretched. Fixed cost, of living are going up around the world. And that will create the need for affordability and value and price points and cost consciousness also for the foreseeable future. So those are trends that they will go up and down notches in the curve, but I think the curve is going in the same direction probably in the majority of the markets. And that's my point of view. That's how we're thinking about the future, and that's why we're moving the portfolio quickly in those spaces. We're looking at the cost structure to be able to compete both on the cost side, but also on how we serve our customers in this future of demand that will be very different from today. Operator: Thank you. One moment for our next question. Our last question comes from Robert Moskow with TD Cowen. Your line is open. Robert Moskow: Hi. Thanks for the question. You know, a few weeks ago, an activist investor announced a stake in your stock. And published a long list of recommendations. So I wanted to know your willingness to engage with them and if there's any ideas in there that you think are particularly important for your strategic direction. One in particular I wanted to know is establishing a margin target for Frito Lay know, it's been discussed in the past. I just want to know, that something that you consider constructive for setting a path for the future? Or you just look at the business and what it needs to do differently than that? Thanks. Ramon Laguarta: Yeah. Listen. Few questions on your question. So our engagement with Elliott has been you know, we had a couple of interactions. Very constructive and collaborative, and we're trying to understand each other. I think we're aligned on one thing, which is critical which is Pepsi goes undervalued. And there's a lot of opportunities to improve the valuation of the company by making a few interventions with a sense of urgency and the way we're doing. So I think we both wanna create shareholder value. We're as interested as any of our investors to do this. So we're aligned. Now of all the ideas that Elliot mentioned in their document, most of them are included in our strategy 2030, and we're acting on it. So I think we're acting with a sense of urgency on both portfolio transformation, simplification of the portfolio, cost reduction to invest in future growth, etcetera, etcetera, etcetera. A lot of positives, There's a few areas where you know, we need to probably educate each other a bit more. Gonna have conversations in the coming weeks and months. And I'm sure we'll reach a point where, you know, they will listen to their perspective. They will help us in our decisions to make PepsiCo a better company and to create value for the long term. So yeah, good collaboration and I'm optimistic about how this will drive sense of urgency and will drive positive change for PepsiCo. Ravi Pamnani: Good. Okay. So this concludes the meeting. Thank you very much. To everybody for your engagement. And again, I would like to thank Jamie for, you know, the incredible work for PepsiCo for thirty-three years and support he's given me and the management team you know, for all those years, but in particular, last two years. So you, and Jamie. I don't know what wanna say. Anything to the team here. Jamie Caulfield: No. Just thank you. It's been a terrific run, and this is a great company. I continue to believe our best days are ahead of us. Ravi Pamnani: Thank you. Operator: Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day. Ravi Pamnani: Thank you, Kevin, Josh.
Operator: Good day, and welcome to AZZ's Second Quarter Fiscal 2026 Earnings Conference Call and Webcast. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Sandy Martin of Three Part Advisors. Please go ahead. Sandra Martin: Good morning. Thank you for joining us today to review AZZ's Second Quarter Fiscal 2026 Results for the period ended August 31, 2025. Joining the call today are Tom Ferguson, President and Chief Executive Officer; Jason Crawford, Chief Financial Officer; and David Nark, Chief Marketing Communications and Investor Relations Officer. After today's prepared remarks, we will open the call for questions. Please note that the live webcast for today's call can be found at www.azz.com/investorevents. Before we begin, I would like to remind everyone that our discussion today will include forward-looking statements made in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. By their nature, forward-looking statements are uncertain and outside the company's control. Except for actual results, AZZ's comments containing forward-looking statements may involve risks and uncertainties, some of which are detailed from time to time in documents filed by AZZ with the Securities and Exchange Commission, including the latest annual report on Form 10-K. These statements are not guarantees of future performance. Therefore, undue reliance should not be placed upon them. Actual results could differ materially from these expectations. In addition, today's call will discuss non-GAAP financial measures which should be considered supplemental and not as a substitute for GAAP financial measures. We refer our shareholders to our reconciliations from GAAP to non-GAAP measures contained in today's earnings press release. I would now like to turn the call over to Tom Ferguson. Tom Ferguson: Thank you, Sandy. Good morning, thank you for joining us to review AZZ's financial results today. Delivered solid second quarter results. Total sales increased by 2%, adjusted earnings per share rose 13.1%, operating cash flow improved by 23%. Underscoring our disciplined execution in a highly dynamic environment. Metal Coatings achieved a strong double-digit sales growth supported by higher volumes and sustained momentum related to robust infrastructure project activity. Metal cutting margins of 30.8% were down slightly as our mix of solar and transmission distribution increased. And these tend to be slightly lower margin markets. We remain confident in the strength of our core markets and the growth potential ahead for galvanized steel in construction, industrial and electrical utility projects this year. Similar to others in the industry this quarter, Precoat Metals faced some mixed market conditions, particularly in relation to tariffs. But focused on protecting margins while pursuing market share opportunities. While Precoat benefited from the tariff impact on pre-painted imported metal, they faced headwinds due to softer building construction that extended to HVAC and appliance end markets. Looking ahead, we are encouraged by Precoat's new customer wins which are generating market share gains. This is primarily due to a strong focus on key markets impacted by reduced access to imported pre-painted metal. Including the aluminum container market. Our container and beverage results continue to reach new highs during the quarter. Indicating that the shift from plastic to aluminum is gaining momentum as we ramp production at the new facility in Washington, Missouri. However, the overall demand outlook remains mixed for Precoat end markets. So we are maintaining a cautious outlook. As ongoing tariffs have contributed to customer hesitation on non-infrastructure related projects. Dave will provide more details on industry trends and AZZ's end markets shortly. Consolidated adjusted EBITDA for the quarter was $88.7 million reflecting a margin of 21.3%. The divestiture of the Electrical Products Group through the AVAIL joint venture created a modest EBITDA headwind in the quarter. Which Jason will address shortly. At our new Washington, Missouri facility, sales continue to increase and operating leverage is improving as we ramp up production. We remain confident achieving gross margin improvements as volumes grow at the new site through the second half of the year. AZZ's proprietary technology continues to set us apart. We continue to pursue technology upgrades ranging from updating system applications continuing to migrate data systems to Oracle, exploring AI opportunities, and developing new galvanizing and coding processes to drive operational efficiencies across our broad network of facilities. As is normal for our Metal Coatings team, they quickly integrated the newly acquired Ohio facility onto Oracle and DGS which is our proprietary digital galvanizing system. With that, I will turn it over to Jason. Jason Crawford: Thank you, Tom. For the second quarter, we reported sales of $417.3 million representing a 2% increase from $409 million the prior year period. Growth was led by our Metal Coatings segment, where sales increased 10.8% over the prior year's quarter. Driven by higher volumes and supported by infrastructure-related spending across our largest verticals. In contrast, Precoat Metals sales declined 4.3% due to a weaker end market environment reflecting lower volumes in building construction, HVAC, and appliance end markets. As Tom mentioned, Precoat continues to win market share in a competitive and dynamic marketplace. The second quarter gross profit was $101.3 million or 24.3% of sales compared to $103.5 million or 25.3% of sales in the same quarter of the prior year. The Precoat Metals segment margins were impacted by customer buying patterns, and the introduction of our new aluminum coil coating facility. Which when combined contributed to have a small drag in margins. Whereas in the Metal Coatings segment, product mix was slightly unfavorable comparison to the prior year quarter. Selling, general and administrative expenses totaled $32.8 million in the second quarter, 7.9% of sales. Compares favorably to last year's second quarter was $35.9 million or 8.8% of sales. Operating income for the quarter was $68.5 million or 16.4% of sales, compared with $67.6 million or 16.5% of sales in the prior year second quarter. Reflecting the strength and operational execution on lower volumes. As noted last quarter, Fernway our 60% joint venture partner in Avail, divested the majority of its electrical products business in the quarter. For the second quarter, this transaction resulted in accounting adjustments to record an additional gain on the sale. Combined with other adjustments and operating performance of the remaining businesses, reported equity and earnings of $59.3 million in the quarter. On an adjusted basis, our quarterly equity and earnings reflected a loss of $2.3 million from continuing operations. The loss in the quarter is primarily due to the excess overhead costs resulting from the divestiture of the electrical products business and the traditionally weaker summer season from our Beale's Welding Solution business. Looking ahead, regarding our 40% ownership interest in the remaining Avail business, which now consists of welding services, lighting and some international joint ventures we are forecasting equity and earnings from unconsolidated subsidiaries to be zero for the remainder of the year. Interest expense for the second quarter was $13.7 million representing a significant improvement of $8.2 million from the prior year due to a combination of debt pay down debt repricing and accounts receivable securitization facility introduced in the quarter. The accounts receivable facility has a borrowings limit of $150 million and is accounted for secured borrowings with an interest rate of one month so far plus 95 basis points. Create an expected annual interest savings of $1.4 million versus current borrowings on the term loan. During the quarter, 100% of the proceeds received from this facility were used to pay down existing debt. The current quarter's income tax expense was $25 million reflecting an effective tax rate of 21.9%. Compared to 25.6% tax rate in the prior year's quarter. The tax rate reduction in the quarter is due to an increase in R and D tax credits attributable to technology spend on our new build Washington, Missouri facility. Reported net income for the second quarter was $89.3 million compared to $35.4 million for the prior year quarter. Since our non-GAAP measure for adjusted net income excludes amongst other items, equity and earnings from the Avail divestiture, of $61.6 million AZZ reported adjusted net income of $46.9 million on adjusted diluted EPS of 1.55 This compares favorably to the prior year's adjusted net income $41.3 million adjusted diluted EPS of $1.37 increase of 13.1% compared to the same period of the prior year. Second quarter adjusted EBITDA was $88.7 million or 21.3% of sales, compared to $91.9 million or 22.5% of sales in the prior year. Excluding the impact of equity and earnings, our adjusted EBITDA for the second quarter would have been $91 million or 21.8% compared to $90.4 million or 22.1% in the same quarter last year. Turning into our financial position and balance sheet. For the second quarter, we generated cash flow from operations of $58.4 million Consistent with our capital allocation strategy, in the quarter we invested $19.3 million in expenditures for the businesses invested a further $30.1 million in the acquisition of our new galvanizing facility Canton, Ohio and increased our dividend payments to shareholders over prior year. With a slight pay down of debt in Q2, combined with our continued financial financial performance, our credit agreement net leverage ratio remained at 1.7 times. Compared to 2.7x in Q2 of last year. As communicated, we continue to maintain a disciplined approach to our capital allocation strategy transitioning our focus to investments in organic growth and strategic M and A, while returning value to our shareholders through cash dividends and share buybacks, and maintaining our debt leverage in the target range of 1.5 to 2.5 times. With that, I'll turn the call over to David. David Nark: Thank you, Jason. Let me begin with an update on the Infrastructure Investment and Jobs Act. As of August, the Department of Transportation reported that 73% of IIJA program funds totaling $319 billion had been committed to specific projects. With approximately $177 billion already outlaid. Similarly, according to the Department of Energy website, 77% or $74.9 billion had been obligated to certain projects. Both agencies are expected to continue to announce awards or initiatives throughout the balance of this year. We believe that because the current legislation is scheduled to expire in 2026 and requires projects such as utility-grade solar to be completed by the end of next year IIJA related spending is having a positive effect on demand for our Metal Coatings segment. We expect multiyear tailwinds associated with IIJA spending and we'll continue to monitor discussions regarding potential reauthorization beyond 2026 once the government reopens. During AZZ's second quarter, we continued to see infrastructure, non-building and civil works projects as a bright spot. Offset by softness in nonresidential and residential building construction. Reported end market sales for AZZ were up including utilities up 19%, consumer up 7.6% while construction sales were up by less than 1% as compared to the same quarter last year. As noted today and in prior quarters, end market growth in utilities is elevated due to IIJA related project spending, particularly solar, transmission and distribution and data center projects. As Tom mentioned, the transition to aluminum packaging in both the food and beverage sectors remains a significant growth driver for AZZ. Our container end market has sustained strong momentum this year supported by continued ramp up of the production at our new Greenfield facility in Washington, Missouri, and recent share gain activity. While we have seen increased opportunities from tariffs associated with imported pre-painted aluminum steel, weakness in both nonresidential building, particularly commercial office and retail construction as well as residential building has created some divergence in our construction end market sales. However, our teams remain well positioned to execute through the balance of the fiscal year and we are approaching calendar year 2026 with measured optimism. With that, I will now turn the call back over to Tom. Tom Ferguson: Thanks, Dave. We continue to see a strong pipeline of project-related activity driven by megatrends such as energy transition and the growing demand for electricity generation to support the rapid growth of data modernization, transmission line expansion and the integration of multiple energy sources will fuel further demand at our plants. As the country continues its journey to re-industrialize the AI boom and cloud expansion are driving massive data center projects and infrastructure development. With higher interest rates lasting longer than anticipated, new housing development and related supporting projects remain muted. Public infrastructure spending tends to be less sensitive to interest rate fluctuations as is often funded through grants, bonds or supported by subsidies. Overall, we anticipate and have planned for a multi-year tailwind in infrastructure spending. Particularly in energy and power generation capacity despite the potential for continued pressure on residential construction. For our 2026 fiscal year, we are reiterating guidance for total sales, EBITDA and adjusted EPS. We anticipate that our sales will be in a range of $1.625 billion to $1.725 billion Adjusted EBITDA will be within the lower half of the range $360 million to $400 million due to the lack of avail equity income as they continue to transition without the electric products businesses. Adjusted diluted earnings per share will be in a range of $5.75 to $6.25 which translates to an increase of between 10% to 20% over the fiscal 2025 adjusted earnings. Although markets may be choppy in the second half of our current fiscal year, which extends through February 2026, our numbers are supported by strengthened projects and structural steel demand forecasts. We continue to strengthen our operational performance and maintain disciplined execution at each of our facilities. Our liquidity position and balance sheet are strong and flexible. With a low debt to EBITDA ratio. Especially given our cash generation capabilities. We remain well positioned to pursue strategic growth opportunities, including our other capital allocation strategies as we have already discussed. Finally, industry consolidation presents ongoing opportunities for our company. And we are actively evaluating bolt-on acquisitions that are strategically aligned fit our integration playbook, and extend our market leadership in Metal Coatings. Our M and A pipeline is healthy and we plan to remain disciplined in pursuing only high-quality opportunities create long-term accretive value for our shareholders. As always, I would like to express my gratitude to our hardworking and highly talented team for executing AZZ's shared vision of growth, profitability and operational excellence. Our mission is to create superior value within a culture where our people can grow and traits matter. Our culture is built on providing outstanding quality and service as directed within our servant leader mindset. These principles continue to shape our path forward and underpin our success. I am proud of our team's execution of the fiscal 2026 plan so far this year and remain confident we are positioned for continued growth and success. We are committed to driving top-line growth, enhancing profitability and generating robust cash flow. All of which are supported by a disciplined capital allocation philosophy. Through the successful execution of our strategic priorities, we believe we will continue to deliver sustainable value for all of our stakeholders. Now operator, we would like to open up the call for questions. Operator: We will now begin the question and answer session. You would like to withdraw your question, Our first question comes from Ghansham Panjabi with Baird. Please go ahead. Ghansham Panjabi: Hey guys, good morning. I guess, first off on the Precoat market share gains that you called out, Tom, can you just give us a bit more color on that dynamic and maybe dimensionalize the boost for AZZ? And I'm just asking because obviously volumes were down in the quarter, you cited some of the obvious in terms of construction and, you know, so on and so forth. How should we think about the contribution from the share gain piece? Tom Ferguson: Yes. I think to a couple of things there. One, we picked up share gain because the and we'd referenced it. The pre-painted imports are because of the tariffs are down significantly. So that's been transitioning to domestic supply and we're painting you know, least as much as our share. If you take that, it's probably, David, what? It's about 10% on imports. So we've picking up our share of it. So we've picked up 3% or 4%. To offset the roughly 9%, 10% market decline. So it's just offsetting but it's also positioning us depending on what happens with tariffs. Hopefully, to sustain that market share and be able to take advantage of it as we go forward. As we're picking up new customers, new applications, converting that, And that's pretty much at our normal margin profile. So it's not like we've had to go aggressively discount to take that share. Is why I'm also confident that those margins will continue to flow through going forward post market softness, if you will. Ghansham Panjabi: Sure. Sticking with Precoat, so some of the challenges that you called out, you know, building construction, HVAC, appliances, they all seem sort of you know, aligned towards the same theme. It doesn't seem like there's any short-term catalyst for those end markets in terms of reversing that weakness. Would it just be the share gains and then you know, the Washington, Missouri facility that are positive offset And how do you think that nets out for segment volumes as we think about the back half of the year? For Precoat? Tom Ferguson: Yes, I'll start and then Jason can probably add some additional color. Yeah, I think you pretty much summed it up. So we're going to continue to assuming the tariffs stay in place, which looks like they will, then we should be able to sustain that market those market share gains from picking up the past imported, prepainted metal. Two, we are do we have the Washamos site? It's, you know, it's still I think we're saying it's running about 20% of its capacity or some number thereabouts. So it's still got to ramp to it as the next six months go on and pretty significantly. So that's opportunity and that is where there's strong demand. In that aluminum container market. That's our sister facility to Washmo, which is the Saint Louis which has two lines, is doing really well because of the high demand in that market. As I look at it, I think well, and then the third piece is we're also aggressively going after other conversions and chasing things. So any kind of rebound in construction. And I think we're seeing some signs of that. We had a big customer well, we had a lot of customers at our annual golf tournament. And, and they generally feel like things have bottomed and starting to come back up in certain areas of the country, particularly. So we feel good about, what we're doing, and I'd also commend the Precoat team. They've adjusted it. They're operating and shifts and times and capacity. You know, we're retaining capacity for the upturn that we hope to have as the year goes on. But also as we talk about our variable cost structure, they've been able to adjust that pretty quickly And I know this is about pre COVID, but I'd say the metal coatings side has done that outstandingly well during that same time period. Ghansham Panjabi: Okay. Very good. Thank you. Tom Ferguson: Jason, did you want to add any? No, think the only other thing you could potentially add there is that, you know, when you think about the construction, it certainly has enough impact on the HVAC and appliance, but very minimally so, if you look at those two, businesses, they're doing reasonably well. And quarter to quarter, there's an impact in terms of inventory levels and model changes, etcetera. So don't see them as being much of a drag in comparison to the construction market. And I'll also add in, we had a good solid September, so we feel good as we've kicked off the third quarter. So kind of in line with the fact that a lot of the Precoat customers are feeling like things are starting the corner is starting to turn. Ghansham Panjabi: Fantastic. Thank you so much. Operator: The next question comes from Nick Giles with B. Riley Securities. Please go ahead. Nick Giles: Yes. Thank you, operator. Good morning, everyone. Guys, still a very solid quarter here and wanted to just turn it on the guidance for a second. So you've reiterated your adjusted EBITDA guidance And just curious really what would take you to the higher low end of the range at this point? I mean, how much is end market driven versus operational? And then how much EBITDA could Washington incrementally contribute as volumes continue to ramp? Thank you. Tom Ferguson: I'll answer the first part of that and then Jason can opine on Washington. I feel like when it comes to I don't know if this has got missed or not. We've talked about it a few times. But you look at the $14 million to $15 million of avail EBITDA impact from last year versus we've signaled zero Q2, Q3 and Q4 for AVAIL. And so that's the biggest impact in terms of our EBITDA guidance. And I'd say that was, you know, harder for us to predict until now you can we can see with primarily WSI as the main asset left in Avail. And they had just gone through this summer is obviously weak because there's just not turnarounds and outages during the summer. So we've felt that. And going forward, though, they do come back into you know, so in terms of the upside. Hopefully they do have a strong fall season, which is you know, back to how turnarounds and outages run. I think interest savings is, is gonna continue. We've paid down the debt. We continue even after acquiring Canton, paid down some debt. So and interest rates have finally moved a little lower. And we've done that through our own actions in terms of repricing and the securitization. So, you know, we feel good about that. It's mostly embedded in our outlook, but you know, there's upsides to that. And then hopefully, get a deal or two done on the particularly on the galvanizing side that before the end of the year and have some impact there and because, obviously, the assets we're buying are gonna be good galvanizing assets that we hope to improve as well. I think those are all the kind of pieces. Precoat's performing well. I think they're driving know, to sustain those margins over 20%. And given the volume fall off, so as volumes pick up at all, that's that can also be upside to us. And then do believe the metal coatings folks are driving hard to sustain that 30%, 31% margin profile while taking advantage of the higher than expected growth, driven partly by regulatory changes and the threat that solar is gonna go away. So we're seeing lots of solar and pole transmission distribution kind of activity, which is we signal maybe slightly lower margin than on balance, but it's really, really good volumes. So we like that stuff a lot. And then Jason on Washington. Jason Crawford: Yeah. Certainly, Washington, you know, as we previously communicated, would be a drag in margins in the first half of the year and then start to turn positive in the second half of the year. And we're very much in line with around about $2 million of a hit to margins in the first in Q2 essentially. From a contribution margin point of view, the businesses contribute with the volume that's flowing through there. We know that's ramp up volume. But obviously, you've got the fixed costs associated with that facility and largely the fixed costs are driven by depreciation of the $125 million So it's very much in line with expectations. As you start to look at the second half of the year, then Q3, Q4, it starts to ramp. And, you know, we were very much in line with the expectation of that ramp profile. We'll start to hit capacity towards the 50% arena Q3 going into Q4, and then really see that start to pop in Q4. So very much aligned with the and very much built into original guidance and where we sit here today. Nick Giles: Tom, Jason, I really appreciate all that detail. Maybe just back on the coiled coating side. I mean, you've obviously deployed meaningful growth capital to expand capacity with Washington. But in the past, I think you have spoken about there could be some margin expansion on the coil coating side that could require some capital Can you just remind us how you're thinking about that opportunity today? What would be the timing around kind of a project like that? And how many quarters would something like that undertake? Thank you. Jason Crawford: Yes. And to be fair, I don't think there's any one big silver bullet out there. I think there's multiple projects that we've started to kick coming through the summer program that we'll start to incrementally see some benefits and, you know, we're seeing them start to kick in. And, you know, to be fair, that's applicable to both sides of the business. There's, you know, as we've highlighted our group our capital allocation is looking at outside and inside and some of the projects that sat in the sidelines, are now getting turned into execution. So you know, again, I don't think there's gonna be a big boost in terms of a step function. But we're going to continue to drive the opportunities that we see in front of ourselves. Nick Giles: Guys, thanks again. Keep up the good work. Operator: The next question comes from Adam Thalhimer with Thompson Davis. Please go ahead. Tom Ferguson: Hey, Adam, we can't hear you. You might be on mute. Operator: Pardon me. We have Timna Tanners with Wells Fargo. Timna Tanners: Hey, Timna. Import opportunity, is that fully played out? Or are we still in somewhat early innings? I know that imports only really started to drop off more recently. So I'm just wondering if we could see a bit more share gains still to come. Tom Ferguson: Yeah. It's really early innings. I think probably a, you know, a couple of months of that. So that should have a good tail to it. It just takes time to ramp up the domestic capacity, change projects we're seeing and things like that. So we feel good about that the balance of the year. I'm not sure it's fully embedded in our forecast. Jason would probably disagree with me. Probably, it is fully embedded. But I'm probably more of the optimist. And so I yeah, I look forward to that because it's we're engaging with some new customers and able to demonstrate our value add capabilities in terms of quality service and particularly responsiveness and it does impact our I would say it does have a slight negative impact on our margin profile because we're, you know, a lot of these are smaller smaller orders. And we're winning them because we can turn them quickly and give them whatever kind of color combination that they want. So we really look forward to that continuing to grow and be able to sustain it regardless of whether the imports come back up or not. Timna Tanners: Got you. Okay. Thank you. On the Washington ramp up, are you seeing any impact of reduced substrate because of the Oswego fire? Jason Crawford: No, no. I mean, certainly not from that point of view. At this point. Obviously, there's one customer supports that facility quite frankly, our you know, our production ramp is ahead of plan. Yeah. And, you know, we're executing with the material and, you know, we're out at the facility a couple of weeks ago and, you know, it's really starting to look like a coil coating facility versus a showpiece that, you know, a lot of the analysts that saw a couple of I guess, six weeks ago or so. So I think we're in very good shape from that execute through the end of the year. Tom Ferguson: There's a lot of aluminum sitting in that on that floor now. Timna Tanners: Gotcha. Okay. Alright. And then final one for me if I could. Wanted to just probe a little bit more the M and A pipeline, any updated thoughts on the economy having any impact on more or less to sell to you at this juncture? Thanks. Tom Ferguson: Yeah. I think there's you know, we're working a couple of the typical bolt-ons for galvanizing and it's one of them is actually a process, so we know that one will go forward. We can never quite predict. We tend to believe we're always gonna be a strong contender for those, and then we've got a good game plan once we do acquire them as we just did with Canton. Almost immediately ramping it up to our margin profile. So I look forward to that, and we're gonna be as aggressive as we need to be. Not seeing a whole lot shake loose because of it, which actually a little surprising. We were hoping to see maybe one of these multisite galvanizers decide to go on the market, but we haven't gotten any indication of that at this point. And then on the Precoat side, there's a couple of things out there. I think it's probably as much in our control as they can be. But once again, there the market hasn't seemed to cause them to wanna move any faster than they were before. So but it's a good pipeline. I think we've got nine good opportunities that are in various stages, not to mention a long list of other ones that we remain in contact with. So I'm hopeful we get something done before the end of the year. And maybe more than one. Timna Tanners: Okay. Thanks again. Operator: The next question comes from Adam Thalhimer with Thompson Davis. Please go ahead. Adam Thalhimer: Good morning, guys. Can you hear me now? Tom Ferguson: We can. We can. Adam Thalhimer: Great. First one, within Precoat, I think there's also a negative impact from tariffs that possibly offsets the positive impact. I was just curious if you could walk through that, Tom. Tom Ferguson: I'll let David do it. Yes. I think as you're right. As you look at the overall market, for imported steel, Adam, We know that the pre-painted imports are down 23% this year. That has been, you know, a bright spot or a tailwind for Precoat. Because that means there's less competitive prepainted steel coming in. But offsetting that, Bayer Galvalume market has been down about 50% due to the tariff impacts. So that's really the difference in the numbers and why, you know, PreCut was having some headwinds this year because normally that imported bear is volume that they would be the natural source to be selected to quote and quote that product. So, but as Tom mentioned, we think that our customers are telling us things have bottomed out. They did buy ahead and placed orders ahead of the tariffs and have been working through the inventory that they've had on the shelf. And we look forward to, to things turning around later on. Yes. And I'd add that the tariff impact is really driven, as Dave mentioned, it's just the uncertainty. So you've got projects being deferred, delayed. I'd say it's a combination of tariffs as well as the lower interest expectations as we had noted. Interest rates have stayed higher from the Fed longer than I think a lot of people And now with the government shutdown, who knows what the next step is. So I think that's just created hesitancy on non-infrastructure projects. Versus what you see on the metal coating side where infrastructure projects are going forward. And if anything on the solar stuff, it's accelerated. So on one segment, it's a positive. On the other segment, it's mixed, as you said, and probably more more negative than positive in the aggregate for Precoat. Adam Thalhimer: Okay. That makes sense. And then second question for me, I was curious on your confidence in no further losses from Avail. I'm just curious if just to be conservative, if we should model a slight loss in Q3 and then where they are in the process of monetizing the remaining businesses. Tom Ferguson: Yeah. And I we very much aligned that now you got to subscale piece of business, which is really three pieces. WSI forming by far the largest in terms of sales. But not in terms of, contribution margin. Then you got a lighting business, which is a nice little business that I think they'll get that transacted you know, hopefully this year. And then there's a Chinese. It's a Chinese joint venture, high voltage bus business that once again, I'd hope that they could get that transacted, this year. WSI is a tougher one because it's a little more impacted, in from a market perspective in terms of, refinery turns around. Turnarounds and things like that. So that's probably a prefer not, but it's probably a longer-term piece. In terms of the Q3, you know, you could I'd say it's hard for us to predict because Q3 should be typically is the fall season and tends to be a stronger one for WSI. On the other hand, as Jason alluded to, they are carrying more over that they can't get at while the TSAs with InVent are running. So, you know, on balance, I think we're pegging it at zero. And I'd say it's more likely slightly negative in Q3. The risk is probably more negative in Q3 than the upside. And then Q4, they go into the winter, but hopefully, some of these other things transact. Jason Crawford: And the only thing, I would talk about, Adam, is they they've started to digest the TSA and started to accommodate the infrastructure that they need to support that. So we are starting to see some moves in terms of, you know, realigning their core overhead costs. So you should get that pickup going into the second half and then, you know, as Tom mentioned, the seasonality impact of the WSI business. Adam Thalhimer: Good color. Thanks, guys. Operator: Our next question comes from Mark Reichman with Noble Capital Markets. Please go ahead. Mark Reichman: Thank you. Just a couple of questions. On interest expense, when we published at the September, we took our interest expense numbers down I think we were kind of landing around $49 million to $50 million for the year. And of course, the second quarter came in a little higher than our revised estimate I was just kind of curious, your guidance hasn't changed But in the past, your guidance had included $55 million to $65 million of interest expense. What would your expectations be for interest expense for the full year of 2026 for the fiscal year 2026? Jason Crawford: Yes. I mean, I think the part in terms of the interest and the picking up some favorability given that we've reduced our total debt through the Avail transaction. As you look at our interest expense in the quarter, then, you know, we certainly picked up some favorability, but it was more towards the back end of the year oh, sorry. The back end of the quarter. Given the repricing, the term loan and introduction of the securitization. So obviously, as you look at our quarter in Q2, that's what we improved in Q3 and Q4, obviously, through cost of debt. And then, you know, we will continue to pay down debt through the same half of the year, excluding any impact from m and a or any share repurchases. Mark Reichman: And the second question is SG and A, 2020, '25 ran about 9%. Of sales. It was 8.2%, I think, in the May, but dipped down to 7.9% this quarter. Are your kind of your expectations for the well, I guess, as a percentage of sales the right way to look at it? Or what would you kind of your expectations be for the remainder of the year and maybe kind of an ongoing you know, percentage? Jason Crawford: Yes. I mean, I think that 8% number is fairly representative. Obviously seasonality kicks in the back half of the year. So certainly in Q4, we're SG and A is little bit more of a fixed cost. So the number that you're seeing in Q2, there really isn't any great pluses or minuses away from that through the end of the year. So it's gotta be more of a fixed number versus a percentage as you look at Q3 and Q4. Mark Reichman: Okay. And just one follow-up to Adam's question. On the equity and earnings of unconsolidated subsidiaries. So we originally had like $1.4 million in the third quarter and I think $774,000 in the February. So what I heard from you is based basically zero in the third quarter, and kind of maybe modestly positive or close to neutral in the fourth quarter for that? And that would be a veil obviously. Jason Crawford: Yes, yes. I mean, guidance is zero for both And I think some of the discussions that we've been having is there's certainly a sensitivity around about that, but we're going get it wrong. We're going get it slightly wrong in the upside or the downside. I would say in Q3, it's probably you know, if anything, it's slightly wrong in the upside and then slightly wrong in the downside, you know, the seasonality the WSI business has got kicked in the Q4. So you know, the determining factor in Q4 is gonna be how quickly they can ramp the overhead cost to, you know, be aligned to the current business. But really, as you look at the numbers then, you know, in CD and Q3 and Q4, it should be, you know, a very minimal plus or minus roundabout zero. Mark Reichman: Okay. That's very helpful. Thank you very much. Operator: The next question comes from John Franzreb with Sidoti and Company. Please go ahead. John Franzreb: Good morning, guys and thanks for taking the questions. Actually want to go back to one of your responses to an earlier question about, Precoat doing better in September. Do you have any idea or can you give us any color as to what's driving maybe recovery in precoating during that month? Jason Crawford: The only thing I would add is, there's certainly fluctuations month to month and, you know, inventory buying patterns plays a part into that. And obviously, they're still coming through our strong construction season. So shipments versus sorry, building inventory versus depleting inventory. You're into that time period where, you know, you're starting to look at the end of the season and accommodate your inventory for that. And again, quite frankly, in September, we've seen a lot of our strength So our customers, you know, if you take that one single data point, our customers are looking for a healthy end to the season. Would be my takeaway. John Franzreb: Okay. Great. And also it also sounded like that maybe demand in the Washington facilities is maybe a little bit better than you expected. Can you kind of remind us or update us as to what the revenue contribution is in Washington that's embedded in your, full year revenue guidance? Jason Crawford: Yes. To be fair, we've not went into that level of detail. And there's still a lot of variations to take place. And quite frankly, we've got a sister facility in the simplest area and, you know, we'll use some of the volume from that to help ramp it So it's not a black and white just looking at that single facility and how it's quite playing to do it, the overall results. There's still a lot to play out here. You know, we are we started the production in April, and we're certainly progressing very, very well. But equally, we're cautious just terms of what could be around the corner. So really don't like if it's specific numbers round about it, but, you know, what we have built into the guidance, we're certainly very comfortable with those numbers. John Franzreb: Okay. Fair enough. And one last question, if I may. The zinc prices have rebounded sharply from their bottoms early in the spring. Just maybe some thoughts or commentary on what you're seeing in the zinc market that might be helpful for us? Tom Ferguson: Sure. Yes, first thing is, yes, we have seen that. Which usually makes, you know, opportunities for not that we base our price off of costs, were very value pricing oriented. But usually when zinc going up on the LME customers understand that's gonna start to affect prices, so that creates some opportunities. Two, we've got six to eight months of inventory in our kettles, so it doesn't have much impact on our margin profile the balance of the year, our costs of zinc the balance of the year, But clearly, that will start to color how we look at next year and as we're entering the process to put our plans and budgets together for, for the next fiscal year. But generally, I think it's going to continue in but I'm not sure, yeah, I'm not sure we're gonna usually, when things start to change, when you when you see some spikes, and this has been more of a gradual increase in and generally, that's very manageable for us. So yeah, minor impact on our outlook in metal coatings for this year. Clearly, as we start to put our plans together, it will be a talking point as we talk about however we end up guiding for the next fiscal year. John Franzreb: Great. Makes sense. Thanks for taking my questions. Appreciate it. Tom Ferguson: Sure thing. Thanks, John. Operator: The next question comes from Jon Braatz with Kansas City Capital. Please go ahead. Jon Braatz: Good morning, everyone. Morning, John. Tom, a couple of questions. On the metal coating business, you completed the Canton acquisition, I think July 1. How much of a contribution did Canton have in terms of revenues in the quarter? Tom Ferguson: It's revenues in the quarter million. Yes, and few 100,000 of yes, contribution margin. Jon Braatz: Okay. Okay, good. And it was like two months in the quarter, so we'll see a full quarter not yet going forward. That's right. Okay. And secondly, on the margin profile for the Metal Coating business, it's been very, very good over the last couple of years. And absent any significant change in zinc prices or the economy and so on, Is that range that you provided in terms of adjusted margin adjusted EBITDA margin for that segment. Is that 20 that low 20 that lower end of the range, is that is that still relevant? Is there a point where maybe you feel comfortable raising that lower end and know, getting closer to the, you know, 30 to 32%, something like that? Absent again, absent any any significant economic changes. Tom Ferguson: Yeah. We tend to yeah. We haven't seen that that 20 the low end of that, or even very much think one quarter, we were below 30%, which, was last winter. We had a rougher than normal Q4 last year. So you know, that was probably the only time in a while we've seen below 30% But yeah. Like, I think we're pretty confident in this, where we're at is 30% to 32%. We'll look at that as we go into the planning process. We just completed our strategic plan and we'll be you know, rolling out some communication on that as we go forward. But yeah, we're pretty comfortable with their margin profile at Holden in the 30 plus percent range. Balance of this year. So yeah, we might get comfortable to guide to a tighter range on that. So Okay. Jon Braatz: Alright. Thank you very much. Operator: This concludes our question and answer session. I would like to turn the conference back over to Tom Ferguson for any closing remarks. Tom Ferguson: Yes. Just a couple of things. I don't think we got any on share buybacks. Jason alluded to it. But we had kind of guided that we'd be buying that we what we issued 10b5-one that for $20 million at a couple of price points. Depending I think we're going to I'm confident we will get $20 million of our shares bought in over the next perhaps few weeks to a couple of months. And look forward to doing that and because we think we're still a great high value stock and business with, with an outstanding outlook, particularly as we kind of finish out the choppiness of this year and look forward to next year. So thank you for joining us. We look forward to talking to you after our third quarter results. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning. Welcome to Byrna Technologies Inc.'s Fiscal Third Quarter 2025 Earnings Conference Call. My name is Donna, and I will be your operator for today's call. Joining us for today's presentation are the company's CEO, Bryan Ganz, and CFO, Laurilee Kearnes. Following their remarks, we will open the call to questions. Earlier today, Byrna Technologies Inc. released results for its fiscal third quarter ended August 31, 2025. A copy of the press release is available on the company's website. Before turning the call over to Bryan Ganz, Byrna Technologies Inc.'s Chief Executive Officer, I will read the Safe Harbor statement. Some discussions held today include forward-looking statements. Actual results could differ materially from the statements made today. Please refer to Byrna Technologies Inc.'s most recent 10-Ks and 10-Q filings for a more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligation to update forward-looking statements as a result of new information, future events, or otherwise. As this call will include references to non-GAAP results, please see the press release in the Investors section of our website, ir.byrna.com, for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results. I will now turn the call over to Byrna Technologies Inc.'s CEO, Mr. Ganz. Bryan Ganz: Thank you, operator, and thank you, everyone, for joining us today. This morning, we filed our 10-Q with the SEC and issued a press release providing our financial results and business highlights for the fiscal third quarter ended August 31, 2025. I'll start today by turning the call over to our CFO, Laurilee Kearnes, who will review our financial results for the period. Following her remarks, I'll discuss the operational highlights that drove our 35% year-over-year revenue growth and continued GAAP and non-GAAP EBITDA profitability for the quarter. I'll then offer insights into our strategy moving forward, before we open the call up to questions from our covering research analysts. Laurilee? Laurilee Kearnes: Thank you, Bryan, and good morning, everyone. Let's review our financial results for the fiscal third quarter ended August 31, 2025. Net revenue for Q3 2025 was $28.2 million, a 35% increase from the $20.9 million reported in 2024. The $7.2 million increase was driven largely by strong chain store and dealer sales tied to our expanding retail presence, the success of our new advertising initiatives, and broader brand adoption. Web traffic began to build late in the quarter and has continued into fiscal Q4. Gross profit for Q3 2025 was $16.9 million or 60% of net revenue, compared to $13 million or 62% of net revenue for Q3 2024. Gross margin performance reflects the changing channel mix, which saw much stronger dealer and international sales for the quarter, the one-time startup costs associated with the compact launcher release, and related manufacturing ramp-up costs, as well as the start of ammo manufacturing in Fort Wayne. We anticipate that the compact launcher and ammo margins will continue to grow as production volumes increase and manufacturing processes become more efficient. Operating expenses for Q3 2025 were $14.1 million compared to $12.2 million for Q3 2024. The increase in operating expenses was driven primarily by increased variable selling expenses and discretionary marketing investment to support the growth. Net income for Q3 2025 was $2.2 million, up from $1 million for Q3 2024. This increase was driven by the overall increase in product sales. We continue to expect our effective tax rate to be approximately 23% for the year. Adjusted EBITDA and non-GAAP metrics totaled $3.7 million, which was up from $1.9 million for Q3 2024. Cash, cash equivalents, and marketable securities at August 31, 2025, totaled $9 million compared to $25.7 million at November 30, 2024. Cash has been increasing since the end of the third quarter, which primarily reflects just normal seasonal working capital timing and collections subsequent to quarter-end, as well as the planned drawdown of inventory. We expect the drawdown of inventory and increase in cash to accelerate throughout the fourth quarter. The company has no current or long-term debt. Accounts receivable on August 31, 2025, totaled $8.9 million compared to $2.6 million at November 30, 2024, driven largely by the increase in dealer sales. Inventory at August 31, 2025, totaled $34.1 million compared to $20 million at November 30, 2024, reflecting our strategic builds ahead of the holiday season and the compact launcher rollout. Mix dynamics this quarter favored the Byrna SD more than initially anticipated, leading to additional purchases of SD million parts. We saw the high point of inventory in July with the reduction since that time of over $3.5 million. We expect inventory to normalize as we move through the peak season and into fiscal Q1 2026. I'll now turn it back to Bryan. Bryan Ganz: Thank you, Laurilee. First, an advertising update. Our Q3 growth of 35% year-over-year is due to several factors, including the growth of our dealer network, the impact of our new advertising initiatives, and the growing awareness of Byrna Technologies Inc. brands. In August, our AI-enabled advertising campaign expanded our reach across new channels that up until now were off-limits to Byrna Technologies Inc. The growing awareness generated by this advertising campaign, including the now-iconic "We Don't Sell Bananas" ad, lifted average daily sessions on byrna.com from 33,000 a day to more than 50,000 a day. That momentum has carried into early fiscal Q4, with web sessions on byrna.com averaging 58,000 sessions per day in the month of September. This surge in web traffic has grown Byrna Technologies Inc.'s opt-in email list to 1.9 million subscribers. We plan to leverage this expanded audience to drive Q4 sales through targeted outreach for our October Black and Orange Sale and our Black Friday Cyber Monday promotions. The "We Don't Sell Bananas" ad was the first campaign we created with the help of AI. By combining this technology with our own proprietary processes, we can quickly generate professional-quality commercials, refresh creative continuously, and A/B test variations at scale. This has also allowed us to adapt content to the requirements of cable and streaming networks more efficiently, creating broader ad distribution opportunities and lowering customer acquisition costs. With these ads, we've also been able to secure placements on MLB, Major League Baseball streaming services, and NFL airport displays, among other networks. These mainstream opportunities on highly visible platforms have elevated brand recognition and acceptance. As these placements demonstrate our credibility and normalization of our product category, we fully expect that they will open the doors to additional mainstream networks with comparable demographics, further amplifying reach and conversion over time. As expected, the added visibility and higher web traffic from these new ad campaigns initially lowered conversion rates. Traditionally, we have seen a 45-day average purchase cycle from initial exposure to the Byrna Technologies Inc. brand; most customers engage with us multiple times before making a purchase. Now that we are in our third month of running the new advertising campaign, conversion rates are starting to tick up, and we expect to see continued improvement throughout the quarter as we trend back to our historical 1% mean. Overall, this expanded media presence is fueling growth in both our e-commerce and retail channels. Speaking of our retail channels, we are excited to now be in more than 1,000 stores nationwide, including our big box partners, premier dealers, and our own retail stores as we gear up for the holiday season. As our brand awareness has grown, we've also seen steady growth with our retail partners, particularly those partners that provide a shooting experience. The benefit of our expanding physical presence is clear. When customers have the opportunity to fire the launcher, conversion rates improve dramatically. What's particularly interesting is the Byrna Technologies Inc. compact launcher, first released in May, has gained much greater traction in these experiential settings as customers can see and feel the difference in size and power. This has resulted in our brick-and-mortar partners selling a greater percentage of CL launchers than SD launchers, while the opposite is true for our online sales. At the same time, our company-owned stores, most of which opened earlier this year, are also performing in line with our expectations. For the month of September, our five retail stores operated at an average annualized run rate of $725,000, with our Salem, New Hampshire store slightly edging out our Las Vegas location to take the number one position. Interestingly, our Fort Wayne, Indiana location, our smallest and most remote store, ranked third at an $800,000 annual run rate. These results validate the strong performance we saw at our first Las Vegas location and confirm that our retail model is resonating across diverse markets. The quick ramp-up in sales across multiple stores reinforces the effectiveness and scalability of our approach as brand awareness continues to grow. For comparison purposes, it's important to note that last year, our retail store sales were included in our e-commerce figures as transactions were processed through Shopify. This year, we developed and implemented our own proprietary POS system built in-house with the help of AI, allowing retail stores to be recorded separately. We chose to develop our own POS solution after determining the available off-the-shelf third-party systems could not truly meet our operational requirements. The successful development of this system highlights how AI has dramatically reduced the cost and time needed to develop in-house apps and accounting systems. While we don't have immediate plans to expand the company-owned retail model broadly, we see additional long-term potential in select flagship markets. These stores also serve as hubs for training, community events, product testing, and direct customer feedback, and they help foster grassroots engagement and word-of-mouth momentum around the Byrna Technologies Inc. brand. To support our demand, we've been carefully monitoring production and inventory levels. As Laurilee mentioned, we've seen a shift in our launcher sales mix. With the initial launch of the compact launcher in May, where there was a pent-up demand for the compact launcher, the SD has now become about 50% of our sales, and the CL accounts for around 30% of our sales. Beyond its lower price point, the SD performs well on Amazon, thanks to its long-standing presence and more than 1,000 reviews. As a result, we've increased our orders for SD parts to be adequately prepared for the holiday season. We expect our inventory levels to reach a more normalized level after the peak season. We also recently implemented a new proprietary shop floor management system at our factory designed to enhance factory efficiency and strengthen first-pass yield. With the introduction of the new Byrna Technologies Inc. compact launcher and the startup of our Fort Wayne ammo manufacturing facility, we experienced the typical short-term inefficiencies that come with ramping new products and operations, which temporarily reduces gross margins in both our ammo and launcher production facilities. However, by developing and deploying our own extremely robust shop floor factory management system, which, again, was built entirely in-house, we were able to virtually eliminate labor and overhead variances in the month of September. As these efficiencies continue to flow through, we expect to significantly reduce the unfavorable labor and overhead variances we experienced in Q3 as we drive gross margin percentages towards our target of 63% to 65% next year. Byrna Technologies Inc. has always been at the vanguard of innovation when it comes to the CO2-powered less lethal launcher market. The company is breaking new ground with the development of products that will take Byrna Technologies Inc. beyond simply being a less lethal weapons company. In fact, we have modified our mission statement to reflect this broader focus. Our mission statement now reads: to provide civilians and security professionals with safe, reliable, and effective less lethal alternatives to traditional firearms that will allow Byrna Technologies Inc.'s customers to protect and defend themselves, their families, and their communities without the need to resort to lethal force. And to provide them with the technology-based systems and solutions that will help protect them in their homes, their vehicles, and when out in public. We strongly believe that by combining recent advances in the area of SOS alert capabilities, along with the intended development of compact communication and recording devices, and the advances in AI, with the incredible stopping power of Byrna Technologies Inc.'s launchers and sprays, we can provide additional protection and functionality to our users. Today, there are many devices that have SOS alert capabilities. Yet in those critical situations where someone needs to protect themselves against an immediate threat, an SOS alert system by itself is not enough, as even in the best of circumstances, help is many minutes away. In these instances, you must be your own first responder, which highlights the need for tools that both contact the authorities and provide the proven ability to protect oneself and one's family when the situation calls for it. Accordingly, we see tremendous opportunity to combine existing SOS alert technology with Byrna Technologies Inc.'s proven safe, reliable, and effective launchers and sprays, giving customers the ability to both neutralize a threat and contact help. We believe that integrating SOS alert technology with Byrna Technologies Inc.'s suite of self-defense devices through products that either fit on the Picatinny rail or are built into our spray or alarm devices, these connected devices will dramatically enhance the value proposition for Byrna Technologies Inc.'s customers. By giving them the ability to summon help if they are under threat, this should not only serve to deter any would-be attacker and provide valuable third-party corroboration of the threat but also defend themselves and their family should the situation demand it. This evolution of our safety devices to include the ability of alerting authorities and capturing the events will strengthen the Byrna Technologies Inc. ecosystem, increase customer engagement, and create the foundation for new technology-driven recurring revenue streams. At the same time, this initiative has the potential to broaden our already large addressable market by reaching into the population of tens of millions of firearms owners, many of whom may be interested in connected less lethal safety solutions that they can easily affix to the Picatinny rail of their firearm when they feel that they may need that extra layer of protection. Even modest adoption within this group could meaningfully expand awareness and usage of Byrna Technologies Inc.'s technology. Together, these efforts could create a compelling entry point and an expanded opportunity for the adoption of Byrna Technologies Inc.'s technology. We have been working on this project for almost a year, and we are steadily advancing the development of our connected safety platform. It is an effort that continues to build momentum as we move closer to bringing this vision to market due to recent AI-driven advances in coding. Our success in developing several proprietary programs, including our own POS application and our shop floor factory management system, reinforces our confidence in our ability to develop the apps needed to be able to have our devices communicate with established SOS alert systems that have become so popular in recent years. In addition to this connected platform opportunity, Byrna Technologies Inc. is also developing the next generation of products that extend beyond our current lineup and address accessible to a broader audience, including a younger demographic and more cost-conscious consumers. As part of this strategy, we plan to introduce a value-focused 61-caliber launcher in 2026, targeted at budget-minded consumers and first-time buyers exploring less lethal protection. We also expect to launch a simplified, highly portable protection device in 2026 that marries the form factor of Byrna Technologies Inc.'s iconic launchers with the stopping power of Byrna Technologies Inc.'s line of BGR self-defense sprays. These two products are designed to expand Byrna Technologies Inc.'s reach to customers that may not be able to afford Byrna Technologies Inc.'s existing range of launchers while maintaining our core focus on safety, reliability, and effective less lethal protection. On the consumable side, we plan to expand upon this theme of making our products available to more cost-conscious consumers through our ammunition offering by introducing more affordable inert and kinetic practice rounds to both compete against cheap foreign imports and encourage frequent training and repeat purchases. We will, of course, continue to offer our premium ammunition lines for professional and enthusiast users. We believe that this balance between accessibility and performance ensures that we are meeting the needs of every customer, from those just discovering less lethal options to experienced users demanding top-tier accuracy and dependability. Byrna Technologies Inc. has proven that we are the leader in providing safe and effective, very reliable, less lethal protection for consumers. We are still in the very early innings of penetrating this market. As we continue to make inroads, it is essential that we offer a variety of less lethal products at a range of price points that meet the needs of a diverse customer base and provide Byrna Technologies Inc. with the opportunity to generate recurring revenue over time. Looking ahead, we are confident that our new advertising programs and our expanded retail footprint position Byrna Technologies Inc. for a strong finish to the year. September sales were strong, and that momentum, combined with the upcoming holiday shopping season, supports our expectation for full-year fiscal 2025 revenue growth to be between 35-40%. The timing of this year's Black Friday and Cyber Monday sales, which fall over the final weekend of our fiscal year, with Cyber Monday landing at the start of fiscal year 2026, is expected to drive exceptionally high order volume. These sales days consistently generate strong demand, with Byrna Technologies Inc. shipping thousands of packages a day during this period. With the fiscal year ending on Sunday after Thanksgiving, the precise timing of order fulfillment will determine whether certain sales are recorded in Q4 or Q1. But, either way, we expect this activity to contribute to a strong finish to 2025 and also set the stage for a fast start to fiscal year 2026. The strong results so far this year demonstrate both our effective execution and the scale of the opportunity in front of us. The continued expansion of our launcher customer base is a critical foundation for our larger vision of building a personal safety platform that extends our model with services and connected capabilities that complement our best-in-class less lethal launchers, sprays, and alarms, with recurring service-based revenue as we look to integrate Byrna Technologies Inc. more deeply into consumer safety routines. We believe that we are only at the beginning of penetrating a large and expanding market. We are laying the groundwork for sustained multiyear growth, and we look forward to updating you on our progress against this roadmap in the quarters to come. This concludes my prepared remarks. Operator, Operator: Thank you. The company will now be taking questions from sell-side analysts. If you would like to register a question, please press. Our first question is coming from Jeff Van Sinderen of B. Riley Securities. Please go ahead. Jeff Van Sinderen: Good morning, everyone, and great to hear of the continued business momentum. Bryan, maybe you could just touch on thoughts on adding new influencers. I know that's something that has been discussed. Maybe touch on areas of focus there? Bryan Ganz: Okay. So in 2023, we kicked off our celebrity influencer campaign with Sean Hannity. And since that time, it's expanded to approximately a dozen conservative radio talk show hosts. We believe that at this point, we have a sufficient number of conservative radio talk show hosts, and we are looking to expand beyond that universe. Towards that end, you may have noticed that we recently brought on board a new director by the name of Adam Roth. Adam was head of sales and marketing for Nike North America before he retired. And he brings with him a wealth of knowledge regarding celebrity influencers or what Nike called brand ambassadors. In fact, I was just on the phone with Adam yesterday as we are putting together a plan and pitch deck for going after a whole new host of brand ambassadors or celebrity endorsers for Byrna Technologies Inc. that will help us expand beyond our existing customer demographic. At this point, I cannot share with you the names of anybody that we're talking to. But we are well into this process. Jeff Van Sinderen: Okay. That's great to hear. And then maybe if you can just touch on the latest, I think there's another CL launcher that's planned. And then also just give us an update if you could on the lower price point unit that you plan to roll out? Bryan Ganz: Yeah. Jeff, I'm not sure what you mean by another CL launcher that's planned. The next new launcher going to be coming out will be the 61-caliber price point launcher, which will come out sometime next year. And it will be largely based on the CL design. It'll be similar in size to the existing CL. But there are no different variations of the CL that are going to be coming out. In terms of the basic box, the price point launcher that we brought out, interestingly, it has not been as popular as we would have expected. We still sell both the basic box configuration, which is just the launcher by itself with no accessories, as well as what we call the universal ready kit, which comes with CO2 and ammunition and an extra magazine so that you can buy simply the ready kit and you are ready to use it. That is still probably 90% of our sales. So, you know, initially, we were concerned that maybe the price point was too high. The market has clearly voted with their and said, no. You know, your $540.99 price point is perfect. Jeff Van Sinderen: Okay. That's an interesting development. So one other thing if I could squeeze it in. Just wondering how ByrnaCare adoption is running in the early days. Bryan Ganz: ByrnaCare adoption is running in line with expectations. We have not yet been able to adopt our website to ask for people to buy ByrnaCare at the end of every purchase. This requires a little bit of additional coding, and we think that we'll have even greater impact. But it's in line with expectations. Jeff Van Sinderen: Okay. Thanks for taking my questions. I'll take the rest offline. Bryan Ganz: Thank you. Thank you. The next question is coming from Jeremy Hamblin of Craig Hallum. Please go ahead. Jeremy Hamblin: Thanks and I'll add my congratulations. I want to come back to the success that you're seeing with the advertising campaign, the momentum you have with web traffic in particular, and just a commentary around expectations on conversion rates. You know, with the, you know, what, 70%, 75% increase in web traffic that you are seeing sequentially, can you just discuss a little bit more in terms of conversions that you were seeing? And whether or not this campaign is reaching maybe a customer set that is outside of your traditional customer set given kind of the viral nature of the campaign? Bryan Ganz: Jeremy, thank you for the question. And honestly, that's the question we're asking ourselves every day as well. As we expand the demographic that we're speaking to, will we see the same conversion rates? And the answer simply is that we don't know. What we do know is that the conversion rates will climb significantly from where they are. Because it does take some period of time for people to make a purchase. They come back to the website on average five to seven times before making a purchase. So, you know, we know that the first time we see incremental traffic, it's not going to result in incremental sales. We have started to see a climb in a climbing conversion rate. But interestingly, we're also continuing to see a climb in web sessions. Yesterday, our web sessions were 70,000 sessions, I think, for the third day in a row. So as we're starting to see higher web sessions, we are, again, getting more and more new consumers on. So it is having a dampening effect on the conversion rate, while at the same time, those new consumers that came a month ago, two months ago, are having a positive effect on conversion rate. Last year during the months of October, November, our conversion rates approached one and a half percent. They're always higher during the holiday season. We don't need anything close to one and a half percent this year when we're generating 70,000 sessions a day to hit our numbers. So to answer your question, is it going to get back to exactly where it was? We don't know. But we do know that it will be significantly higher than where it is currently, and we are already seeing that trend. Jeremy Hamblin: Great. That's helpful. And then just in terms of what you expect on channel mix here in Q4, you've obviously had significant expansion in the number of wholesale doors you're selling into. But given this lift that you're seeing in traffic both at byrna.com and on Amazon, how should we be thinking about the mix of business here in Q4? Laurilee Kearnes: Hi, Jeremy, it's Laurilee. Yeah, I mean, we will still continue to see strong dealer and chain store sales. We see additional orders coming in as they're ramping for the holidays as well. So we still expect to see that strength there. That being said, we expect our DTC channels to be a higher percentage of overall sales than they were in Q3. Jeremy Hamblin: Got it. Helpful. And then just last one for me. In terms of thinking about kind of the expense leverage that you're getting in the model, saw, you know, OpEx, you know, really well contained here in the third quarter. As we look ahead, you know, you saw about what $7.3 million year-over-year growth in sales, but OpEx was only up $2 million year-over-year in Q3. Should we expect that kind of expense leverage ratio to maintain here both in Q4, but then as we think about kind of projecting out in 2026 and beyond? Laurilee Kearnes: Yes. I mean, I think in Q4, it'll be close. We do ramp up some additional marketing in Q4 from Q3. So we will continue to see that leverage maybe not quite to the extent. I mean, Q3 was a great quarter for us on leverage. Going into next year, there will be some additional for new positions, some things we're hiring. But for the most part, we'll continue to see that leverage as we move forward. And really, this quarter, it was really just it was marketing expense, and variable selling expense was really the increase. Everything else held pretty steady. Jeremy Hamblin: Great. I'll hop out and congrats and look forward to seeing the development. Thanks, Jeremy. Operator: Thank you. The next question is coming from Matt Koranda of ROTH Capital Partners. Please go ahead. Matt Koranda: Hey, guys. Good morning and thanks for taking the questions. I guess you sort of tangentially addressed it earlier, Bryan, but I just wanted to put a finer point on sort of how the guidance fits with the 70% lift that you've seen in web traffic. I guess if I just look at the midpoint of your guide, and it would suggest about 25% growth in sales in the fourth quarter, but the web traffic numbers are pretty substantially above that. So maybe just fit those two things together. Assume the answer is generally conversion and being conservative there, but just a little bit more color on that would be great. Bryan Ganz: Yeah. As we said before, it will take us some time for our conversion rates to get back to a mean of 1%. And we have seen this happen time and time and time again. Where we see a significant spike in web sessions and it takes some period of time for the conversion rate to catch up. But in every case, it ultimately does catch up. So we don't believe that we're going to get back to our normal conversion rate in Q4. And in fact, you know, web sessions are growing daily. But we do expect that it will occur over time. And I think, you know, we have to be cognizant of that, you know, it's going to take some time for that to happen. Matt Koranda: Okay. And then maybe just a tool at your disposal would be promotions. So just any thoughts that you have heading into the holiday on sort of the promotional posture that we're considering? Any shift in strategy that we might consider to drive improved conversion that would sort of help with the web traffic you're seeing. Bryan Ganz: Every year, at this time of year, we have two separate sales. We have kind of an early Black Friday sale, which is our Byrna Technologies Inc. Black and Orange Sale that happens at the end of October, and there's always a big conversion during that period of time. And then we have the traditional Black Friday, Cyber Monday sale that happens starting the Wednesday before Thanksgiving. This year is a little bit of an issue because this period of time, these six days, represent 40% of our sales in November. So it's an enormous amount of sales that are happening in the last six days of the month, one of which is Thanksgiving, and we're closed. And then when we come back for three days, we're going to have to get something like six or 7,000 packages out the door. So, you know, my only concern is, you know, how many of those packages can we get out the door and what, you know, ends up falling into Q1. Matt Koranda: Okay. Understood. Maybe just curious for an update on how to think about the wholesale expansion into the end of this year and next. I know you mentioned a thousand doors, I think you're in as of the end of the third quarter. Where do you think things will shake out by the end of this fiscal year? And do we have any kind of stretch goals for next year in terms of doors that we'd enter? Laurilee Kearnes: Yes. Hi, Matt. So where we are right now, we think we're pretty well positioned. You know, we want to make sure we don't become too saturated. So we're probably mostly holding where we are on our current retail footprint. We'll continue to work with all of our partners to make sure we help them with better conversion, better tools, and I think we'll hold at that point. Perhaps there will be more later. You know, as Bryan said, we may look for special markets where we put additional corporate stores in some of those markets. But, right now, we feel pretty good as far as where we are on the retail store. Bryan Ganz: If I can just add, Matt, I think, you know, our team has done an amazing job working with our partners. And I think at this point, we have a very, very good footprint of stores. There are, as Laurilee says, certain areas where, you know, we're not as represented as well as we should be. And we will likely open up Byrna Technologies Inc. retail stores in those areas. But I think the bigger issue for us and our focus for 2026 is going to be expanding our existing relationships. We have seen Bass Pro, for example, increase the number of SKUs that they're offering. They're offering additional colors. They're offering additional models. And this is having a significant impact on their weekly sales. This is what we need to do with all of our partners to make sure that they're doing as well as they can in each store. And I think there's huge opportunities for growth within the existing footprint. And not that we will not take on more partners. We will, but we need to be very selective about it because putting two stores right next to each other is not helpful. Matt Koranda: Okay. Makes a ton of sense. Maybe if I could just sneak one more in. You mentioned the SOS and connected platform, which sounds really exciting. And I'm curious, when do you think loosely that could become sort of commercially available to consumers? Would that be a next year event, or is that something like a more like a 2027 event? Bryan Ganz: No. It will be a next year event. But keep in mind that it is going to be phased. So that and let me just say, all of this technology exists. These SOS alert systems, RapidSOS, Noonlight. There's a lot of these services out there already. The hardware technology already exists. What we are doing is packaging it in a format to work with Byrna Technologies Inc.'s products. So there are some things that we are very far along on that will certainly be released in 2026. There are other sort of more aspirational products that we have that may, you know, not come out until 2027. But unlike the development of a brand new launcher where there's a lot of technology that has to be developed from scratch, this is really taking existing technology and adapting it for use with Byrna Technologies Inc.'s suite of products. So this will happen much more quickly than traditional development projects. Matt Koranda: Okay. Great. I'll leave it there, guys. Thank you. Bryan Ganz: Thank you, Matt. Operator: Thank you. Our next question is coming from Jon Hickman of Ladenburg Thalmann. Please go ahead. Jon Hickman: Jon? Oh, hello. I just wanted to maybe just a follow-up from one of the last questions. But how are you could you elaborate on how the whole Sportsman's Warehouse? Are you complete with them? Are you still rolling out stores? Are you adding more shooting lanes? Can you talk about that a little bit? Laurilee Kearnes: Hi, Jon. It's Laurilee. Yes, I think we're on track with where we expect to be with Sportsman's. They have a mix of, you know, different presence in different stores. They're working through some of their stores and their markets to determine what works best. What we found is these stores where we put the shooting pod seems to help drive additional demos, additional conversion in those stores. So that's really something that's driving well. Now that doesn't fit in all of their stores, due to, you know, their footprint, and what works in different markets. So continuing to support them. We feel great about the partnership with them. And, you know, like I said, we've got a various mix, but we're on track and well positioned. Jon Hickman: How many SKUs are they carrying? Laurilee Kearnes: They carry most of our SKUs. You know, there are obviously a few accessories and things that they don't. But they carry all of the various launchers. They carry ammo. They carry CO2 and a number of accessories. And sprays as well. Jon Hickman: Okay. Okay. Know the exact number, but it's pretty much our full product line. Bryan Ganz: Yeah. And Jon, I think that the big takeaway from that Laurilee said is that this shooting pod has proven to be very, very effective. Now we have an agreement with Sportsman's where this is exclusive to them. So, you know, unfortunately, we don't have the shooting experience in some of the other partners that we work with. But these shooting pods have been very effective, and the stores that have the pods have done extremely well. Jon Hickman: I don't know. Maybe you can't answer this. Are you in Cabela's or are you trying to get into Cabela's? Laurilee Kearnes: Yeah. Cabela's is part of Bass Pro. So last October, we actually went on a national basis with Bass Pro Cabela's. So we are in all of their stores. Jon Hickman: Okay. All my other questions were basically answered. So great. Thanks so much, Jon. Operator: Thank you. This concludes our question and answer session. I'd now like to turn the call back over to Mr. Ganz for his closing remarks. Bryan Ganz: Donna, thank you very much. And I just want to thank everybody on the call for taking the time. And we will, of course, keep everybody apprised on these very exciting new projects that we're working on. Thank you very much. Operator: Thank you. Thank you for joining us for today's Byrna Technologies Inc.'s fiscal third quarter 2025 conference call. You may now disconnect.
Operator: Greetings. Welcome to Helen of Troy's Second 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. Anyone should require operator assistance during the conference, please note that this conference is being recorded. I'll now turn the conference over to Ann Racunis, Director, External Communications. Thank you, Ann. You may now begin. Ann Racunis: Thank you, operator. Good morning, everyone. Welcome to Helen of Troy's second quarter fiscal 2026 earnings conference call. Before I review our agenda with you, I'd like to welcome our new Chief Executive Officer, Scott Azel, who joined the company last month. The agenda for the call this morning is as follows. I will begin with a brief discussion of forward-looking statements, Scott will then share some of his initial thoughts and areas of focus. Brian Grass will provide a high-level discussion of the quarter and our progress on key initiatives. Tracy Shereman, our assistant CFO, will then provide an overview of financial performance in the second quarter and provide commentary on 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 current expectations with respect to future events or financial performance. Generally, the words anticipates, believes, expects, and other similar words are words identified in 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 companies. 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 and related investor presentation has been posted to the company's website at helenoftroy.com. And can be found on the investor relations section of the site or by scrolling to the bottom of the home page. The earnings release contains tables that reconcile non-GAAP financial measures to their corresponding GAAP-based measures. And I will now turn the conference call over to Scott. Scott Azel: Thank you, Ann, and good morning, everyone, and thank you for joining today's call. It is a great honor to speak to you as the CEO of Helen of Troy. Before I begin, I would like to thank both Brian and Tracy for their leadership these past few months. I'm so pleased they've agreed to continue helping me lead this company as chief financial officer and assistant CFO. I've enjoyed the opportunity to become acquainted and collaborate closely with them since I've joined. Their company knowledge, industry insight, and enterprise leadership are immensely valuable, especially as we make a smooth transition to our future. As this is my first earnings call since joining the company last month, let me share a little bit about me and why I'm enthusiastic about the future of Helen of Troy. I most recently served as corporate vice president and general manager of Nike North America, and I was a member of the Nike executive leadership team. Prior to this role, I was the president and CEO of Converse Inc. for four years, where I led a turnaround. A turnaround built on placing the consumer at the center of the enterprise, investing in new product innovation and brand building, and empowering our teams around the world to win in the marketplace. I look forward to getting to know many of you during the weeks and months ahead. But as you get to know me, you'll discover first, I'm extremely curious. I'm always looking at how things work and looking around the corner for the next key consumer behavior and category shift. Second, I'm a relationship builder. I enjoy meeting people and getting to know people. It makes me a better leader. And finally, I'm incredibly competitive. And I want to win. These three characteristics have been a fundamental part of my DNA both professionally and personally. The reason I chose to join Helen of Troy is simple. I love trusted brands. I love thoughtful product solutions and working with teammates that are passionate about consumers and solving consumer problems. I'm excited about the opportunity in front of us to engineer a great comeback story. We have the ability to reverse Helen of Troy's recent underperformance and restore this company's reputation for consistent growth by providing world-class innovation to our consumers. But let's be clear. I am clear-eyed about the challenges we are facing. I embrace the opportunity to reverse course. Occasionally, companies need to go through renewal, and at Helen of Troy, that renewal has started. It's underway. Our focus is to invigorate the exceptional assets we have, to leverage our leadership brands and talent within our organization to win in the marketplace and to win in the workplace. There are many areas for enhancement, but no quick fixes. I work with great optimism, urgency, and purpose. One of my leadership traits is to inspire my team to fear staying still. Execution is the job of management, and we will be laser-focused on executing fewer, more impactful initiatives with excellence. One of my indispensable learnings for executing well is the importance of culture. This is the secret sauce that binds and fuels the enterprise ambition and drives enduring value. I believe leadership influences culture by setting a vision, and management must set the pace and speed towards a clear destination. We will reduce organizational complexity and bureaucracy that has handcuffed this organization. It takes too long to make decisions. I'm so grateful for Brian, Tracy, and other company leaders that have already started to install some of these cultural remedies. Together, we will continue to inspire right actions in our associates to accelerate the best decision-making. I intend to point and direct resources to the most innovative ideas to incubate and take hold. We will take thoughtful and swift actions to simplify our business and drive transparency and accountability across the company. We will empower nimble and more concentrated teams that can make decisions quicker and closer to the consumer in the marketplace. I imagine one of the big questions on your mind today is, tell me more about your long-term strategic plan. It is the right question to ask. It is just a bit too early for me to provide all the details. But let me share with you four of my initial thoughts. First, I want to reenergize this company, its brands, and its people. Although we've slipped recently, the categories we compete in demonstrate genuine growth potential. Going forward, our plan is to focus our attention and investments in a disciplined manner to those brands and opportunities that have the most promise. Helen of Troy has a firm foundation with the opportunity to get back to industry-leading margins and strong cash flow. We have the flexibility to invest in our future to create more competitive advantage and still deliver a strong financial profile. Second, we will position our corporate structure to place the consumer at the center of everything we do. We will place resources and talent closer to the consumer in the marketplace. Our associates want to establish a closer connection with our marketplace and our consumers, which will enhance their engagement and create a distinct presence as we win in the marketplace. My early observation is we have talented people across this enterprise. They just want to win. With that in mind, nothing we will do is more important than developing our people and adding more top talent. At the end of the day, I place my bets on people, not on strategies. Third, I want to strengthen the broader portfolio for predictable volume and profit growth. In my experience, best brand innovations always win. It is especially important that we refocus our creative engine to amplify building best-in-class devices and complementary consumables. There's a solid foundation in place already. Our platform is valuable and durable. We have maintained leading market share positions in key categories. We have begun making necessary adjustments to our product roadmap so that we're positioned to make more best-in-class products while staying laser-focused on execution and ensuring they're in the market on time. However, I want to underline that there is not a quick fix. Our goal is to continue to be the brand solution of choice for our consumers, and this will require us to become even better at design, engineering, and marketing, anticipating the needs of our consumers. Finally, I want to improve asset efficiency and maintain our shareholder-friendly policy. On the asset side, our emphasis will be on improving working capital efficiency and more broadly, balance sheet productivity. On the capital side, we will use cash flow generation of our business to invest in our core business first, reduce our debt, and then search for accretive acquisitions in the future, and then consider return of capital to our shareholders. I plan to continue Helen of Troy's practice of proactive investor outreach via investor meetings and attending relevant investor conferences. In summary, we earned our way into a difficult period, and clearly, we need to behave our way back to high-quality sustainable growth. Over the next few months, we will be working on a long-term plan which will provide a roadmap for our growth ambition. We operate like we are wearing bifocals with vigilance on the near term, but always maintaining a primary focus on maximizing sustainable long-term value for our stakeholders. I will not be satisfied until we place the company on a sustainable path to further increasing market share, growing revenue, and delivering consistent returns for our shareholders. If we do this, I believe we can regain the trust of our stakeholders. With that, I want to turn it over to Brian. Brian Grass: Good morning, everyone. For joining. I'd like to start by welcoming Scott to the company as our new CEO. I believe his experience, business philosophy, leadership style, and strategic vision are a perfect fit for us as we enter the next phase of our evolution. After only a little more than a month, our associates have been energized by his commitment, passion, growth mindset, and people-first approach. I'm confident his leadership will help us deliver stabilization and reliability in our shorter-term results while we continue to rebuild our platform for sustainable long-term growth. As Scott joined us after the end of the quarter, Tracy and I will take the lead on discussing our results and outlook for the remainder of the year, but I know Scott is eager to take questions regarding his experience, why he chose Helen of Troy, and what he sees after five weeks at the company. Turning to the second quarter. We are not at all satisfied with our results, but we believe we took a step in the right direction with net sales and adjusted EPS at or above the high end of our outlook ranges. Highlights include double-digit revenue growth for Hot Tools, Curlsmith, and Osprey. Growth in both point of sale dollars and units for Braun, Osprey, Olive and June, and OXO. Olive and June revenue and profitability that continues to exceed expectations, DTC revenue growth of 15% year over year, and positive free cash flow of $23 million fiscal year to date despite a cash flow drag of approximately $34 million from higher tariff payments. Looking more broadly, during our last call in July, we identified five key priorities to rebuild our platform for profitable growth and shareholder value creation. One, restoring confidence with key stakeholders. Two, improving go-to-market and operating effectiveness. Three, refocusing on innovation for more product-driven growth. Four, focusing on the fundamentals and fully leveraging the unique strengths of our brands, and five, reinvigorating our culture with resilience and an owner's mindset. I'm pleased to share that we made meaningful progress across all five priorities since our last call. I'm most encouraged by the work we did to improve our go-to-market and operating effectiveness. We recognize that some of our past strategies and execution have fallen short, impacting our credibility with key stakeholders. We've made meaningful modifications to course-correct our structure, strategy, execution, and approach, which we believe will improve the reliability of our operating results in the near term and lead the way towards growth and consistent shareholder value creation in the longer term. As part of our effort to improve go-to-market effectiveness, we realigned our commercial triangle of product, sales, and marketing within each division, putting our brands at the center. And rebuilt our organizational structure with single points of accountability under our segment leaders to deliver business results. We have seen immediate benefits in terms of alignment, communication, clarity, efficiency, speed, and ownership of results. We are also making progress toward our goal of sustained operational excellence across the enterprise. As examples, our distribution operations are now hitting service level targets and nearing peak efficiency levels, and we've made improvements to our direct-to-consumer platforms, digital assets, and overall consumer experience. We helped drive double-digit DTC growth for the '26. While our second quarter results reflect the early impact of our focus on fundamentals, simplifying operations, sharpening our priorities, and increasing agility, they also highlight that we remain in a transition period with further improvement still needed. I thought it'd be beneficial to give continued perspective on tariffs. As the macro environment remains complex with tariffs continuing to influence our operations and impact our financial performance. As most are aware, in April, the US government implemented a broad set of tariffs aimed at restructuring trade relationships, particularly with China. Since then, we have experienced significant increases in tariff rates, which have created immediate and ongoing revenue, earnings, cash flow, and balance sheet impacts. In response, we've taken a series of tariff mitigation, cost reduction, and cash flow preservation actions that we've outlined in previous calls and continue to build on. One, supplier diversification. We have actively worked to mitigate tariff risks by diversifying our sourcing and manufacturing footprint outside of China. Tracy will give you an update, and there's material in our investor presentation on this. Two, inventory management and SKU prioritization. We purchased targeted additional inventory in late fiscal 2025 and early fiscal 2026 ahead of potential tariffs. Subsequently, throughout April and May, we significantly reduced purchases of finished goods from China until tariff levels decreased to a more manageable level, limiting our overall exposure. Three, supplier cost reductions. In an effort to offset some portion of tariff increases, we have pursued cost reduction opportunities with our suppliers, which we have continued to stack up since liberation day. Four, customer price increases. We notified retail customers of targeted price increases with the original goal of having them in place near the end of the summer. Working collaboratively with our key retailers and in careful consideration of market and category dynamics, we have now implemented the majority of our planned pricing increases as of September. However, there are some isolated price increases that are still pending. We're holding shipments in some instances as we work toward consistent adoption across our retail customer base. We expect a slight delay in implementation and the holding of shipments to compress our operating results in the '26 as compared to our previous expectations, which has been factored into the outlook provided in our second quarter earnings release. And five, cost management. In response to tariffs and revenue declines over the past several quarters, we implemented a series of measures to reduce overall costs, optimize working capital, improve balance sheet productivity, and preserve cash flow. While tariffs present ongoing headwinds, we believe our diversified sourcing strategy, extensive tariff mitigation, and proactive cost management positions us well to continue to adapt to the disruption and that will continue to evolve. Focus remains on balancing short-term adjustments with investments in innovation and growth, ensuring the business remains resilient and healthy as we take steps toward a return to growth and long-term value creation. Turning back to our second quarter results. I'll start with our Beauty and Wellness segment. Sales declined 4%, favorable to our outlook range of a decline of 11.3% to 6.1% despite ongoing consumer pressures and continued revenue disruption from tariffs. Olive and June was a standout, delivering better than expected sales of $33.4 million. Segment organic sales declined as consumers remained cautious, tariffs weighed on direct import orders, retailers adjusted inventories, and our overall point of sale declined. Turning to international results for the segment. Remaining retail inventory from last year's weak cough, cold, and flu season, coupled with the slow start to this year's season, led to lower replenishment in the second quarter. In China, government incentives favoring localized fulfillment are driving consumer and distributor purchases away from preferred global brands like Braun, which are not sourced domestically and are not price competitive without the subsidy. Taking a step back from the beauty and wellness financial results for the quarter, I'd like to highlight some underlying bright spots we see in the business. Curlsmith recently completed a brand refresh under the campaign It's a Curls World. The update simplifies curly hair care into a three-step routine, introduces fresh new packaging for easier navigation, and brings innovation with products like the Awestruck definition cream and moisture memory release. These are designed to extend curl longevity, boost hydration, and provide customized solutions across moisture, strength, and frizz control. Shipments to retail partners, including Ulta, began in the second quarter. Olive and June continues to build momentum in DIY nail care. With innovative tools and products that deliver salon-quality results, the brand is resonating with a broad customer base. Growth this quarter was fueled by replenishment demand, new product launches, and expanded distribution. Retail partners are also expanding assortment and in-store placement, giving Olive and June even more reach in the back half of the fiscal year. We are pleased that our beauty portfolio was recently recognized by the Allure Best of Beauty Awards. Often called the Oscars of the beauty industry, they are a powerful endorsement and recognition of product excellence and innovation. This year, our brands earned five top honors: Curlsmith for best curl enhancer, Drybar Hot Toddy for best heat protector, Revlon One Step Volumizer Plus for best brush dryer, Hot Tools for best static curling iron, and Olive and June gel mani for best breakthrough. These wins underscore the strength and diversity of our beauty brands and reflect the team's outstanding work to drive innovation and execution across our beauty business. In home and outdoor, second quarter results were consistent with our expectations. Net sales declined 13.7% as the domestic market remained under pressure from the impact of tariffs on direct import orders, cautious consumer spending, and lower replenishment from retail partners as they manage inventory levels with a cautious view of the consumer environment. This was partially offset by OXO distribution gains and continued strong performance in food storage, bath, and kitchen gadgets at retail. Internationally, segment sales grew driven by Osprey. Turning to OXO. The brand's fundamentals remain strong. Consumers are responding well to Twist and Stack food storage solutions for their durability and secure sealing lids. Our rapid brewer is earning outstanding feedback for speed, versatility, and thoughtful design. And the new compact conical burr coffee grinder was recognized by Forbes as the best value pick in its category, praised for consistent grind quality and slim user-friendly design. Other recent launches continue to grow, including OXO ceramic bakeware and additions to our emerging OXO Tot feeding line, further reinforcing OXO's reputation for solving everyday problems with high-quality intuitive products. Hydro Flask highlights include the new Micro Hydro, which is proving to be highly fashionable and versatile, compact enough for everyday carry, yet functional across wellness, outdoor, and travel occasions. Early adoption has been strong, and we see the opportunity to build this into a distinct franchise. Our new 24-ounce travel tumbler and travel bottle also drove nice growth during the quarter, reflecting continued demand for performance hydration and the brand's ability to continue to expand into adjacent sizes, shapes, form factors, and categories. Osprey posted strong growth in the quarter led by technical and travel packs. In the US technical pack market, Osprey remains the number one brand with share more than three times larger than the next competitor. Consumers are rewarding the brand's sustainability leadership, including our move to 100% recycled fabrics and elimination of PFAS-based durable water repellent across all textile products. Performance remains a differentiator as well. Our new Archeon series, featuring an abrasion-resistant, 100% recycled fabric, performed so strongly in testing that our machines could not wear it down. That level of quality is resonating with consumers. The limited edition Archeon Fujin backpack, created in collaboration with Carryology, sold out in just 24 hours. In addition, new transporter and daylight travel packs grew double digits and our kit carriers gained share and grew point of sale. Despite near-term demand variability and ongoing retail inventory adjustments, OXO, Hydro Flask, and Osprey continue to show positive consumer traction. We are prioritizing innovation, brand relevance, and sustainability as core elements that will restore growth and deliver long-term value in home and outdoor. In closing, we are giving perspective on challenging external factors today. Let me be clear. It's up to us whether we grow or not. While we expect the environment to remain challenging, our north star must be to keep the consumer at the center of everything we do. Consumers are seeking a better value proposition for their limited share of wallet. We can deliver that proposition across a strong portfolio of brands with innovative products that resonate with the consumer and exceed their expectations with differentiated features, thoughtful designs, and superior performance. When we support these efforts with the right brand-building initiatives, flawless retail and operational execution, and a delightful end-to-end consumer experience, it should be a winning formula in any environment. Getting that formula right is up to us. Before turning the call over to Tracy, I want to acknowledge the dedication and professionalism of our associates. Their resilience and commitment are critical as we work through this period of new beginning. We are taking deliberate steps to strengthen our foundation, refine our strategies, improve our execution, and position Helen of Troy for long-term success. We remain focused on delivering our commitments while we rebuild our platform to drive profitable growth and value creation for our shareholders. And now Tracy will review the financials in more detail and provide our financial outlook for the remainder of fiscal 2026. Tracy Shereman: Good morning, everyone, and thank you for being with us today. I want to give Scott a warm welcome to Helen of Troy. In just a short time, I've been impressed by his leadership style and his ability to inspire and engage with teams across the organization. Like many others, I'm confident he's a great fit for our culture and the brands that define Helen of Troy as we move into our next chapter. Today, we reported results at the favorable end of the net sales and adjusted EPS outlook ranges we communicated during our earnings call in July. This result is encouraging and reinforces our commitment to maintaining focus and discipline as we implement key initiatives to strengthen our business performance. As Brian highlighted, we made further progress on our tariff mitigation strategies, including initiatives aimed at reducing costs and safeguarding cash flow. We now anticipate that we can lower our cost of goods sold subject to China tariff to between 25-30% by the end of fiscal 2026, as compared to our previous expectation of below 25%. While this is slightly higher than we originally targeted, we believe we are making the right choices to mitigate supply risk, ensure product quality, secure favorable cost, and navigate the business disruption that has emerged. Year to date, we have experienced an approximate $10 million impact from tariffs on our cost of goods sold, and we expect a reduced negative effect in the later half of the year, amounting to less than $9 million as we benefit from the price increases that Brian mentioned. Please refer to the investor presentation on our website for a complete summary of the tariff mitigation actions we are taking, as well as a summary of the gross unmitigated impact of tariffs at current rates, the amount we believe we can mitigate or offset, and the net remaining impact on operating income for fiscal 2026. Turning your attention to the results from the second quarter. Consolidated net sales decreased 8.9%. When excluding the effects of 16%. Approximately 30% of the organic revenue decline was attributed to tariff-related revenue disruptions. As expected, this primarily stems from two key factors: the pause or cancellation of direct import orders from China in response to higher tariffs and trade policy uncertainty, and changing dynamics within the China market, which include a transition towards localized fulfillment models and increased competition from domestic sellers who are benefiting from government subsidies. While we expect these headwinds to persist into the second half, their impact is expected to be less significant compared to the first half. The remaining decline is indicative of softness in certain categories and overall point of sale decline. Even if several of our brands gained or maintained market share and saw point of sale unit improvement. Category softness can be attributed to changing consumer behaviors, particularly the prioritization of essential categories amid concerns regarding future pricing pressures and overall economic uncertainty. As these trends influence purchasing volumes, retailers also continue to modify their inventory levels. Furthermore, we observed a slowdown in thermometry replenishment across the Asia Pacific region, which was a result of a less severe illness season last year. Now I would like to turn to our business segment performance. Starting with Home and Outdoor, where net sales experienced a decline of 13.7%. Approximately four percentage points of this decline can be attributed to tariff-related disruptions, which include lower club direct import orders in the insulated beverageware and home categories in response to increased tariff rates. The remaining decrease reflects ongoing broader demand weakness in both the home and the insulated beverageware categories, including continued POS decline in beverageware, due to heightened competition and net distribution losses. This softness was further pressured by retailer inventory adjustments and lower sales in the closeout channel. These challenges were somewhat mitigated by strong demand for technical, travel, and lifestyle packs, increased sales from expanded distribution in the home category, and additional sales generated from a new product launch in the insulated beverageware category. Shifting our focus to the beauty and wellness segment. Net sales saw an organic business decline of 18.2%. Approximately five percentage points of this decrease were attributed to tariff-related disruption. The decline also includes the cascading impacts of trade policy in the China market, affecting international thermometry sales in addition to a reduction in domestic sales of heaters and certain beauty products. The remaining decline is reflective of broader demand weakness for thermometers internationally, which is attributed to lower replenishment levels due to a less severe illness season last year in Asia. A downturn in beauty sales is primarily driven by diminished consumer demand, heightened competition, and a net distribution loss compared to the previous year, as well as a decrease in water filtration largely due to weaker consumer demand and intensified competitive promotional efforts. These headwinds were partially offset by incremental revenue from Olive and June of $33.4 million. Consolidated gross profit margin decreased 140 points to 44.2% due to higher tariffs on cost of goods sold, which unfavorably impacted gross profit margin by approximately 200 basis points, and higher retail trade and promotional expense in response to a more competitive retail environment. These factors were partially offset by the favorable impact of the Olive and June acquisition, lower commodity and product costs, and favorable inventory obsolescence expense year over year. SG&A ratio increased 310 basis points primarily due to increased share-based compensation expense, higher outbound freight costs, the impact of the Olive and June acquisition, and the impact of unfavorable operating leverage. These factors were partially offset by the favorable comparative impact of higher distribution center expense in the prior year period due to additional costs and lost efficiency associated with automation start-up issues at the Tennessee distribution facility. GAAP operating loss for the quarter was $315.7 million, primarily due to $326.4 million of non-cash asset impairment charges incurred primarily due to the sustained decline in our stock price, and the lower gross profit margin and higher SG&A rate I just mentioned. On an adjusted basis, operating margin decreased 360 basis points to 6.2%. The decrease was primarily driven by the impact of higher tariffs on cost of goods sold, which unfavorably impacted adjusted operating margin by approximately 200 basis points. As Brian discussed, our price increases to retailers largely became effective after the end of the second quarter, so the tariff cost impact on our second quarter operating margin was greater than what we expect on a go-forward basis. The gross margin decline was also driven by higher retail trade and promotional expense, higher outbound freight costs, and the impact of unfavorable leverage. This was partially offset by the favorable impact of the acquisition of Olive and June, lower commodity and product costs, favorable inventory obsolescence expense year over year, and the favorable comparative impact of higher distribution center expense in the prior year period as I mentioned earlier. Home and outdoor adjusted operating margin decreased approximately 540 basis points to 9.6%. This reflects the impact of higher tariffs on cost of goods sold, which reduced operating margin by approximately 240 basis points. This was partially offset by the favorable comparative impact of higher distribution center expenses in the prior year period. Adjusted operating margin for beauty and wellness decreased 130 basis points to 3.1%. This reflects the impact of higher tariffs on cost of goods sold, which reduced operating margin by approximately 180 basis points. This is partly offset by the contribution from Olive and June. Income tax benefit as a percentage of loss before income tax was 6.4%, compared to an income tax expense as a percentage of income before income tax of 22% for the same period last year. The decrease in the effective tax rate is primarily due to the tax effect of the impairment charges in fiscal 2026, and increases in tax benefits for discrete items, partially offset by valuation allowances on intangible asset deferred tax. Non-GAAP adjusted EPS was 59¢ compared to $1.21 in the same period last year. This year-over-year decrease was primarily due to lower adjusted operating income and higher interest expense, partially offset by a decrease in adjusted income tax expense. Turning to our inventory balance. We ended the quarter with $528.9 million, or approximately $59 million higher than the same period last year. Excluding inventory related to the Olive and June acquisition, and $32 million of tariff-related costs layered into inventory, our ending inventory was largely flat year over year. That said, our inventory remains higher than we'd like, and we remain focused on driving improvements in the second half of the year. Turning to our debt and liquidity position. We ended the second quarter with total debt of $893.2 million, a sequential increase of $22 million compared to the '26. Free cash flow was unfavorably impacted by roughly $27 million of cash outflow from tariffs, inventory build ahead of our peak selling season, and higher capital spending tied to supplier transitions outside of China. The borrowing availability on our revolving credit facility is $578.6 million, and the limitation on our ability to borrow based on our leverage ratio is $212.7 million. Our net leverage ratio was 3.5 times at the end of the second quarter compared to 3.1 times at the end of the '26. The increase was driven by higher net debt and lower trailing twelve-month EBITDA due to the revenue decline in the first half of the fiscal year. Looking ahead, free cash flow is expected to sequentially improve over the balance of the year, and leverage and interest coverage will remain areas of focus. At the end of the second quarter, we are in compliance with all covenants under our credit agreement. However, given the potential range of outcomes related to sales trends, tariffs, and other macroeconomic factors, we will likely proactively engage with our lender group to secure additional flexibility to ensure continued compliance. Now I'd like to turn to our outlook. Despite the ongoing trade disruption that presents a challenging operational landscape, we are encouraged by the progress we are making to alleviate the effects of tariffs and enhance our operational and financial standing. As such, we are providing an outlook for the remainder of the fiscal year. Our outlook includes our anticipation of lower direct import orders following tariff-related pullbacks, the ongoing impact from changing dynamics in the China market, lapping of tariff-related order pull forward in '25, and continued soft consumer demand. Additionally, we're observing ongoing consumer trade-down behavior as shoppers seek value and prioritize essential categories. In light of these trends, we expect retailers to remain cautious, managing inventory levels tightly amid ongoing uncertainty and inflationary pressures. We expect these challenges to be somewhat mitigated by additional revenue generated from the Olive and June acquisition, the implementation of pricing actions largely effective by September, and the cautious view of potential unit volume declines tied to price elasticity. As Brian mentioned, there are some price increases still pending, and we're holding shipments in some cases to ensure consistent adoption across our retail customer base. We expect that this will slightly compress the pricing benefits in the second half of the year as compared to our original expectations but is necessary to avoid pricing disruption in the market. On a full-year basis, we expect net sales between $1.74 billion and $1.78 billion, which implies a decline of 8.8% to 6.7% year over year. In terms of our net sales outlook by segment, we expect a home and outdoor decline of 11.8% to 9.7% and the beauty and wellness decline of 6.2% to 4%, which includes an expected incremental net sales contribution of $130 to $137 million from Olive and June. On a full-year basis, we expect consolidated adjusted EPS in the range of $3.75 to $4.25, which implies a decline of 47.7% to 40.7% year over year. For the third quarter, we expect net sales between $491 and $512 million, which implies a decline of 7.5% to 3.5%. In terms of our net sales outlook by segment, we expect Home and Outdoor decline of 12.8% to 8.7%, and the beauty and wellness decline of 2.9% to growth of 1%, which includes expected incremental net sales contribution of $36 to $39 million from Olive and June. We expect third-quarter consolidated adjusted diluted EPS in the range of $1.55 to $1.80, which implies a decline of 41.9% to 32.6% year over year. Our adjusted EPS outlook includes expected margin compression, reflecting growth investments to support future revenue expansion and new product development, pressures from a more promotional environment, consumer trade-down behavior within our categories, a less favorable overall product mix, higher product cost driven by higher tariffs, and unfavorable operating leverage. We expect margin compression in the '26 to be partially offset by Project Pegasus initiative and strategic price increases implemented largely by September, the comparative impact of unfavorable operating efficiencies at our Tennessee distribution facility in the prior year, and cost reduction measures implemented in the first six months and continuing throughout the year. We believe our actions to reduce spending will lead to a more normalized non-GAAP SG&A ratio in the range of 34% to 30% for the second half of the fiscal year, supported by our seasonal revenue patterns and more favorable operating leverage. Easing tariffs related to trade disruptions and the favorable impact of our price increases to retail on our SG&A ratio. In terms of our tax rate, we expect our adjusted effective tax rate to range from 15% to 16% for the full fiscal year, with third and fourth quarter ranges between 22% to 25% and 28% to 31%, respectively. Inventory is expected to decrease from current levels to approximately $480 to $500 million by the end of the fiscal year, or roughly $27 to $47 million above fiscal 2025. This increase is primarily driven by approximately $41 million of tariff-related costs we expect to be capitalized into inventory at year-end, along with inventory prebuilds related to Southeast Asia sourcing transition. We also expect to hold additional inventory ahead of Chinese New Year, which falls two weeks later than last year. As previously shared, we still expect the majority of direct tariff costs to impact the second half of the fiscal year, which is largely aligned with our pricing actions. We also expect our diversification and dual sourcing strategies to reduce supply risk and help insulate us from tariff policy changes. Related operating expenses and capital expenditures are expected in fiscal 2026, with most of the diversification benefit realized towards late fiscal 2026 and early fiscal 2027. In closing, I am confident we are well-positioned to navigate the current environment and come out stronger by focusing on a few clear priorities: strengthening supply chain diversification beyond China, implementing focused and collaborative pricing strategies, maintaining cost and cash discipline, and protecting our balance sheet. Under the guidance of Scott and Brian, and the renewed energy of our global team, I believe we're on track to begin unlocking the full potential of our diverse portfolio of leading brands and driving sustainable long-term growth. With that, I will turn it back over to the operator for Q&A. Operator: Thank you. We'll now be conducting a question and answer session. We ask you please limit yourself to one question and one follow-up. You may requeue for additional questions. If you would like to ask a question at this time, please press 1 from your telephone keypad. A confirmation tone will indicate your line is in the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. The first question comes from the line of Rupesh Parikh with Oppenheimer. Please proceed with your questions. Rupesh Parikh: Good morning. Thanks for taking our questions. So maybe, Scott, a question for you to start out. I know you've only been there a few weeks at this point, but just curious how you feel about the portfolio today. Are there any opportunities for divestitures? So just at a high level, your initial takes on just the portfolio as you see it today. Tracy Shereman: Yeah. Before we answer that question, Rupesh, we're gonna let clarify a comment she made in her remarks. Yeah. Thanks, Brian. Yeah. Just need to clarify my commentary related to the full-year revenue outlook by segment. So in my remarks, I provided an outlook for the incremental revenue contribution from Olive and June roughly $130 to $137 million, which is the total revenue contribution for the year, not the incremental contribution for the year. So the correct incremental contribution for Olive and June is in the range of $109 to $112 million. So this information has been provided in the earnings release, which is correct, as well as the investor presentation. Scott Azel: Thank you, Tracy. Rupesh, nice to meet you. Super excited about being here. I think to reask your question myself, you said what do I've seen after the first couple of weeks here at Helen of Troy? Why I'm excited. I tell you this. I think about first when I first investigated Helen of Troy, you know, a couple of months ago. And then as I'm looking at the background information on the company, I look around my home, and I see the Osprey backpacks that my son and I used as he was on his road to becoming an Eagle Scout or the OXO products in my kitchen. Or the Curlsmith products that my daughter uses. And I say, wow. What a collection of amazing brands that have so much promise and opportunity. Then as I did more investigation, I said to myself, you know, a company that had such an amazing path that in the most recent days have been challenged. We have so much opportunity going forward. As far as divestiture of portfolio, after five weeks at this point, you know, all of our brands, I think, have promise, but it's something that we're evaluating on a going forward basis as we think about our long-range plan and where we're going. But at this point, I can't give you a specific answer on any one brand or any decision at this point. Rupesh Parikh: Great. Thank you for the call. I look forward to meeting you. And then maybe just one follow-up question. And David, I'm not sure how much color you can provide today, Brian, Tracy, but just curious, you know, as you look at the guidance for this year as we look to next year and beyond, like, you know, do you think this is a fair earnings base you could potentially grow off of going forward? Or I don't know if there's any, like, any color you can provide and just how to think about the earnings base that we're seeing now and the ability to grow off of it in future years. Brian Grass: Yeah. I think we're not gonna wanna give specific guidance for fiscal 2027 at this point, but I would call out, you know, there's large transitory, we believe transitory impacts to both revenue and expense in fiscal 2026. And we believe a lot of those will dissipate, you know, in the second half of this year and especially as we get into next year. You know? So I would point that out as being a building block for growth next year. We'll have to, you know, finish going through our planning and size up everything in the aggregate as we, you know, get more visibility through the second half of this year. But we definitely believe there's transitory impacts that were unfavorable in 2026 that we don't believe would exist in 2027. Tracy, you wanna add anything to that? Tracy Shereman: Yeah. No. I think that's absolutely right. I think, you know, what we experienced in the first quarter and second quarter, you're gonna see that improve in the back half. I think that will help us be the building blocks as we look at fiscal 2027. Rupesh Parikh: Great. Thank you. I'll pass it along. Operator: The next question is from the line of Robert Labick with CJS Securities. Please proceed with your questions. Robert Labick: Good morning, and welcome, Scott. Nice to meet you, and thanks for taking our questions. Scott Azel: Awesome. Nice meeting you. Hey, Bob. Robert Labick: Morning, Brian. So to start, just you know, with Scott here, in your experience, you know, what does it take, and how does a company revitalize brands that were, you know, leaders, maybe still are, had really strong growth, but growing as much, maybe losing a little share here and there. What are the steps needed, and what are the biggest challenges to restoring growth to, you know, leading brands that aren't growing as much? Scott Azel: Bob, great question. I tell you from my past a couple of things. One is obsessing the consumer and consumer insights. Two is driving innovation, and then looking at the operating model and saying to yourself, what's getting in the way of decision-making so that you can go from idea to marketplace with speed. When I look at a company at our size, I see much opportunity in terms of the people, the culture, and the background that really comes down to management philosophy, management discipline, and management role modeling what's most important. The work that Tracy, Brian, and the team have done in the last couple of months to put more resources and more people closer to the marketplace, closer to the brands, closer to the consumers, it's a step in the right direction, but really creating the piping and the plumbing this becomes something we do every day. It's about growth. It's about where we're going. It's about leading the consumer. It's about building the category. When we talk about our long-range brands in the future, that's what our focus is gonna be around. Robert Labick: Okay. Great. And then just kind of for my follow-up question, I guess, Brian, can you just maybe discuss optimal leverage and capital structure for the business? And your expectations for talks with? You mentioned, obviously, you're in compliance with all covenants, but maybe looking to get some, you know, better, you know, options going forward. So maybe just give us a sense. Your relief. Yeah. Thank you. Exactly. Go forward. And just give us a sense of where, you know, your thoughts on the balance sheet and how that relief may go. Brian Grass: Yeah. I mean, optimally, in this environment, we would like leverage to be closer to two times and maybe even below that as we go forward. In terms of, you know, my view of, you know, the covenant situation and where we are, I feel really good about where we are. We've had discussions with the vast majority of our banking group at this point to make them aware of the possibility and to talk through, you know, what it means, what it'll look like, and that type of thing. And I would say every single one of those conversations has been supportive and constructive. So I expect some form of holiday in terms of those covenants and in terms of what other impacts there would be. You know, there will be fees associated with doing an amendment, but I'm not expecting any large structural changes to, you know, interest, the cost of interest, or anything else like that. So that's what I know at this point. We'll continue to evaluate the need to work through that process. And if we do need to work through that process, we'll do it swiftly. Robert Labick: Okay. Super. Thank you. Operator: Our next questions come from the line of Susan Anderson with Canaccord Genuity. Please proceed with your question. Susan Anderson: Hi. Good morning. Thanks for all the details this morning, and welcome aboard, Scott. Wondering maybe if you had any high-level views yet just on the category where you see the opportunity going forward for growth, whether that's in beauty and wellness or home and outdoor or maybe even categories that you're not in yet. Thanks. Scott Azel: Yeah. Go ahead. Susan, nice to meet you. Again, early days, but a couple of things. One, the answer is yes and yes, both in home and outdoor and in beauty and wellness. You know, as I've traveled and I still have many travels to go over the next days and weeks, whether it be the innovation I'm seeing around Osprey, I'm building the legacy and ethos of that brand in adjacent categories as well as in existing categories. A lot of upside opportunity. Curlsmith is still just scratching the surface as I talk to retailers and talk to our consumers around restaging that brand and connecting with the consumers that resonate with them. And the restage is happening as we speak. We talked about Olive and June. It's in its early days of a great book that's being written. And then OXO has an abundance of innovation that starts with authenticity and really a connection with the true chef that can't be characterized by our competition. But I can tell you that in early days that, we have a lot of opportunity to focus on fewer initiatives and drive impact with the brands that we have to fix in that foundation. And second, paying down debt. And then looking at M&A as a growth driver, which has been a part of our past going forward. But we've got to get our foundation right first. Brian Grass: I would just add, Susan, beauty, it's not one that Scott may be specifically touched on. But it is a category that we think there's opportunity in. We need to do better within the category. We realize that. We're actually excited about short, medium, and long-term innovation that we have in the pipeline there that we're going to leverage to drive that growth and perform better within that category. So, you know, it's not an opportunity at this moment, but we see it being an opportunity as we go forward. Susan Anderson: Okay. Great. And then maybe if you can give some more color just on the segments and the puts and takes of the brand the quarter, like, for instance, in beauty and wellness. It sounded like the wellness brands were kind of the weaker part of the portfolio. I'm curious how the prestige hair brands did. And then also the tools. And then within home and outdoor, it once there also sounded like home was kind of the weaker area. Curious how OXO performed. Thanks. Brian Grass: Okay. Yeah. We can walk around the wheel a little bit. I would say overall, what we saw is that sell-through sell-in is lagging sell-through for the first two quarters of the year. And, hopefully, that would be evident based on some of the disruptive factors and things like that, but I want to make sure people understand that. And I think inventory is being managed cautiously by retailers in most cases. We have one or two cases where we've got isolated higher pockets of inventory, but those are exceptions and isolated, I think. So, you know, I would say that as a broad statement. You're correct on your first statement about wellness being a little bit weaker in terms of our revenue. I think that was driven largely by direct import disruption. And we continue to see impacts of, you know, a weak cough, cold, flu season from last year and then a slow start to the season this year is kind of having a double effect in terms of the wellness business. Beauty, as you know, we kind of talked about, we're in some strong categories in beauty overall, is doing well. I think there's pockets where there is some consumer trade-down occurring and there's, you know, strong competition in the channel and some of our categories. But I feel really good about where we're going in that business in terms of, you know, the alignment we've done internally and kind of the doors that that's unlocking. And then our new product pipeline, like I said, short, medium, and longer-term, looks really good. And, you know, the all-inclusive tool that we just launched is now starting to get really good traction. So that's exciting for us. And then I think the last is home and outdoor, and I'll give Tracy a chance to weigh in after. Home was softer in terms of our shipments, but I wouldn't I think that's, again, a lot of disruption related to retail inventory adjustments. And, you know, impact of direct imports and kind of a lot of that noise. I think as we look more steady state going into the second half of the year, we feel really good about the home business. And then, you know, outdoor, and hydration, I think you know the story there. Osprey is doing really, really well, and it did well in the quarter. And we think we have the ability to continue to build on that with white space opportunities, continue new products, adjacencies, that type of thing. And then hydration, you know, we do see that category softening. What we like about it is there's kind of a pivot back to bottles where we've had historical strength. We intend to lean into that, and we're working on some stuff to kind of differentiate ourselves from the competition in the bottle space. And that will be coming out in the future. And then the last point I'll make is related to new products and category adjacencies and Hydro Flask. It's not in hydration, but as we look broadly, can Hydro Flask go? We're excited about opportunities to kind of expand it into some other areas, which will be coming soon. Tracy, anything you want to add? Tracy Shereman: I think that's a very good overview of how the brands performed. I would say for Home and Outdoor, you know, both OXO and Osprey had favorable POS within the quarter. As Brian mentioned, you know, where we're soft is in insulated beverageware. But I think the work that we're doing and rebuilding our connectivity with the consumer and our pipeline is gonna help fuel, you know, the division overall. Susan Anderson: Okay. Great. Thanks so much. Good luck this holiday. Operator: The next questions are from the line of Olivia Tong with Raymond James. Please proceed with your question. Olivia Tong: Great. Excuse me. Thanks. Good morning, and welcome, Scott. Looking forward to working with you. My first question for you is just when you look at the categories that Helen of Troy is in, where you see the greatest opportunity for innovation, and if you could layer in, you know, your past experiences driving turnarounds, where you've done that. How you think that you can bring that to Helen of Troy. And then for all of you guys, I suppose, specifically for the drinkware category, the innovation in the deck sounds very compelling. The person the better color profile, so forth and so on. But how do you balance some of the fairly heavy discounting that we're seeing both in external retailers and then on your own DTC with plans to turn around the business? And then also, can you give some broad strokes just on the category and the competitive dynamics? That is a particularly competitive category? Thank you. Scott Azel: Great meeting you. I'll take the first part. Maybe Brian and Tracy can jump in. You know, I think I see opportunity really across our whole portfolio of making innovation and putting the consumer in the marketplace kind of first and foremost like, kind of more in the DNA of what we do every day. And that comes from the way we lead from the top, the talent that we have leading our businesses, and where we place our resources and investments. So I at several weeks in, I wouldn't say there's any one category that we have to do it in. We need to do it in the categories we have strength right now today, as well as the categories that are not performing where they need to be for the future. So, that's the way I think about it today. The way I think about it from my past, it's really making sure that team talent and routines are focused around innovation in the consumer. And making sure we're acting with speed to capture consumer and category opportunities, you know, ahead of the marketplace. I've done that in the past, and it's such an opportunity for us at Helen of Troy. And it's not something that we can't do. It's just something we have to make a priority on how we operate every day. Brian Grass: Yeah. Olivia, on your second question, what we see is that the hydration category had been heavily influenced by kind of the tumbler part of that category and maybe some saturation has kind of occurred in the channel. And I think the bulk of what you're referring to in terms of discounting and kind of trying to clean a lot of that out is in the tumbler space. It's another reason why I like kind of the pivot to bottles where we have our strength. I think we're less exposed on the tumbler side, and so we're really gonna lean into where the trends are going and the kind of the pivot and form factor and try and maximize that opportunity. We also think we have distribution opportunities to maximize and improve on and we're gonna go after that. But and then, you know, thirdly, what I said earlier about kind of we think Hydro Flask can go into some adjacent categories, and we're working on that product lineup now. So we still feel good about the space. I think, you know, there's some normalization going on there, and I think that's largely concentrated in tumblers. But we'll obviously have to navigate the broader kind of dynamics going on in terms of discounting and, you know, what's kind of in the channel already that we'll have to navigate through. Olivia Tong: Got it. That's helpful. And then just following up, about tariff pressures and your level of confidence in offsetting those pressures. I know it's too early to see the impact of the pricing yet. But given the increased promotional environment and the distribution losses that you've seen, it doesn't necessarily sound like price is the most available lever at this moment. So to the extent that you can comment on other mitigation plans that you have, the conversations that you've had with retailers. I know you mentioned earlier about some of the holding of shipment that may impact the second half. What other tools do you have at your disposal should it take a little bit longer to get the price increases flowing through? Brian Grass: Yeah. I can start, and Tracy may want to build. Look. We've been working on pricing ever since liberty Day occurred. I mean, first, we had to do our internal work to assess what pricing we thought made sense, and a lot goes into that. And so we, you know, spent a period of time doing that. And then we also collaborated with retailers as to what they thought made sense and price points and all that type of stuff. And then they have that you have to work through. And then the last piece of it is you as you get it out there and you get it accepted, you gotta have consistent adoption amongst your key retailers. It doesn't work if you don't get that. And that's really where we are today. If there are any pockets holding shipments, it's to make sure that we have that consistency. Adoption, and we're going to hold the line on that to make sure. And if, you know, you're a if you're one retailer, you don't want a different adoption by another retailer. You're not gonna like that. And so it's our responsibility to get all that right. And I think we've done that for the vast majority of our pricing, and there's just a few additional things to work through. So I feel confident about the ability to have the prices in place with our retailers really, without exception, and I think that's coming very shortly. Then I think there's what do you assume in terms of price elasticity. And what we try to do is be very conservative in our assumptions about price elasticity, and I think that's it. We've done that, and that's reflected in our outlook. You might ask, well, why do the price increase if you're gonna lose a lot of it in unit volume? You're still better off, I believe, in terms of profitability. And in some cases, retailers where they have private label product, they want the price increase in market because they can't raise the price on their private label and have it bumping up against the branded product. And so, strategically, they want the differentiation there. And so from a few different perspectives, the price increase makes sense, and it definitely helps the profitability even if you lose a large part of it in terms of unit volume. So I hope that answered your question. That's kind of the way just that we look at pricing. I feel really good about getting it in place and where we are in terms of that. And then, you know, it's about what happens with the consumer and what choices do they make. You asked about other levers also. You know, pricing is a big lever, in terms of our ability to offset what we're able to. And we've pulled a lot of other levers as well, and we mentioned all of those in our prepared remarks. They're also kind of referred to in the earnings release. The ability to use those more, I would say, look. We're gonna continue to pursue cost decreases with our suppliers. And we continue to kind of stack those up. And, hopefully, those will just be upside as we're able to continue to get those. And we'll we're gonna do that no matter what happens with retail price and increases. We've pulled a lot of the other levers and made significant choices. What we don't want to do is pull so far back on our growth investment for the remainder of this year that it puts us in a bad spot as we go into fiscal 2027. So we are trying to sustain and hold the line on new product development and the right brand-building initiatives to keep our business healthy and position ourselves for growth. So we're not gonna go any further than we kind of have at this point there. In fact, we may find opportunities we want to lean into. And often cases, when we lean into those, they're incremental. So there's a cost, they're incremental, and they drive revenue. And so those are easy choices to make. And they don't all they're not all easy, but some are. And we'll lean into the ones that we think can improve both our position and drive incremental revenue for us in the second half of the year. So, hopefully, that's a little bit of flavor of how we're looking at it. I think we've pulled a lot of the levers. Feel good about where we've ended up from a price increase perspective, only thing that we're being cautious about is how the consumer responds in the elasticity of it, and I feel good about the other mitigation actions that we're taking and feel good about the position of we're only gonna go so far when it in terms of reducing our new product or brand-building investment. Tracy Shereman: Yeah. No. I think that wraps it up nicely. Brian mentioned, you know, we are just focused on making sure we can implement, you know, across, you know, our retailers and controlling our spending to make sure that, you know, we can manage to these headwinds. Operator: Thank you. And my final question comes from the line of Peter Grom with UBS. Please proceed with your question. Shiroc: Hi. This is Shiroc, for Peter Grom. Thanks for taking our question. So just two questions here. With a good part of your tariff headwinds now largely behind you and, you know, price mix expected to slow through in the second half, I'm curious, like, how much of the recovery is dependent on some level of volume stabilization? You know, you've mentioned, you know, being conservative on elasticity assumption. But to what extent does your outlook assume that volumes at least hold steady or begin to recover? And if so, do you see that being more of a full Q dynamic? Tracy Shereman: Yeah. I would say thanks for that question. I would say for the outlook, you know, we're assuming kind of the consistent soft demand trend that we're seeing in the first half. And then we took a conservative position on the elasticity. We're seeing a headwind, a tailwind in the back half. It's from the retailers rebalancing inventory and recovery of the direct imports in the second half. Shiroc: Okay. Great. And then my last question here, which is the, anything you can share on the broader consumer backdrop? I know you've mentioned some trade-down before. And are you still seeing similar things there? And then one more on beauty, we have seen some improvement there just based on what we've heard from, you know, public companies. Are you also seeing the same thing? Brian Grass: Yeah. Let me do the beauty one first. You know, beauty at a broad level there's probably not overall trade-down occurring. I think there is trade-down within certain categories within beauty, and we do see it in some of the data related to our categories, especially as it relates to the younger consumer, which is increasingly stretched in this kind of environment. But at a broad level, when you're looking at some of those other companies, you may not see it. We also see it in terms of an indication of it anyway in terms of the disparity POS dollars that we have for our products and POS units. And I'll give you an example of how it's kind of mixed. We actually saw average unit strength in Curlsmith and Hot Tools. So average unit revenue was higher in those two. And then in Revlon and Drybar, average unit revenue was down fiscal year to date for two brands. So it's a little of a mixed bag. I would say we see indications of it but would agree with you at a broader beauty level. It's not, you know, moving the needle on the overall category. I think you gotta go with a couple of clicks down to decide, okay. Is it driving this category or another category? We are seeing indications of it, but, you know, it's not an excuse. We need to, you know, adjust to the market, and I think it all comes down to new product development, how we support that new product development. And then once we get that right, all this other stuff takes care of itself. Shiroc: Got it. Thank you. Operator: Thank you. This concludes our question and answer session. I'd like to turn the floor back to management for closing comments. Scott Azel: Thank you all for joining us today. As I mentioned, I'm excited to be a part of Helen of Troy. In closing, I want you to walk away with that, we are clear-eyed about our current situation. We are focused on fixing our foundation, and we're bullish and excited about our future. I look forward to speaking with many of you in the coming weeks. Thank you. Operator: Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Good day, and thank you for standing by. Welcome to the Richardson Electronics earnings call for 2026. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to turn the call over to your speaker today, Edward Richardson, CEO. You may begin. Edward Richardson: Good morning, and thank you all for joining us in 2026. We appreciate your continued support and interest in Richardson Electronics. Joining me today are Robert Ben, Chief Financial Officer, Wendy Diddell, Chief Operating Officer, Gregory Peloquin, General Manager of our Power and Microwave Technologies Group which includes Green Energy Solutions, and Jens Ruppert, General Manager of Canvas. As a reminder, this call is being recorded and will be available for playback. I would also like to remind you that we will be making forward-looking statements. They 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. In 2026, total sales were $54.6 million, up from $53.7 million in Q1 of last year. Driven by sales growth in both PMT and Canvas, PMT delivered notable year-over-year sales growth driven by continued strength in our semiconductor and RF power segments. It's important to note that sales growth was partially offset by the inclusion of our Healthcare business in both the current and prior quarters. As a reminder, we sold our healthcare in 2025, so this will impact our year-over-year comparisons through the end of Q this year. The healthcare engineering and manufacturing team is making good progress finishing production of AltiTubes and finalizing repair processes for the Siemens tubes, which should result in positive operating contribution toward the end of FY 2026. Within our GES business unit, we're very pleased with the year-over-year growth in the wind segment. The performance provides us with growth evidence that the policies from the current administration are not hurting demand for our alternative energy solutions. We believe our wind business is protected because we're pursuing programs strictly on land-based turbines to support global customers in providing solutions that improve the performance and efficiency of the existing fleet. While overall sales were down slightly in GES, this was driven by a large one-time order in our EV rail sector in the first quarter of last year that did not repeat this year. Backing out this sale, GES would have been up quarter over quarter. The strategic priority of the company is engineered solutions, which are products we make ourselves in LaFox. The strategy focus, along with improved manufacturing utilization in the quarter, contributed to the higher gross margin versus the prior year. The long-term investment in our global footprint is also a strength, helping us better manage the tariff landscape. Finally, we're pleased to report that we generated positive operating cash flow in the quarter, marking six consecutive quarters. Our cash position remains strong at $35.7 million, providing us with flexibility to support both our ongoing operations and strategic growth opportunities. I'll now turn the call over to Robert Ben, our Chief Financial Officer, who will provide a detailed review of our first quarter results and capital position. Robert Ben: Thank you, Edward, and good morning. I will review our financial results for our first quarter fiscal year 2026, followed by a review of our cash position. Consolidated net sales for 2026 increased 1.6% to $54.6 million compared to net sales of $53.7 million in the prior year's first quarter. When excluding Healthcare, which the majority of assets were sold in January 2025, net sales increased by 6.8%. Please note that healthcare results, including prior periods, are consolidated into the PMT segment beginning this quarter. This was our fifth consecutive quarterly year-over-year increase in sales. First quarter net sales growth was led by a 2.8% increase in PMT sales. Excluding Healthcare, PMT sales were up 10.5% and were due to higher demand from the company's semiconductor wafer fab customers as well as our legacy power grid tube product lines. Canvas sales increased 8.3%, which reflected improved market conditions in Europe. Partially offsetting these increases was a 10.2% decrease in sales for our GES business unit. While revenues in the wind segment increased, they were offset by the nonrecurrence of a large EV locomotive order from the prior year's first quarter. Consolidated gross margin for the first quarter was 31% of net sales compared to 30.6% during 2025. The 40 basis point increase in consolidated gross margin was primarily due to margin improvement in both PMT and GES. PMT's gross margin increased to 31.3% from 30.1% as a result of a favorable product mix and improved manufacturing absorption. GES gross margin increased to 29.6% from 29.4% due to product mix, including a higher percentage of products we manufacture in LaFox. Lower gross margin for Canvas partially offset the improvement in consolidated gross margin. Operating expenses as a percentage of net sales improved to 29.2% for 2026 compared to 30% in 2025. As a result, operating income was $1 million for 2026 compared to an operating income of $300,000 in the prior year's first quarter. Other income totaled $1.4 million for the quarter, which was $1.1 million higher than 2025. The increase from the prior year's first quarter was mainly due to a nonrecurring gain of $900,000 from a confidential contractual settlement. Net income was $1.9 million for 2026 compared to $600,000 in 2025. Earnings per common share diluted were $0.13 in 2026 compared to $0.04 in 2025. EBITDA for 2026 was $3.3 million versus $1.7 million in the prior year's first 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 first quarter fiscal year 2026 press release that was issued yesterday after the market closed. Turning to a review of our cash position, cash and cash equivalents at the end of the first quarter fiscal 2026 were $35.7 million compared to $35.9 million at the end of fiscal 2025. Cash flow provided from operations was $1.4 million compared to cash flow provided from operations of $400,000 in the first quarter of the prior year. Capital expenditures of $1 million in 2026 were primarily related to our manufacturing business facilities improvements and IT systems, versus $900,000 in 2025. We paid $900,000 in the first 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 2026. As of the end of 2026, the company had no outstanding debt on its revolving line of credit with PNC Bank. In addition, we have extended this credit agreement through October 6, 2028, with similar terms and a $20 million borrowing limit. Now I'll turn the call over to Gregory Peloquin, who will provide more details for our PMT and GES business groups. Gregory Peloquin: Thank you, Robert, and good morning, everyone. PMT and GES are key components of our multiyear growth plan. Coming out of FY 2025, we had a strong backlog, launched several new products, expanded our customer base, and advanced multiple development programs from beta testing to preproduction. Building on that positive momentum, in Q1 fiscal year 2026, PMT excluding healthcare grew to $37.8 million, a 10.5% increase over the prior year and a 5.1% increase over Q4 fiscal year 2025. GES sales were $7.3 million, up 35.5% over fiscal Q4 2025 and down 10.2% year over year due to a multimillion-dollar EV locomotive billing that did not occur this year and without which GES would have been up in the quarter versus the prior year's first quarter. However, on a positive side, the core wind turbine business grew 86.1% over the prior year and 16% over the prior quarter, supported by new customers, global expansion, and new products. Our pitch energy modules and related wind energy products lead GES quarter-over-quarter growth. We continue to gain market share with our end customers by developing new products and solutions that they are incorporating. Today, we serve dozens of wind turbine owner-operators, including exclusive partnerships with the top four owner-operators of GE wind turbines, RWE, Inver Energy, Enel, and NextEra. We also saw growth in our new multi-brand PEM turbine platforms. We continue to grow this program internationally, expanding in Europe and Asia with new products for other turbine platforms such as Suzlan, Senvion, Nordex, and SSB. We have now received orders from customers in Australia, India, France, and Italy. Our GES growth strategy centers around power management applications. We rapidly design multiple products, secured patents, and built a strong global customer base and partnerships. Our success is evident in our growing pipeline as we capitalize on numerous growth opportunities to support new power management requirements, significant energy transformation, and wind turbine repowering projects. We're entering Q2 FY 2026 with solid momentum. We've recently added key technology partners such as Kiba, Goshen, and Wulong, who will play critical roles in both wind power management and energy storage. 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 power management and wind turbine engineers in North America. Expanding our design team to accelerate enhanced design cycles prior to transitioning the work to our world-class manufacturing and test group in LaFox is one of our main strategic priorities this year. We expect to have the Sweetwater Design Center operational in Q2 FY 2026. Turning to Power and Microwave Technologies Group or PMT, which includes the electron device group, our legacy tube and semiconductor wafer fab equipment business, and RF and power microwave components group, or PMG. In the quarter, sales growth was led by increased demand in both 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. We also saw continued growth in the fourth straight quarter among our semiconductor wafer fab manufacturing customers. Looking ahead, we're excited about the strategic initiatives across PMT and GES, including our ESS or energy storage system program, global expansion of our green energy products, and new technology partnerships. While we are navigating a higher degree of uncertainty associated with the impacts of tariffs and market conditions, we are pursuing opportunities that may come from these disruptions. Investing in infrastructure, expanding our design and field engineering teams, enhancing our in-house design and manufacturing capabilities to support growth demand and innovation. Our field engineering team continues to identify new customers and opportunities. Our global capabilities and global go-to-market strategy set us apart from our competition in the power management, RF microwave, and green energy markets. We have developed a business model that combines legacy products with new technology partners and solutions. Aligning with our growth strategy to deliver engineered solutions to a global customer base. This model differentiates us from our competition. Our GES products and technology partners support our niche product strategies. As it appears federal subsidies will be harder to get under this administration. Looking at our new ESS project and strategy, we are focused in key states that will continue offering large subsidies such as Illinois, Massachusetts, and California. We are expediting our efforts to expand our global market penetration of our power management products for green energy applications, focusing particularly on Europe and Asia. As currently, about 70% of our GES sales are in North America. We are working on these initiatives alongside marketing our services to companies who need partners in the US to manufacture, test, and support products currently made in other countries. We acknowledge that there are a lot of moving parts of end nodes in this market right now. But we have successfully used our global resources and capabilities to mitigate the effect of situations like this in the past. 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 new technology partners that fill technology gaps. We have a proven strategy of identifying opportunities in this multibillion-dollar market reserve. As a result, we feel FY 2026 will be another growth year for both PMT and GES. And with that, I'll turn it over to Jens Ruppert to discuss Canvas. Jens Ruppert: Thanks, Gregory, and good morning, everyone. Canvas 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. Canvas reported revenue of $8.3 million in 2026, an increase from $7.6 million in the same quarter of the previous year. Our gross margin as a percentage of net sales decreased to 30.9% from 34.3% in 2025, primarily due to product mix and higher inbound freight costs. The backlog at the end of 2026 remains strong at $38.4 million, providing a robust foundation for future business. During this most recent quarter, Henley 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 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, milling, and packaging equipment. Our initiatives focus on increasing Canvas' 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 over quarter, we are cautiously optimistic about improving demand in our markets. Positive indicators such as increasing requests for quotes and encouraging customer feedback suggest steady growth. Our dedicated sales team continues to explore new opportunities while I focus 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 Diddell. Wendy Diddell: Thank you, Jens, and good morning, everyone. While our healthcare business is now included in PMT, I want to provide some additional color as we go through this transition period over the next several quarters. As a reminder, we sell CT tubes exclusively to DirectMed as provided under the terms of the January 2025 sale and distribution agreements. I am pleased to convey we are making excellent progress finalizing production of our Alta tubes. We've also made good strides over the last quarter validating new equipment and materials required to improve our processes for the repaired Siemens tube types. Comparable healthcare sales throughout most of FY 2026 will be lower than the prior year given DirectMed acquired the healthcare parts business. The sale concluded in January 2025, so this unfavorable comp will continue through Q3 FY 2026. We anticipate the financial impact of the retained CT tube business will turn positive in 2026 or shortly thereafter. Last quarter, after the sale of Richardson Healthcare, we discussed our focus on accelerating growth and improving efficiency. In the first quarter, we were pleased to see year-over-year growth in PMT and Canvas, as well as the wind energy portion of GES, reflecting our ongoing investments in these sectors. Of particular importance is the success we continue to see with our engineered solutions growth strategy. We also see some initial benefits from the Big Beautiful Bill. There are implications in the bill that are fostering wind turbine repowers, which lift sales of our wind turbine modules as well as sales of products from our technology partners. Wind management companies need to upgrade their towers to receive comparable tax in coming years. In the quarter, we announced our participation in the REV Illinois program, which provides significant tax credits in return for investment in alternative energy technology development in the state of Illinois. We're making progress developing a world-class battery energy storage demonstration site at our LaFox facility. As we've mentioned before, the demand for battery energy storage continues to accelerate, and our turnkey solutions position us to capitalize on that growth. Our Made in America marketing campaign recently kicked off with the addition of a dedicated business development manager. We are highlighting our capabilities on our website and through trade show attendance. In addition, we are leveraging our existing sales organization and global customer relationships throughout the company. Finally, we are seeing increasing demand for our engineered solutions in the semiconductor wafer fab equipment market. Our large customers in this segment indicate sustained growth relating to the ongoing benefit of AI on equipment demand throughout the world. Rest assured, the management team remains focused on efficiency and cash as well. The end of the significant inventory growth in support of one of our largest suppliers who will soon terminate production of power grid tubes is in sight. In this regard, we are working closely with other partners to ensure ongoing sources of supply, but we are in a good inventory position to execute this strategy over several years. Longer term, we remain committed to driving growth both organically and through strategic acquisitions. We're being thoughtful in our approach. We are looking for the right opportunities to utilize our capabilities and accelerate our growth while making full use of our global infrastructure. We believe our current strategic initiatives will drive revenue and profitability growth over the next several years while we consider longer-term strategic acquisitions that further enhance our business. I will now turn the call back to Edward Richardson. Edward Richardson: Thanks, Wendy. In closing, our results this quarter demonstrate the strength of our strategy and the resilience of our business model. By sharpening our focus on repeatable sales, driving strong cash flow, and building on diversity 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 confidence in our ability to deliver sustainable value for our customers, shareholders, and employees as we move forward. We will now open for questions. Operator: Certainly. Ladies and gentlemen, due to time constraints, we ask that you please limit yourself to one question and one follow-up. Again, we ask that you please limit yourself to one question and a follow-up until we all have a chance. For a question, after which we will answer additional questions from you as time permits. As a reminder, to ask a question, please press star 11 on your telephone. Our first question will be coming from Robert Brooks of Northland Capital Markets. Your line is open, Robert. Robert Brooks: Hey. Good morning, guys. I wanted to ask you on where we are with the Ultra 3000s getting onto GE's approved aftermarket vendors list. On your fourth quarter call earlier this summer, you had said that you did a final test in June, and the engineering team sent it to GE Legal, and it was sitting there. But all indications were that the service agreements were not going to be jeopardized if the Ultra 3000s are used. And so I just wanted to hear where that's sitting or any new developments on that. Gregory Peloquin: Yeah. Hi, Bobby. They update me every week. We actually talk to GE about other things, this included. So we're in communication with them. Their engineering team has signed off on it, and the last communication, which was last week, was that it's final signatures from legal. They're still waiting on it. And it was promised to us here in the next week or two. That's the status of it. Once we get that final signature from their legal team, we will send them a number of units. They'll test them, mainly for safety, not for function, but for safety because their installers will be working with it. And so, once that's done, they'll approve it, and then along with that, not only are we pushing, if you will, GE, but also two of our largest owner-operators are also pushing it. Because they have both TSAs and their own repair. So the short answer, which I just went long on, is we expect it to be signed in the next couple of weeks. They'll do the audit of it for quality, safety. And we fully expect sign-off here in Q2 at some point. Robert Brooks: Got it. And then the semi fab sales were up 52% year over year, which was great to see. But I just wanted to make sure I'm thinking about it right. Wasn't Q1 last year we were at, like, a trough level for those sales? And then the follow-up is, would you expect that year-over-year growth rate to continue through your fiscal 2026 or maybe at the minimum, the nominal level of semi wafer fab sales in Q1 stay consistent through fiscal 2026? Gregory Peloquin: Yeah. You're correct, Bobby. Q1 of last year was the lowest quarter of the year for Lam. Although they recovered very well. And we don't get a lot of visibility from them. But the most recent information that they've put in the portal looks like these larger numbers they've been talking about now, which seems like a year or two, we should start seeing strong, strong growth in Q3 and Q4 of our fiscal year. But we'll kind of be at the same run rate here in Q1 and Q2. With large growth in Q3 and Q4 based on their forecast, which is a forecast. Robert Brooks: Thank you. Operator: And our next question will be coming from Anja Soderstrom of Sidoti. Your line is open. Anja Soderstrom: Hi. Thank you for taking my questions. So I'm just curious where the wind orders you noted from several countries around the world. How meaningful were they, and how do they compare to the actual opportunity there? Gregory Peloquin: Yeah. So we've launched it hard to produce this product globally with our customer base. It's a smaller market than North America, but still a very strong market for us. We've been able to do a great job in introducing four new platforms, which will be more popular in Europe than GE, Nordex, Senvion, Suzlon, and SSB. We've done already in part of Q1 alpha and beta testing with customers in Australia, India, France, and Italy. And they've approved that, and we've already received orders in our Q1 from customers in those four countries. And we look at this every week. If I look at the document that we track, all the opportunities that we're currently working on in terms of our teams worldwide, it's getting up to two or three pages. So it's active. It's just an education process for these customers that it's available. And this product is available for their specific turbines. And then, of course, like we did with North America, you'll have alpha testing, beta testing, and then final production. But I would say it's not going as fast as we'd like. Nothing ever does. But we're getting some good traction expanding this capability, if you will, outside of North America. Because as you know, 70% of our business is currently in North America, so it's pretty much nothing but upside outside of North America. Anja Soderstrom: Okay. Thank you. And what do you expect in terms of CapEx for the year given your expansions in LaFox and the Texas Center? Robert Ben: So I'll take that one, Anja. We're estimating it'll probably be in that $5 million range. So a little bit higher than last year, but last year was very low because there were some programs that were pushed into FY 2026. So, again, we'll stick with that $4 to $5 million range. Anja Soderstrom: Okay. Let me also add something. Yes. Wendy Diddell: Real quick. On the REV Illinois program and, Greg, you can jump in here. The CapEx requirements themselves are not significant in this fiscal year. What we're looking at is some equipment that will help improve our manufacturing efficiencies and position us for new opportunities primarily and particularly in the ESS solution. So what we'll be looking at, the REV Illinois program allows us to account for people, in addition to CapEx, in addition to other R&D related expenses. And that's where we're focused on right now with making sure we've got the engineering resources we need, the program managers we need, so that when we get our facility built here in FY 2026, we'll be ready to efficiently and effectively market that. Gregory Peloquin: Yep. Yeah. I mean, this good example is the demo site. That all that development and goes towards the number that we've been to attain to get all the subsidies and rebates. And just one thing in the REV Illinois program. You know, we're going to apply for every single subsidy and tax credit we can get with this green energy program. Luckily, the state of Illinois has even better than California, the most rebates and tax incentives for people doing wind, solar, energy storage, green energy itself. So we found out about this from some local contacts. We applied. You have four years to do it. And it's approximately $8 million in total investment and a number of headcount. But we have four years to do it. So we're not doing things to get that credit. We're doing things to grow the business and increase shareholders' value. But our estimate is we'll hit those numbers very easily, so we might as well take advantage of it. Anja Soderstrom: Okay. Great. Thank you. That was all for me. Operator: Thanks, Anja. And our next question will be coming from Brendan Kinney, Private Investor. Brendan Kinney: Hello. Can you hear me? Robert Ben: Yes. I can hear you, Brendan. Brendan Kinney: Hi. So just one quick question. The operating income, you know, it was mainly due to a nonrecurring gain of $900,000. Could you just fill in a bit more detail about what that was? Robert Ben: Hi, Brendan. This is Robert Ben. First of all, the operating income, as I stated in my remarks, was $1 million, and that did not include the nonrecurring gain, that's below in other income. Just to clarify. So operating income for the quarter more than tripled from last year's first quarter. But to specifically address your question on the $900,000 nonrecurring gain, you know, as I stated in my remarks, that's from a confidential contractual settlement. So, unfortunately, I'm not really allowed to say much about it other than that. Brendan Kinney: Okay. I missed that. Yeah. Thank you. Operator: Thank you. Thanks, Brendan. Star 11 on your telephone and wait for your name to be announced. Our next question will be coming from Chip Rui of Roe Asset Management. Your line is open. Chip Rui: Good morning, guys. Good quarter. I have three questions, so maybe I'll just lay them out. And you can divvy them up. First, I think the when do your comment on the repower initiatives and the Big Beautiful Bill. Could you expand on that? I think the sentiment has been kind of misplaced on you guys around wind anyway because you're not OE. You're pretty much all aftermarket. So now that there's a potential positive from the administration on repowering, I just like to dig into that a little bit more. Secondly, the operating leverage looked great. On the operating income, can you just give us some thoughts on how the rest of the year will play out? Can we continue to see muted expense growth that would contribute to good leverage to the year? And last, maybe, Edward, I'd like the comments on kind of I mean, clearly, the semi business and PMT is a really positive thing to hear. The outlook there. But maybe dig into the other side, the legacy RF business seems like it's perking up too, so maybe some details there. Gregory Peloquin: Thanks, Chip. Hey. I'll Chip, I'll just talk about the first question you had. It's a great question. So and you hit it on the head. You understand it very well that almost all of our business other than Suzlon is aftermarket. And so with this administration kind of removing a lot of the subsidies you get for new turbines, kind of like your old car in college, can't afford a new one, so you refurbish and fix up your current one. What's kind of going on, and the term in the industry is called repowering. Where they, in some cases, drop the turbine to the ground and then replace everything they can, and then they'll have a turbine that's good for another ten to fifteen years. At that time, instead of putting lead acid batteries back into the turbines, many of our customers and some of those larger orders we got in terms of our large, you know, get a 1.25 book to bill in FY 2025. With people ordering parts for this repowering program. So they will put in our pitch energy modules, which will last up to fifteen years instead of the lead acid batteries. And so that decision by the government, which is getting a lot of press, actually, in a roundabout way, supports us and hopefully will expedite some of the large orders we have on our books in terms of pulling them in over the next two to three quarters. The last thing with that and the Big Beautiful Bill, Wendy's talking about if they get it done by the end of this calendar year, they can put some of that money to the side or keep the current rebates and tax credits that they have now. So we're working a lot of our owner-operators to get their forecast between now and the end of the year. So we again, we grew 23% in FY 2025. Fully expect based on the forecast and some of these other things that GES will grow double digits in FY 2026. Wendy Diddell: And then, I guess, operating leverage. I'll take that one. Okay. So in terms of leveraging and operating expenses, you know, I'm looking at our forecast for the full year. It'll be up just a little bit, not a lot over FY 2025. As we invest in some of the programs that Greg has mentioned, you know, in terms of additional engineers, additional people outside the US focusing on green energy growth. But, Chip, one of the things we do well as a company is really managing our SG&A level and keeping that increase under control. So I would not anticipate a significant increase over FY 2025. Does that answer your question? Chip Rui: Yes. And then just thoughts on the RF side. Edward Richardson: Right. Well, our RF tube business still remains about $85 million. We're going through a period where our largest supplier is actually going to exit the business over the next three to five years. And a lot of that equipment and technology we own, so we're in the process of trying to determine if we move it back here or work with other tube manufacturers around the world. But it's put us in a position where we built up our inventory very substantially. On the other hand, that inventory tubes are like good or fine wine. You know, they under vacuum, and they last forever. So we have no issue as far as obsolescence on the tubes, but our difficulty at this point is finding other manufacturers or making a decision to bring some of that manufacturing back here. But what you'll see over the next three or four years is our inventory go down dramatically as far as that's concerned. But the business stays extremely profitable, and we're pleased to be pretty much sole source on tubes around the world. Chip Rui: Okay. That's great. Did you see I thought you said you saw a pickup in the kind of that core business in the quarter and some more positive signs. Edward Richardson: In the tube business, I think it's just about level. What we are seeing is a pickup in the semis to have equipment manufacturing business. You know, we follow Lam's quarterly vendor meetings and listen to them, and they're talking about a very positive increase in their business going forward. In the best year, we did about $40 million with Lam and people in that business. And I think right now, we're running in the low twenties, Wendy, somewhere. So we see an opportunity to grow substantially in that business going forward. Gregory Peloquin: And then on the RF solid-state side, if you bring to that because that was, you know, business that we were in before, that also grew. And we're seeing a large uptick in military defense, RF communications, drones, and then, of course, SATCOM, globally, to get 5G to all these remote areas. That's the business that picked up, and that's where the growth was on the solid-state side. Chip Rui: Okay. That's what I was asking. Thanks for the clarification. And that sounds like that sector, the defense side, it's pretty hot across the board. Do you see kind of accelerating participation into that end market? Gregory Peloquin: Yeah. And it's, you know, because of this global infrastructure that Edward put in place decades ago, it really is a benefit to a company like us. We're seeing a lot of the drone manufacturers are in Europe, and we have a great team there. But, you know, it's military too, but what we're seeing also, you know, urban development, homeland security, disaster management, forest fires. I mean, drone technology is expanding very, very fast, and we have some of the, if not the best, technology partners like 3R Wave that have great products for that. So we're participating in it, and that's where the growth is on the solid-state RF and microwave side. Chip Rui: Okay. Thank you. Operator: And I would now like to turn the conference back to Edward Richardson for closing remarks. Edward Richardson: Well, we want to thank you very much for following our progress and growth. We're really pleased with the performance of the company, and if you have further questions, please feel free to call us at any time. Thank you very much. Operator: And this concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good day, ladies and gentlemen. And welcome to the Levi Strauss & Co. Third Quarter Fiscal 2025 Earnings Conference Call for the period ending August 31, 2025. All parties will be in a listen-only mode until the question and answer session, at which time instructions will follow. This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. This conference call is being broadcast over the Internet and a replay of the webcast will be accessible for one quarter on the company's website, levistrauss.com. I would now like to turn the call over to Aida Orphan, Vice President of Investor Relations at Levi Strauss & Co. Thank you for joining us on the call today to discuss the results. Aida Orphan: For our 2025. Joining me on today's call are Michelle Gass, our President and CEO, and Harmit Singh, our Chief Financial and Growth Officer. We'd like to remind you that we will be making forward-looking statements based on current expectations, and those statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in our reports filed with the SEC. We assume no obligation to update any of these forward-looking statements. Additionally, during this call, we will discuss certain non-GAAP financial measures that are not intended to be a substitute for our GAAP results. Definitions of these measures and reconciliations to their most comparable GAAP measure are included in our earnings release available on the IR section of our website, investors.levistrauss.com. Note that Michelle and Harmit will be referencing organic net revenues or constant currency numbers unless otherwise noted, and the information provided is based on continuing operations. Finally, this call is being webcast on our IR web and a replay of this call will be available on the website shortly. Today's call is scheduled for one hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. And now I'd like to turn the call over to Michelle. Michelle Gass: Thank you, and welcome, everyone. What I'll share today builds on the themes I've been emphasizing this year as we pivot to become a DTC-first head-to-toe denim lifestyle retailer. The consistent execution of our strategic priorities is driving a meaningful inflection in our financial performance. And today, I'm pleased to share that we delivered another very strong quarter with upside across the P&L, giving us the confidence to raise our full-year revenue and EPS guidance. In Q3, we delivered our fourth consecutive quarter of high single-digit organic revenue growth. Strength was once again broad-based across our business, including DTC and wholesale, international and domestic, women's and men's, and tops and bottoms. Our growth was led by continued strong sales and profitability in our direct-to-consumer channel, up 9%, fueled by strong comp growth as well as solid performance in global wholesale. Our largest market, the US, grew 3%, and our international business was up 9%, led by an acceleration in Asia. And we continue to see robust performance in our core as well as outsized growth in our key focus areas like women's and tops. The results we've delivered this quarter against an increasingly complex backdrop are yet another proof point that our strategies are working. Looking ahead, there are several factors that give me even more conviction that our momentum will continue. First, our narrowed focus enables us to maximize the full potential of the Levi's brand. We will continue to build momentum through impactful marketing campaigns, strategic partnerships, and innovative collaborations, ensuring that the brand remains firmly at the center of culture. Second, the total addressable market for denim is large and growing, as consumer preferences continue to shift towards casualization. As the definitive market leader, we are well-positioned to take advantage and drive growth. Third, our denim leadership puts us in a prime position to define and own head-to-toe denim lifestyle, further expanding our addressable market. As we drive this momentum forward, we'll continue to deliver an innovative and robust product pipeline across genders and categories. Fourth, our DTC-first strategy is bringing us closer to the consumer and generating consistent and significant growth, while we have also stabilized and grown our wholesale business. Both channels are seeing strong improvements in profitability. Fifth, while international already comprises nearly 60% of our total business, there are still untapped opportunities for us to grow, particularly in Asia where our business has momentum, and the opportunity for continued expansion is considerable. Underpinning all of this is our culture of performance, with a sharpened focus on operating with rigor and executing with excellence, from go-to-market efficiencies and more productive store operations to end-to-end supply chain improvement. I will now turn to highlights from the third quarter in the context of our strategies. All numbers that Harmit and I will reference are on an organic, continuing operations basis. Let's start with our first strategy, being brand-led. Levi's had another strong quarter of growth. In the quarter, we launched the final chapter of the reimagined campaign with Beyoncé. This campaign delivered as intended, fueling momentum across the business, specifically driving growth in our Levi's women's business up 12% year to date. In August, we debuted our new global campaign starring Shabu, underscoring our relevancy and authenticity with men. The campaign showcases our most iconic products, the 501, the trucker jacket, and the western shirt. And we're pleased with how this campaign is being received by our fans. In addition, we also cultivated enthusiasm for the brand through a broad range of collaborations, including a joint collection with Nike, fusing Levi's heritage denim craftsmanship with Nike's athletic sneaker culture. Our collaborations generate brand heat and introduce Levi's to new consumers. And just this week, we launched a special collection with Toy Story, in celebration of their thirtieth anniversary. Turning to product, our evolution to a head-to-toe denim lifestyle retailer continues to gain momentum, all while strengthening our position as the global authority in denim. Our Levi's women's business continues to deliver outsized growth, up 9% in Q3, while our leading Levi's men's business grew a solid 5%. Driven by our diversified fit, we saw strong growth in our bottoms business, which was up 6%. We're continuing to inject newness into the looser fit trend, with the new baggy utility silhouettes for him, and the launch of our baggy dad barrel for her. And we're driving a revival in low rise with our low and super low collection of fits, which are delivering strong growth. As we evolve into denim lifestyle, we're making meaningful progress on our seasonally relevant assortments as consumers look for more buy now, wear now products. Following last year's reset, tops continue to drive notable growth, up 9% with strength across women's and men's. For the quarter, our shorts business delivered strong growth across genders. We continue to infuse newness into the assortment through fit and fabric innovation, from our linen blend styles to the launch of the 501 curve. And with respect to our premiumization efforts, we began to roll out our elevated Blue Tab collection to Europe in early September, following a successful launch in Asia and the US earlier this year. Blue Tab merges Levi's iconic aesthetic with a refined quality and thoughtful Japanese craftsmanship. Looking to the holiday season, we are well-positioned with the right merchandise assortment and the right marketing campaign. We're expanding the range of occasions and amplifying the many ways that fans can embrace our denim lifestyle assortment through elevated fabric, textures, and embellishments. We're excited to showcase Levi's through a fresh lens that reflects the season's full spectrum of style. Now shifting to our strategy to be DTC-first. Global direct-to-consumer sales were up 9%, driven by strong performance in both our stores and online. We generated high single-digit comp growth fueled by higher UPT, AUR, and full-price selling as our expanded denim lifestyle assortment continues to resonate with our consumers around the world. And as we continue to grow our DTC channel, we remain focused on doing so profitably, with our productivity initiatives resulting in more than 400 basis points of margin expansion in the quarter. We're pleased with the strong results from our store optimization initiative, which have improved both the consumer experience and store productivity. We've enhanced our in-store lifestyle merchandising to make the environment more inspiring and shoppable, highlighting our broader assortment of head-to-toe looks. We've also been focused on improving our assortment planning and life cycle management, resulting in lower promotions and higher full-price selling. Additionally, we're in the process of rolling out a new global selling model for our store team. Which coupled with our enhanced labor scheduling system, is improving the consumer experience and delivering operational efficiencies. We had another quarter of very strong growth in e-commerce, up 16%, driven by an increase in traffic across all segments. We expect e-commerce to continue to be our fastest-growing channel on the path to comprising 15% of our total business, up from just 9% today. In our wholesale channel, net revenues were up 5%, reflecting growth across all segments. In the US, the Levi's brands were up 2% as we continue to invest in top doors and expand and elevate our assortment. Western Wear is core to who we are, and we're pleased to have recently expanded our product assortment with Boot Barn and gained new distribution at Cavender's. We also see opportunities to increase our penetration with premium and specialty accounts as we broaden and elevate our lifestyle assortment. Now turning to our third strategy, powering the portfolio. Our international business grew 9% in Q3. Asia accelerated in the quarter, driven by double-digit growth in key markets like India, Japan, Korea, and Turkey. I recently visited several stores across India, Korea, and Japan, and it is clear that consumers are responding to the work we've done to ensure the best expression of our denim lifestyle assortment. Japan, in particular, is a market with a very high bar for denim. We've been investing in Japan over the past decade, transitioning the market from primarily a wholesale business to now close to 75% DTC. Walking our stores in Nagoya, Shinjuku, and Harajuku, some of our highest volume stores in the world, you'll see the fullest and most premium expression of the Levi's brand. Up almost 50% since 2019, and continuing to gain momentum, we remain optimistic about future opportunities in Japan, and we will replicate our successful playbook in this market across the globe. Beyond Yoga was up 2%, and DTC was up 23%, driven by comps, new doors, and e-commerce. Growth in DTC was offset by a decline in wholesale as the team focuses on higher quality sales in the channel. Looking to Q4, we have additional stores opening in Boston, Houston, and two more stores in Northern California, bringing our total store count to 14. We expect Beyond Yoga to end the year up low teens versus prior year. In closing, we delivered another standout quarter with sales and earnings growth that positions us to increase our outlook for the year. We are fully prepared and well-positioned for holiday, as we enter the season with momentum despite an increasingly uncertain external backdrop. We have several tailwinds that give me confidence in not only delivering a strong finish to 2025 but also another strong year in 2026. Finally, I'd like to thank our incredible, talented, and passionate team for driving our transformation into the world denim lifestyle leader and delivering outstanding service to our fans every day. And with that, I will turn it over to Harmit to provide a financial overview of the quarter and our expectations for the remainder of the year. Harmit Singh: Thanks, Michelle. In quarter three, we delivered strong financial results, exceeding expectations across sales, gross margin, EBIT margin, and EPS. We remain focused on establishing a strong track record of consistent execution and results. The strategic transformation across our organization has enabled us to evolve into a higher-performing company with stronger revenue growth, expanded margin, improved cash flows, and higher returns on invested capital. Given the outperformance in quarter three and continued strong trend, we are also raising our revenue and EPS outlook for the year, despite incorporating higher tariffs than assumed in our previous guidance. Now turning to our quarter three results. Net revenue grew 7%, reflecting the power of our diversified business model. International markets drove approximately 75% of our growth, and the US contributed 25%. This international strength reflects our continued expansion and brand resonance in key markets globally, while our US business maintains solid underlying momentum. By channel, growth was evenly balanced between wholesale and direct-to-consumer, each growing and contributing roughly 50% of our revenue increase. This balanced performance underscores the success of our DTC-first strategy while maintaining strong partnerships in wholesale. By gender, women's contributed approximately 40% of our growth, with men's accounting for the balance. We continue to execute against our strategy to capture greater share in our underpenetrated higher gross margin women's segment, while a large men's business continues to generate solid growth as we fuel momentum in the category. Turning to gross margin performance. We delivered another strong quarter with a quarter three record gross margin of 61.7% of net revenue, expanding 110 basis points versus the prior year, more than offsetting 80 basis points of tariff headwind. Three key drivers fuel the continued expansion. First, our structural business mix continues to evolve favorably with the accelerating shift towards higher margin DTC, international, and women's category. Second, targeted pricing actions we have taken across our assortment, as well as higher full-price selling and reduced promotional levels in our direct-to-consumer channel as consumers continue to gravitate towards newness. Third, approximately 50 basis points of the upside in gross margin was driven by foreign exchange. While we are judicially approaching pricing opportunities across our business, in quarter three, we saw a significant increase in units, demonstrating healthy underlying demand for our brand. I'm pleased to report that our adjusted SG&A performance came in line with our expectation, representing less than 50% of total revenue, over a 150 basis points improvement from our first half run rate. The primary factors contributing to the increase in SG&A dollars include higher performance-based compensation, given the momentum in our business, costs associated with our store opening, as well as expenses associated with the transformation of our distribution network. The combination of robust gross margin and our disciplined approach to SG&A management delivered an adjusted EBIT margin of 11.8% and generated 34¢ of adjusted diluted EPS, both ahead of our expectation. Our focus on profitability as we accelerate growth has enabled us to grow both adjusted EBIT and adjusted diluted EPS up approximately 25% to prior on a year-to-date basis. Now let's review the key highlights by segment. The Americas net revenues were up 7%. Our US business was up 3%, delivering a fifth consecutive quarter of strong growth. DTC grew 6% and now represents over 40% of the US market. US wholesale net revenues were also up despite the challenges posed by the transition of our US distribution centers, driven by broad-based strength across the region. LatAm has seen several consecutive quarters of double-digit growth, including Q3, which was up 23%. America's operating margin expanded 50 basis points driven by gross margin and revenue leverage. Europe's net revenues were up 3%. All key markets delivered growth led by very strong performance in the UK. While weather impacted footfall in June and July, we exited the quarter with strong performance in August, and we continue to expect mid-single-digit growth in Europe for the year. Operating margin grew 80 basis points versus the prior year from strong gross margin expansion. Asia's net revenues accelerated to up 12%. The segment saw double-digit growth in both DTC and wholesale. Operating margin increased 50 basis points to prior year, Asia is up 8% on a year-to-date basis, and operating margin for the year is up 40 basis points to prior year. Turning to our shareholder returns program and the balance sheet. In the quarter, we returned $151 million to shareholders, a 118% increase versus last year. We've also closed the first phase of the docket sale. And with the proceeds, we have implemented a $120 million accelerated share repurchase program and retired approximately 5 million shares, with the remaining shares to be settled by 2026. We have returned $283 million to shareholders year to date, which is substantially higher than our annual cash payout target. And for Q4, we declared a dividend of 14¢ per share, which is up 8% to prior year. We ended the quarter with reported inventory dollars up 12%, driven by purposeful investment ahead of the holiday and higher product cost than a year ago due to tariffs. In unit terms, inventory was up 8% versus last year. As of today, we have 70% of the product in the US needed for holiday. Before turning to guidance, let me briefly share our updated assumptions around tariffs. Our updated guidance reflects the latest tariff rate, which includes 30% for China, and an increase to approximately 20% for the rest of the world, compared to 50 basis points previously. However, given the Q3 results, we continue to expect only a 20 basis points impact to gross margin. This translates to a 2 to 3¢ impact to adjusted diluted EPS. Unchanged from last quarter's guidance. As respects to quarter four, this equates to an 80 basis point headwind to gross margin and a 3¢ impact to adjusted diluted EPS. Looking to 2026, we are continuing to take actions to offset the impact of tariffs. As a reminder, these mitigation initiatives include promotion optimization, targeted pricing action, vendor negotiation, and further supply chain diversification. Now I will turn to our outlook for Q4 and then cover the full year. While we are taking a prudent approach to our outlook, given the complex macro environment, and the absence of the fifty-third week, which contributed four points to the top line in 2024, we remain confident in the underlying strength and momentum of our business. In quarter four, we expect organic net revenue growth to be up approximately 1%. And on a two-year stack, this equates to 9% organic growth. Reported net revenues are expected to be down approximately 3% because of noncomparable items, including the fifty-third week, denizen, and footwear, which are no longer included in the revenue base. Gross margin is expected to contract approximately 100 basis points in quarter four, driven by tariffs as well as the impact of the fifty-third week. And we expect adjusted EBIT margin to be in the range of 12.4% to 12.6%. We expect the tax rate to be in the low twenties, higher than a year ago. And adjusted diluted EPS to be in the range of 36¢ to 38¢. For the full year, we are taking our revenues up by approximately a percentage point and EPS by 2¢. We now expect reported net revenue growth of approximately 3% for the year. And we have increased our expectations for organic net revenues to approximately 6% up from prior year. We now expect gross margin to expand 100 basis points for the full year, up from the 80 basis points stated in our prior guidance, including the incremental drag from tariffs. We continue to expect adjusted SG&A as a percentage of revenue and adjusted EBIT margin to be in the range of 11.4% to 11.6%. by 2¢ to a dollar 27 to a dollar 32 for the full year. In closing, our four consecutive quarters of high single-digit growth and raised revenue expectations underscore the strength and resilience of our business. As we accelerate profitable growth, we are transforming into a best-in-class DTC-first denim lifestyle retailer, unlocking new opportunities and delivering greater value for our shareholders. Our disciplined execution and agility have enabled us to deliver 14 consecutive quarters of DTC comp sales, expand margin, drive cash flow, and return significant capital to our shareholders, including the recent ASR. I will now open up the line. Operator: Due to time constraints, the company requests you ask only one question. If you have an additional question, please queue up again. If at any point your question has been answered, you may remove yourself from the queue by pressing star 11 again. Our first question comes from the line of Laurent Vasilescu of BNP Paribas. Please go ahead, Laurent. Laurent Vasilescu: Oh, good afternoon, Michelle and Harmit. Thank you very much for taking my question. I wanted to ask about your European momentum. We had a major US brand caution about the European marketplace the other week, again, around increased promotionality. Curious to hear what you're seeing in this important marketplace. How do you how are your European pre-books look for next spring? And then, Harmit, just on the Q4 guide, the gross margin down 100 basis points. Can you maybe just unpack that a little bit more, what the fifty-third week impact on the GM? And what are the positive offsets? Thank you very much. Harmit Singh: Sure. Laurent, thanks for calling in. So Europe was up 3% for the quarter. You heard in my prepared remarks about the weather impact. But as soon as the weather cooled, we saw Europe accelerate to double-digit growth, especially as we exited the quarter. There was some shifting in July and August, but September remained strong. We've seen growth in the quarter across both channels. DTC was up four, Wholesale was up 2%. Some key markets really performed. UK was up, you know, high mid-teen. And high single-digit growth in Germany and Italy. If you think across men and women, women continues to be strong in Europe. And the consumer is gravitating towards a broader assortment, looser fit, 501, tops, which is our fastest-growing category. So our view is unlike the other major brands, that you mentioned, we expect to end the year up mid-single-digit, and this is accelerated substantially relative to a year ago. September is off to a good start. Our pre-book for spring is up mid-single-digit. Having said all that, our operating margins were also up 80 basis points. So I think that is working its way through it. On your question, I can broadly talk Q4 guidance, and then I'll talk gross margins in a minute. But on Q4, we expect the momentum of our business to continue. We do have an incremental headwind on tariffs. It's impacting gross margin first unmitigated by 130 basis points and mitigated by about 80 basis points. And EPS by three ten. Had it not been for tariffs, our gross margins in quarter four would have been up. I mean, it's it's it's pretty fractured. And then we're just taking a conservative approach to the quarter given the complex macros, you know, the status and maybe potential impact on demand. We are not seeing it as we close out September. And the continued transformation of our distribution center. The way to think about it, folks, is our we're raising our full-year top-line guidance to 6% organic. And you think of the last three years, 23 organic growth was flat, 24 was about over close to 3%. And this year, 6%. So as I said in the prepared remarks, the solidly on track to be a mid-single-digit growth company. And EBIT margins should end the year in the mid-eleven percent nine in 2023. They're close to nine. So we've steadily improved that. Higher gross margin efforts on SG&A and flow through onto EBIT margin. Laurent Vasilescu: That's great. Well, yeah, best of luck with the holiday season. Harmit Singh: Thanks. Thank you. Thank you. Operator: Our next question comes from the line of Matthew Boss of JPMorgan. Your line is open, Matthew. Matthew Boss: Great. Thanks. So, Michelle, could you elaborate on the momentum that you cited entering the season? Maybe what are you seeing in the denim category or from the consumer broadly? And then Harmit, so have you seen any material change in demand trends in September or October globally? Or is it just prudent planning for the remainder of the quarter that's driving the moderation that's embedded in your fourth quarter organically? Revenue guidance? Harmit Singh: I'll answer your second first because I'm sure it's top of mind for folks. No. It's just being the prudent guidance is just being you know, conservatism on the max. We're not seeing any underlying change in trends as that reflected. I think we're really well set for holidays. And Michelle can give you a perspective on the category and the consumer. Michelle Gass: Sure. So, Matt, thanks for the question. First, let me let me talk about the category. We're really excited. I mean, the denim category is accelerating. Both here in the US and globally. And as the definitive market leader, we are very well positioned to take advantage of that. And of course, as the leader, we help fuel the growth, and we're seeing that happen. Just to remind everyone, we are the market share leader across men's and women's globally, and we continue to maintain our number one share of position in the US as well for both men and women. I'd say most recently, we're really thrilled to see that we're gaining share in youth premium, and with our signature business. So when we think about our business from a segmentation standpoint, doing really well with Red Tab and for those consumers who are more value-oriented, we saw our signature business up double digits this quarter. What's driving that for our business in terms of market share gains and again, as the leader, helping to fuel the momentum on the category overall, I mean, it starts with product. We're bringing a lot of newness and innovation into our business through fits, fabrics, silhouettes. A lot of that's still happening with boots and baggy. But we're really seeing strength across the board. And importantly, not only is it continuing to be the leader in denim bottoms, but we're really expanding our addressable market as we think about going from denim bottoms to head-to-toe denim lifestyle. And, you know, we're seeing that momentum in categories like tops. So when take a step back, I mean, we've been around many decades. We really built this business on denim, but we're building our future on denim lifestyle. So feel good about the category, our position. Now more broadly, to your question on the consumer, I think kind of building on Harmit's comments in mine, our consumer continues to be resilient, and we're seeing that around the globe. I mean, it starts with the business, our fourth consecutive quarter of high single-digit organic growth globally. And I think it's important to make note that this for the quarter, this business was driven largely through unit growth. Right? So it's unit growth that's really fueling that momentum. And we saw broad-based strength across geographies, across categories, that's both men's and women's tops and bottoms. And both DTC and wholesale. So consumers responding, our strategies are working. I mentioned the denim category accelerating. I mentioned really kind of being relevant across these various consumer cohorts. And we get that we're operating in a complex environment here in the US. We're staying close to it. But when you think out about the Levi's brand, in times of uncertainty, consumers turn to brands that they know and trust. And Levi's certainly one of those brands. So we're optimistic as we enter the fourth quarter. We expect the health and the momentum of our business to continue. We've been planning for holiday all year. And I would say we have our most robust lifestyle assortment we've ever brought to the consumer with lots of seasonally relevant product across really all categories. And again, we continue to make progress on this head-to-toe, so you'll see lots of the fashion bottoms as well as tops and outerwear, third pieces. And I think products that really go sort of from day to night at work to evening events, especially during that holiday season, but there's a lot of newness and that will also be fueled by tremendous marketing. We've had a great year of marketing with Beyoncé. We got Shaboozy right now, and you can expect us to continue to connect in a relevant way during the holiday season. Matthew Boss: That's great color. Best of luck. Michelle Gass: Thanks, Matt. Operator: Thank you. Our next question comes from the line of Ike Boruchow of Wells Fargo. Please go ahead, Ike. Ike Boruchow: Hey. Thanks. Let me add my congratulations. Maybe, Harmit, just to focus on margins specifically, can you comment on two things? One, within the SG&A cost line, you a little bit about it earlier, but the distribution line is around is running around 7% of sales right now. I know can you remind us the moving pieces on the warehousing and DCs? You have going on? A year ago, it was around 6%. I think historically, it's been 5%. How quickly does that margin start to benefit you guys as you go into next year? And then to that point, are you comfortable, beginning to lay out a timeline on the return to 15% margin you guys kind of put back on the table several quarters ago as the momentum picked up. Thank you. Harmit Singh: Cool. So let me Ike, I'll start with gross margin and give you some color about what happened in Q3. So people and yourself understand. Then I'll go quickly into SG&A and distribution. Think of gross margin in quarter three, up 110 basis points, higher than what we had expected when we talked about this a quarter ago. Three basic factors. One is the structural mix, which is higher women's DTC and international that we think continues for a long, long time. The second is we have taken moderate pricing, and we're driving higher full-price sales. And the third is the FX benefit, which we had called at about 50 basis points. This more than offset about 80 basis points of headwind from the tariffs. And so that's why, you know, a, we were ahead of last year and the over-delivery was affected. Difficult to predict. We haven't predicted FX for quarter four as an example. And full price, you know, it's it's something we're focused on. It's difficult to forecast that. So those are that's gross margin. Then you think about SG&A. Our SG&A, you know, for the quarter, was below 50%. If you think the first half of the year, it was higher than 50% of revenue. Higher than you know? So the run rate was lower than the first half of the year, which was higher. The way we think of SG&A, I mean, there are two ways to look at it. A, our gross profit dollars are growing at a faster pace than SG&A. So if you think of year to date, our gross profit dollars are up $220 million, and SG&A is up $126 million. So clearly driving high flow through. If you look at it just as a revenue to SG&A, SG&A is up 6%, and revenue is up 8%, so clear leverage. As we think we end the year, you know, if 6% is the revenue guidance organically, SG&A is probably in the mid-single digits of this year leverage. On that. And this quarter, our you know, SG&A, being up relative to a year ago, there's performance comp which is a big piece. We're having a good year. Distribution cost, which I'll come to in a minute, so I'll answer your question. You know, we opened on a gross basis 14 new stores. I mean, you know, and that's really, you know, the trifecta factor in DTC. Is driving the result. Especially as we market expenses marketing expenses moved a little bit between Q4 and Q3. Launched the Shibuzi campaign and some foreign exchange headwind. Your question, Ike, about distribution, Overall, as you know, we are remapping our distribution network to more of a hybrid network built for omnichannel. From a manual network that is built for wholesale. So there are clear benefits that we will see over time. In the short term and transformations obviously have a short-term impact, Over the short term, you know, we've in the US, we've been running parallel DCs as we ramp up the new DC that's run by a third party. If you think of distribution cost about 7%, and they've increased from from a year ago, I would say about half of that is the reclass and distribution expenses from selling to distribution for e-commerce. And the other half is equally split between volume, which is driving, you know, more distributed expenses and the cost of parallel running. Our expectation is that parallel running of DC because good news is there's demand is pretty robust. So as we make this transformation, we have to do it in a way that we not only fulfill the demand for customers and consumers, but also ramp up and close this DC. So our view is and it's, you know, it's art and science. So we're working through that. But I think by the end of quarter one 2026, is when we probably ramp down parallel running of the DC. So early 2026. And when we report results, for quarter four. In early 2026, we'll give you a perspective on distributed expenses. But over time, long term, we should reduce cost per unit and the cost of running parallel DC. Does that help, Ike, answer your question? Ike Boruchow: Yes. And I'm just curious timeline on the 15%. If there's anything you can share. Harmit Singh: Yeah. I think, you know, you're you're asking for a quick review on to Investor Day or or preview on that. But I think the way to think about that, I is you know, our our EBIT margin should end the year about in the mid-eleventh. Right? And, you know, and they've grown nicely over the last couple of years. I think the basic building blocks are the following. The gross margin expansion continues. I mean, our view is that the structural piece continues, say and, you know, if you take probably a five-year period, you can say that 200 basis point you know, that should help EBIT. The SG&A leverage if you have you know, as we get to mid-single-digit growth company, I think the SG&A leverage is about 200 basis points. We may amp up advertising a little bit, you know, given the wonderful programs, our chief marketing officer, and these are are invoking. I think that helped drive the brand, make the brand stronger. And importantly, drive revenue. I think that's probably a 50 odd basis points of headwind, and that will come with revenue. So I think that's your building blocks. So you think of gross margin expansion SG&A leverage, and a little bit of reinvestment in advertising gets you to 15%. Ike Boruchow: Got it. Thank you. Operator: Thank you. Our next question comes from the line of Paul Kearney of Barclays. Paul Kearney: Thanks for taking my question. Within the wholesale business growth, can you speak to how much was driven by maybe new points of distribution or expanded assortment versus like for like on stronger sell-throughs? And how would you categorize inventory levels within the retail channel, setting in the holidays? Thank you. Michelle Gass: Sure. Paul, thanks for the question. So as we said in our earlier remarks, we're quite pleased with the continued growth that we're seeing in the channel. This is now four consecutive quarters with this quarter at 5%. We do expect the year to be slightly positive in the wholesale channel for the entire year, which was actually up from our prior expectation, which we had said previously flat to slightly up. We saw positive growth in this channel across all segments. We saw particular strength in US Wholesale. We saw it in Asia, Latin America, and in the signature business, which is more for that value consumer. The growth is largely being driven with existing accounts as their consumers are responding to our fashion fits, women's especially is outperforming, and lifestyle. So while we, yes, we are bringing in some new accounts like Western Wear, got new distribution, and Cavender's were expanding in Boot Barn. The growth is largely coming from our execution with our existing partners. Paul Kearney: Great. Thank you. Best of luck. Michelle Gass: Yeah. Thank you. Harmit Singh: Thank you. Operator: Our next question comes from the line of Oliver Chen of TD Securities. Please go ahead, Oliver. Oliver Chen: Thanks. Hi, Michelle. Hi, Harmit. Regarding Americas, the low single-digit growth, is your expectation that that's continues in Q4? And on the wholesale side, it's been a little more challenging channel, but do you think it'll remain sustainably positive, or will that be potentially volatile? Second, there's a lot of great initiatives and partnerships with part of the thesis is also, like, amplify to simplify with inventory management. And SKU rationalization. So how do we reconcile those two in terms of where where you are in that journey? Michelle Gass: Sure. Thanks, Oliver, for the question. You know, as it as it relates to The Americas, or I can speak to the biggest part of the business, which is The US, we're really proud about how the team has been executing in that market. This is our fifth consecutive quarter of growth. And because you all know, it's our largest, most mature, most competitive market. And both channels, DTC was up 6%, wholesale up 2%, and we continue to see long-term growth opportunities in both those channels. So I think about the DTC business here in the US, we have the potential to even double our store count and further accelerate e-commerce on the back of the momentum we have. And on wholesale, which I was just talking about more broadly, global wholesale, but wholesale in the US remains strong. And our key partners are responding and their consumers are responding to our expanded product pipeline across men's, especially women's, where we continue to be under-indexed, in particular in the wholesale channel, and then that head-to-toe lifestyle. As we look forward, I'll just say that we as we look Q4 in the US and in The Americas, we expect the business to remain healthy against executing the same strategies we've been talking about. Leaning into DTC, you know, driving units per transaction, driving conversion, driving greater full-price sell-through. As I was mentioning earlier, though, a lot of our growth is coming off of units. So while we are seeing that enhanced AUR, we're also driving a lot of volume growth. And but I will say as it relates to US wholesale, while we expect continued positive growth in DTC, for the fourth quarter, we do expect in US wholesale to be down given that we're lapping a very strong quarter last year, and we had that fifty-third week. So as we lap last last quarter's fourth quarter, strong results, the fifty-third week, and just frankly, be continuing to be prudent as we think about this channel given the complex macro environment we're operating in in the US. So Oliver, does that fully answer? And then you had part two of the question. Let me answer that, and I'll come back and make sure I've fully answered. But then part two, I'm glad you asked the question about SKU rationalization because we continue to make really good progress there. So while we talk about expanded assortment, lifestyle, we are also at the same time reducing SKUs. And we've decreased our SKUs by about 15% compared to last year, and this has been an ongoing journey over the last eighteen months or so. So we're continuing to raise the bar there. And what's really enabling us to do that is through a tighter globally common or globally directed assortment. So just for perspective, if we think about the season we're in right now, the 2025, 40% of our SKUs are globally common. That's up from a couple years ago. Where it was under 10%. So that allows us to make sure, again, that we can get the breadth and the lifestyle where we're getting significantly higher productivity per SKU. And and that metric just for fun is is up 20% on a on a SKU productivity. So, it really speaks to how the team is leaning in with a much stronger merchant mentality and operating like a retailer. That's helping us drive those tailwinds that we're seeing in the business overall and especially in DTC. Oliver Chen: Yeah. Thanks, Michelle. That's really helpful. This is quick. Think, Harmit, are there any gross margin comparisons we should be aware of as we anniversary, them this year and and think about next year? Harmit Singh: So last year was fifty-third week. This year, I think the only piece will be, you know, we probably see tariff impact in the in the second half of this year. Next year, and the first half. The way we think about gross margin and I think you're asking for high-level framework. For '26. And I and it's a good question. Let me just talk about it because as we build up plans for next year, the tailwinds that we that we think probably help gross margin accretion. One is we're looking at pricing opportunities, again, targeted not only in the US but globally given that 60% of the business is global. Is outside the US. Structured improvements of DTC international women's continues. We continue to focus on full-price selling, and it's not anywhere close to 100%. So there's clearly opportunity there. The other piece is as we think about product cost, you know, Michelle talked about the simplification of SKUs. We're looking at a shorter go-to-market calendar. And cotton commodity is is is in a better spot today than it was a year ago. We've broadly locked in product costing for the first half. We're the process. By the time we report and guide Q26, we'll probably have locked in the second half. So stay tuned. And the headwind is largely tariffs. And so you've seen some impact in the second half of this year. You offset the first the quarter three working you know, to try and do what we can for quarter four, but I've guided you the appropriate numbers. And so those are the tailwinds and the headwinds that you think about. Gross margin. Michelle Gass: Thank you very much. Paul Kearney: Thank you. Operator: Our next question comes from the line of Dana Telsey of Telsey Advisory Group. Please go ahead, Dana. Dana Telsey: Hi. Good afternoon, everyone. As you think about the lifestyle offering, Michelle, with tops and with bottoms, and jackets outfits, what did you see in the growth rates of the different categories? And given the marketing that you've been doing in the collaborations, how do you think of the AUR opportunities going forward? Thank you. Michelle Gass: Great. Thanks, Dana, for the question. You know, we're we're really pleased with the progress and the acceleration in our TOP business overall. And I like to say, while we're pleased we're not satisfied, and, there's a ton of upside because top represents just currently 22% of our business. But as we shared earlier, our tops grew 9% overall for the quarter, 10% year to date, and we're really seeing the strength across channels and genders. So if you double click underneath that, men's up 10%, and we're really seeing popularity in things like western tops, button downs, polos, wovens. You know, as we think about our top strategy and denim lifestyle, we do start closer to closer to our core. So, you know, really injecting light into, like, the western shirt, which is being advertised in our campaign right now with 20%. Similarly, women's tops up 8%, seeing it across both channels. Denim tops, they'll start there, up 12%. Wovens, including things like blouses, fashion, button downs, up 37%. And then the category we're really expanding in to expand her closet, dresses and jumpsuits up nearly 20%. I think importantly, as we drive all this newness and excitement, in head-to-toe dressing, we're seeing both growth in newness and in our core, which is really important, to continue to support both. Kind of back to the opportunity, if you think about our business today, again, while we're making progress, there's so much upside. Our ratio of bottoms to top is three to one. Now that's up significantly from years ago where from years ago where it was seven to one or five to one. But our goal is to get to one to one, and, I'm very confident we will. And as we drive TOPS, it's a UPT driver. It can be a traffic driver, and it really kind of completes this mission we're on to have Levi's stand for head-to-toe denim lifestyle. So hopefully that addresses your question, Dana. Dana Telsey: Yes. Thank you. Michelle Gass: Great. Thanks. Operator: Thank you. Our next question comes from the line of Aditya Kakani of UBS. Your line is open, Aditya. Jay Sole: Hi. I think this is Jay Sole, and hopefully, you can hear me. But my question is that sounds like you took some pricing in Q3. Harmit, I think you said one of the gross margin drivers Q3 was pricing. Was that in response to tariff in Q4? Sorry, before that, the consumer, it sounds like responded well to those price increases. Did you see any resistance in Q4? Do you plan on accelerating the price increases? And therefore, do you expect the consumer to react differently if you increase prices in the fourth quarter? Thank you. Harmit Singh: So, Jay, we did. We took, you know, a little bit of pricing in Q3. It was not an MSRP because you know, the goods are already been ticketed. This was in the sell-in to our customers. In the US. I'm talking about. And, you know, we do it thoughtfully. We have really great momentum as you mentioned, driven by demand. But to answer your question, no impact on demand. We're not seeing any impact on demand either from the customer. Or the consumer. The other piece that's really working for us is our new products. Because and so as we think longer term, pricing through innovation, is is is one is one lever. We are also taking a hard look at our promotion, you know, and minimizing this as we focus on higher full-price selling. Will also you know, be something that probably continues into into '26. So we're we're thinking about pricing, it's more important to think about what's the price value equation for our products relative you know, to the marketplace, and that's an important consideration set. The other piece that's important, Jay, is the segmentation of a product. So if you think of the value consumer in the US, we offer signature product. It's a great price point. It's offered through Walmart. And it had a great quarter. It's up double digits. We've just also introduced Blue Tab, which is a premium product. It's it's premium position. It's one and a half times to two times the price of Red Tab product. And offers real value even when you benchmark that. It's a limited offer. We hope to scale it. It's doing really well. So that's how how one is thinking through it. And there's a little bit of pricing in other parts of the world. But it's not, you know, something that we've done globally. So when we talk about '26 and guide '26, we'll give you a perspective on the pricing actions we have taken or our teams have taken around the world. Jay Sole: Got it. I mean, thank you so much. Harmit Singh: Thanks, Jay. Operator: Thank you. Our next question comes from the line of Paul Lejuez of Citi. Please go ahead, Paul. Tracy Kogan: Thank you. This is Tracy Kogan filling in for Paul. I just had a follow-up on the last question. I think you said, from what I understood, that you only raised prices on sell-ins to your partners. So have you actually had time to see the consumer response to these higher prices, or were you only saying that your partners haven't had any hesitancy to buy at these higher prices? And then just more broadly, I was hoping you could comment on the US wholesale business, how sell-ins are comparing to sell-outs. Thank you. Harmit Singh: Generally, Tracy, good question. I think it's a combination of both, you know, because, you know, the pricing initiatives have been now there through the quarter. You know? A, the customers are not we don't see any demand contraction you know, given the marginal pricing that has been taken or consumer reaction. The consumer generally resilient, you know, so far. And and that's how we're approaching the pricing plus the full-price selling has been there for a while. And given that the consume that the product is very relevant, and hitting the mark. You know, we're not seeing any consumer pullback. I think that was your first question. What was the second one, Tracy, again? Tracy Kogan: I was hoping you could just comment more broadly on how the sell-in to your wholesale partners are comparing to the sell-outs. Are they being more cautious than maybe the end consumer might indicate or or something like that? Harmit Singh: No. The the set truths have been very consistent with the sell-in. And and that's why you know, we are, you know, optimistic about ending the year strongly and then maintaining the momentum as we begin '26. Tracy Kogan: Gotcha. Thanks very much. Harmit Singh: Thank you, Tracy. Operator: Thank you. At this time, I'd like to turn the floor back over to Michelle Gass for any closing remarks. Madam? Michelle Gass: Yes. Thank you, everyone, for joining the call, and we will look forward to talking to you at the end of Q4. Operator: Thank you. This concludes today's conference call. Please disconnect your lines at this time.