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Operator: Thank you. Greetings. Welcome to the Radiant Logistics Inc. financial discussion for Second Fiscal Quarter ended December 31, 2025. This afternoon, Bohn Crain, Radiant Logistics Founder and CEO; and Radiant's Chief Financial Officer, Todd Macomber, will provide a general business update and discuss financial results for the company's second fiscal quarter ended December 31, 2025. Following their comments, we will open the call to questions. This conference is scheduled for 30 minutes. This conference call may include forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The company has based these forward-looking statements on its current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about the company that may cause the company's actual results or achievements to be materially different from the results or achievements expressed or implied by such forward-looking statements. While it is impossible to identify all the factors that may cause the company's actual results or achievements to differ materially from those set forth in our forward-looking statements, such factors include those that have in the past and may in the future be identified in the company's SEC filings and other public announcements, which are available on the Radiant website at www.radiantdelivers.com. In addition, past results are not necessarily an indication of future performance. Now I'd like to pass the call over to Radiant's Founder and CEO, Bohn Crain. Bohn Crain: Thank you, John. Good afternoon, everyone, and thank you for joining in on today's call. With the benefit of our diversified service offering, we delivered another quarter of solid financial results. generating $11.8 million in adjusted EBITDA for our second fiscal quarter ended December 31, 2025. We had a tough year-over-year comp as the year ago period included $64.8 million in revenues for air charters, bringing approximately 8 million units of IV fluid to the U.S. as a result of the national shortages resulting from Hurricane Milton. . When excluding $5.9 million in adjusted EBITDA from the Milton project in the year ago period, adjusted EBITDA increased by $5.7 million or 93.4% and compared to $6.1 million for the second fiscal quarter ended December 31 of 24. This growth breaks down as follows: Same-store growth of $3.6 million in our U.S. operations, same-store growth of $1.4 million in our Canadian operations and another $0.7 million in growth from our acquisitions. Without the lower margin of the Milton project in the current period, our adjusted gross profit margin returned to more normalized levels improving 340 basis points to 27.3% compared to 23.9% in the year ago period, demonstrating our ability to maintain solid margins even as we navigate a challenging freight market. Importantly, when excluding the impact of Project Milton in the comparable prior year period, our adjusted EBITDA margin expanded by 780 basis points to 18.6%, reflecting our continued focus on operational efficiency and disciplined cost management. And while still very early in our journey, we continue to be encouraged by the prospects of Navigate, our proprietary global trade management and collaboration platform. Navigate represents a meaningful differentiator for us in the marketplace and supports both domestic and international shipments by aggregating and organizing supply chain to deliver enhanced visibility, automation and faster decision-making. With streamlined deployment measured in weeks, not in months or years, our customers can quickly reduce costs optimize routing and improved buying and routing decisions. We believe this speed to market and ease of deployment represent a clear competitive advantage and then Navigate will serve as a meaningful catalyst for organic growth as we introduce the technology to our current and prospective customers in coming quarters. We are also pleased to announce the launch of Ray, our first AI-powered agent. With its initial focus on streamlining the administration of quote requests from our international agents around the world. Ray represents an important step in our ongoing digital transformation journey and complements our Navigate platform by further automating and accelerating key workflows. By leveraging artificial intelligence to handle routine administration task, we expect rate to improve response times for our global network of agents, enhance service quality for our customers and drive additional operational efficiencies across our organization. We look forward to expanding Ray's capabilities into additional AI-powered solutions in coming quarters. As previously discussed, we believe our durable business model, diverse service offering, disciplined approach to capital allocation and low leverage continues to serve us well. We remain virtually debt-free with no net debt as of 11.25 relative to our $200 million credit facility and on track with our continued efforts to deliver profitable growth through a combination of organic and acquisition initiatives, while thoughtfully releveraging our balance sheet through a combination of strategic operating partner conversions, synergistic tuck-in acquisitions and stock buybacks. With respect to our stock buyback program, we acquired another $2.7 million of our stock through the 3 months ended December 31, 2025. Looking ahead, we expect to stay the course with our balanced approach to capital allocation through a combination of agent station conversions synergistic tuck-in acquisitions and stock buybacks, while at the same time, looking to invest in incremental sales resources with attention given to our deployment of the Navigate technology. With that, I'll turn it over to Todd Macomber, our CFO, to walk us through our detailed financial results and then we'll open it up for Q&A. Todd Macomber: Thanks, Bohn, and good afternoon, everyone. Today, we will be discussing our financial results, including adjusted net income and adjusted EBITDA for the 3 and 6 months ended December 31, 2025. For the 3 months ended December 31, 2025, we reported net income attributable to Radian Logistics of $5.35 million on $232.1 million of revenues or $0.11 per basic and fully diluted share. For the 3 months ended December 31, 2024, we reported net income attributable to Radiant Logistics of $6,467 million on $264.5 million of revenues or $0.14 per basic and $0.13 per fully diluted share. This represents a decrease of approximately $1.1 million of net income over the comparable prior year period or 18%. For adjusted net income, we reported $8.76 million for the 3 months ended December 31, 2025, and compared to adjusted net income of $10,696 million for the 3 months ended December 31, 2024. This represents a decrease of approximately $2.6 million or approximately 24.5%. For adjusted EBITDA, we reported $11,774 million for the 3 months ended December 31 and 2025 compared to adjusted EBITDA of $12.16 million for the 3 months ended December 31, 2024. This represents a decrease of approximately $242,000 or approximately 2%. While we reported adjusted EBITDA is essentially flat the prior year period included $5.9 million of EBITDA represented by the frequent project cargo work we referred to in our press release as the Milton project, which was awarded a radiant for Q2 2025. Excluding this nonroutine Radiant's Q2 fiscal '25 adjusted EBITDA would have been $6.1 million on a normalized basis the current quarter would essentially reflect a $5.7 million increase, representing 93.4% quarter-over-quarter growth in adjusted EBITDA. For the 6 months ended December 31, 2025, we reported net income attributable to Radiant Logistics of $6,598 million on $458.8 million of revenues or $0.14 per basic and fully diluted share. For the 6 months ended December 31, 2024, we reported net income attributable to Radiant Logistics of $9.843 million on $468.1 million of revenues or $0.21 per basic and $0.20 per fully diluted share. This represents a decrease of approximately $3,245,000 over the comparable prior year period or 33%. For adjusted net income, we reported $12,543 million for the 6 months ended December 31 compared to adjusted net income of $18,570 million for the 6 months ended December 31, 2024. This represents a decrease of approximately $6,035,000 or approximately 32.5%. For adjusted EBITDA, we reported $18,571,million for the 6 months ended December 31, 2025, compared to adjusted EBITDA of $21,468 million for the 6 months ended -- for the 6 months ended December 31, 2024. This represents a decrease of approximately $2 million or 13.5%. With that, I will turn the call over to our moderator to facilitate any Q&A from our callers. Operator: Thank you. [Operator Instructions] The first question comes from Elliot Alper with TD Cowen. Elliot Alper: Yes. Great. This is Elliot on for Jason Seidl. So nice growth after excluding the project work from last year. Curious if you could talk about the demand environment currently, maybe what your agents are telling you? And then any project work from severe weather in the March quarter? Bohn Crain: Sure. I think generally speaking, people are, I guess, growing increasingly bullish in terms of where we are. We've seen a little bit of improvement here. Again, excluding the project cargo from the year ago period, some really good growth international and kind of ocean imports, in particular, continues to remain relatively soft. But all in all, with the diversity of our business and candidly, some of the traction we're getting with the Navigate technology platform is really helping to kind of help us put points on the board in this environment. It seems to be most recently kind of a tightening of capacity. And we've seen the tender rejection rates starting to come up. So I don't think we really have seen kind of the benefit of that most recent dynamic in the quarter ended December. But as we come into the quarter, March, which historically is our seasonally slowest quarter it will be interesting to see kind of how this tightening capacity environment kind of affects overall margin characteristics and what's -- kind of what's happening in the domestic market. And I think all of this capacity tightening will be constructive for us in our -- in the peer group more broadly. And -- I'm sorry, Elliot, what was your second question? Elliot Alper: Just on if we should expect any project work from the severe weather we've seen to begin the calendar year? Bohn Crain: Nothing on the -- kind of on the books yet. We'll continue to watch it. I won't say we root for natural disasters, but we're certainly there to pick up the phone when they when they occur. Again, most recently, there's a kind of an unusually cold weather system in the -- that hit the Southeast, which will probably cause a little bit of slowness for a lot of folks around that particular event. But in terms of kind of broader natural disasters, fires, hurricanes, that type of stuff. There's nothing kind of immediately on the kind of in process for us around those types of opportunities. Elliot Alper: Okay. Great. And it sounds like you guys are making a lot of progress on Navigate. I know it's still very early in the journey, but I'm true like how much revenue you expect from Navigate this year? Bohn Crain: I don't want to get into specific numbers, but kind of looking at it a little more broadly what's really exciting for us is, ultimately, we're partnering with our customers as they kind of onboard their vendors onto the platform and the visibility and their ability to kind of better control and manage their vendor base. But as we're onboarding our customers' vendors onto the technology and they're getting exposure to what it represents in its capabilities. We're starting to get what I'll call reverse inquiry inbound interest from these vendors themselves as becoming direct customers. So we really are seeing a compounding effect of Navigate as our -- as we continue to grow our community, I think we're getting really positive feedback and kind of broadening interest. So we see this having a lot of application in different industry verticals and different ecosystems as we continue to roll it out. Operator: [Operator Instructions] Okay. There are currently no questions in the queue. I'd like to turn the floor back to Bohn Crane for any closing remarks. Bohn Crain: Thank you. Let me close by saying that we remain optimistic about our prospects and opportunities to continue to leverage our best-in-class technology, robust footprint and extensive global network of service partners to continue to build on the great platform we've created here at Radiant. At the same time, we intend to thoughtfully reeler our balance sheet through a combination of age station conversions, synergistic tuck-in acquisitions and stock buybacks. Through our multipronged approach, we believe we will continue to create meaningful value for our shareholders, operating partners and the end customers that we serve. Thanks for listening and your support of Radian Logistics. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Ladies and gentlemen, thank you for standing by. Morning, and welcome to the Outdoor Holding Company's fiscal third quarter 2026 earnings call. At this time, all participants are in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Participants of this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. I would now like to turn the call over to Michael Backel of Darrow Associates, the company's Investor Relations firm. Please go ahead, sir. Michael Backel: Good morning. And thank you for participating in today's conference call. Joining me from Outdoor Holding Company's leadership team are Steve Urban, Chairman and Chief Executive Officer, Paul Kaczowski, Chief Financial Officer, and Jordan Christensen, Chief Legal Officer and Corporate Secretary. During this call, management will be making forward-looking statements, including statements that address Outdoor Holding Company's expectations for future performance or operational results. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the risk factors described in Outdoor Holding Company's most recently filed periodic reports on Form 10 and Form 10-Q, the Form 8-Ks filed with the SEC today, and the company's press release that accompanies this call, particularly the cautionary statements in it. Today's conference call includes non-GAAP financial measures that Outdoor Holding Company believes can be useful in evaluating its performance. You should not consider this additional information in isolation or as a substitute for results prepared in accordance with GAAP. For a reconciliation of this non-GAAP financial measure to net income or loss, its most directly comparable GAAP financial measure, please see the reconciliation table located in the company's earnings press release. The information discussed on this call is current as of today, 02/09/2026. Except as required by law, Outdoor Holding Company disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. It is now my pleasure to turn the call over to Outdoor Holding Company's Chairman and Chief Executive Officer, Steve Urban. Steve Urban: Good morning, everyone. Thank you for joining us for our third quarter fiscal 2026 earnings call. We believe these communications help you better understand our progress in moving and improving the company's performance. We look forward to this quarterly dialogue and we remain committed to transparent and thoughtful communication with investors. Turning to the quarterly results, fiscal Q3 2026 was a strong period operationally and financially. I am going to provide some initial thoughts, then we will turn things over to Paul to discuss our financial performance. I will close things out with some thoughts on where we are headed. Net sales were $13.4 million, an increase of 7% or about $900,000, outperforming broader trends in our strained consumer spending environment. Gross margin remained strong for the quarter at 87%. Gross merchandise value increased to nearly $216 million and we experienced a modest improvement in our take rate to 6.2% from 6.17% in last year's period. We continue to execute our strategy to operate as a streamlined pure-play e-commerce marketplace. In the third quarter, we continued to make significant progress reducing operating expenses. Including depreciation and amortization, operating expenses declined significantly year over year, down about $22 million with our operating expenses being the largest component with a reduction of approximately $21 million. A closer look at this expense reduction shows that a significant portion of this improvement reflects lower litigation-related costs, but importantly, recurring ordinary course corporate operating expenses declined by approximately $1.4 million driven primarily by reductions in corporate headcount, legal spend, and facilities cost. As I have said before, gunbroker.com can be operated effectively with a smaller, more streamlined organization by reducing redundancies and rightsizing our personnel to match the scope of our operations. Our actions over the past several quarters reflect that view. These cost reductions contributed to net income before discontinued operations in the quarter of $1.465 million compared to a loss of $21.077 million in the same period last year. This translated to earnings per share of $0.01 for the quarter versus a loss of $0.18 from continuing operations in 2025's third quarter. The significant cost improvements drove strong cash generation of over $4 million from operations during the quarter even after restructuring costs, legal costs, dividends, and other costs, which Paul will discuss in more detail. Before I turn things over to Paul, I would like to touch on our most important financial metric, adjusted EBITDA, which we believe provides helpful insights into the underlying performance of the business given the level of non-recurring items impacting reporting results. To help clarify our performance, we include a table detailing adjusted EBITDA in both our earnings release and 10-Q. This quarter's adjusted EBITDA number confirms our progress as we delivered a 54% increase in adjusted EBITDA for the quarter to $6.5 million compared to $4.3 million in 2025's third quarter. I will now turn it over to Paul Kaczowski, our Chief Financial Officer, to discuss the quarter's performance in greater detail. Paul Kaczowski: Thanks, Steve. Excited to share some highlights from our third quarter. Outdoor Holding Company reported net income for a second consecutive quarter at just under $1.5 million in Q3. Third quarter adjusted EBITDA was $6.5 million, a robust 49% of net sales. We reported an improvement in Q3 adjusting earnings per share from the previous year's $0.04 per share to $0.05 per share. Q3 is seasonally one of our highest quarters for sales, and that remains consistent this year. GMV was $215.8 million and grew 6.4% while net revenue was $13.4 million, an increase of 7% compared to the same period last year. Firearm unit sales were up over 8% from last quarter, while adjusted mix decreased by 3.7% resulting in an increased share of adjusted mix by 56 basis points. The significant increase in firearm GMV was partially offset by a decline in the non-firearms category. The company is committed to improving the user experience on Gunbroker and recently announced a strategic partnership with Master FFL to improve the transfer process for products subject to FFL regulations. This partnership required an upfront investment in Q3 impacting COGS, but margins remained strong at 87.1%. We anticipate this continued expense until the implementation is complete. Bottom line is that our strong adjusted EBITDA was driven by improved operating efficiency, reduced expenses, and increased GMV when compared to last year's third quarter. The strength of the company's operating model is also evidenced in the increased cash position of nearly $4.2 million from last quarter, including $500,000 of interest income bringing our current cash balance to $69.9 million. The company intends to deploy some of that cash through its share repurchase program as trading permits. Surplus cash generation continues to be impacted by legal costs, but we expect a larger percentage of cash from operations to gradually be retained by the company as these matters are resolved. Looking at results for the first nine months of fiscal 2026, net sales were up slightly at $37.2 million compared to $36.8 million in fiscal year 2025. Year-to-date fiscal 2026 gross margins were 87.1% versus 86.7% in last year's period. Reducing operating expenses and improving the user experience will remain a focus. For the first nine months of fiscal year 2026, our adjusted EBITDA per share is $0.12 compared to $0.10 per share for the first nine months of fiscal 2025. We have reduced operating expenses by $28.9 million year over year largely driven by legal resolutions and reduced corporate expenses. As a result, the net loss before discontinued operations was $4.5 million for the first nine months of fiscal 2026 or $0.04 per share, a significant improvement over the $40.6 million net loss from continuing operations or $0.34 per share for the first nine months of fiscal 2025. We expect our financial performance to continue progressing on this positive trajectory, but results may be tempered by legal costs in the short term as we continue to resolve remaining issues. Now, let me turn it over to Steve for some final remarks before we take your questions. Steve Urban: Thanks, Paul. Overall, we are pleased with the progress made this quarter. The results reflect the impact of the cost reduction initiatives implemented over the past several quarters and we believe there remains additional opportunity to further improve operational efficiency. We have made such progress by relocating the headquarters and eliminating other redundant costs, but we will continue to evaluate and execute on additional opportunities to simplify the organization. Our near-term objective remains to achieve a $25 million adjusted EBITDA run rate before sales growth over the next twelve months. Paul also pointed out our substantial cash position. In January, we announced a stock repurchase program. We have since been in earnings-related blackout, but look forward to deploying the repurchase program when we are in open trading window over the next couple of months. We remain focused on disciplined capital allocation to support long-term shareholder value. Looking forward, expect continued cost optimization alongside targeted investments to improve the user experience on the gunbroker.com site with the goal of increasing traffic, increasing transaction volume conversion, and ultimately revenue. With our gross margins and disciplined operational efficiency, each dollar of incremental revenue will have a tremendous impact on profitability, driving improved shareholder value. That concludes our opening remarks. I will now turn the call over to the operator for questions. Thank you. Operator: We will now begin the question and answer session. Please pick up your handset before pressing the keys. Our first question comes from Matt Koranda with ROTH Capital. Please go ahead, sir. Matt Koranda: Hey, guys. Good morning and nice job on the quarter. Curious to hear a little bit more about what you think is driving the good performance in firearm sales for you versus NICS? You are well outpacing that. Wanted to hear a little bit more about maybe some of the enhanced seller tools that you put into place. That might be helping that? How much is it the used, the shift in the used in the industry in general that's helping you out there. Maybe just to unpack that a little bit for us. Steve Urban: Sure. Thank you. Let's see. So our focus is on buyer experience. We have been working hard to basically streamline the process to make it as easy as possible for people to find things, to make it as easy as possible for them to buy things, transact, and then, we just did a release at SHOT Show, talked about Master FFL to streamline as much as possible the kind of the fulfillment process on the back end with the transfer dealers and what have you. So for us, it's all about buyer experience, you know, and we are creating seller tools as well. But it's all about customer experience, you know, making that experience as seamless as humanly possible. And I think that, you know, in part, that is what's playing, you know, that's helping us drive growth is getting back to our fundamentals and focusing on the experience of the marketplace. Additionally, yes, used guns continue to be very strong. Although, you know, we've just guns in general were a great category for us over the last quarter. So our continued just continuing to focus on that customer experience. We are also continuing to work on universal payments. We are trying to just look at every aspect of the transaction process and just make it as seamless as humanly possible. Matt Koranda: Okay. That makes sense. Curious on the universal payments implementation, Steve, maybe where are we, I guess, in terms of implementation there? When is it realistic to expect that it might be rolled out across the platform? And what does that unlock for you in terms of incremental GMV, that you can go after? Steve Urban: Sure. So, in terms of what it could mean, right now, about 30% of our transactions are not done through credit card. And so what we look at is how many transactions are foregone because, you know, people do not want to have to send a check, go to the, you know, go to the post office, go to the bank, and get cash, go to the then take it to the post office and get a money order. So, you know, to our way of thinking, that part of the process is not as streamlined as it could be. And so you know, for us, universal payments we could make money on that 30%. Which would, you know, increase our take rate. But we also can make that experience to the buyer more seamless by allowing them to just pull out their credit card for anything on the site as opposed to, you know, certain transactions have to be paid for in a way that has a lot more friction. And so we consider that to be a very big opportunity for driving GMV, which in turn drives revenue. In terms of timeline, you know, it's actually there's a lot of complexity in payments. There's licensing issues. There's compliance issues, KYC, AML, you're dealing with banks. Banks are slow moving. You know, it's not a super easy process. The technology isn't that hard, but just all the process around it is, you know, challenging. So I do not really want to put out a timeline and miss it because I do not think we are quite close enough yet. But, you know, this is the highest priority for the engineering team we are working diligently every day to, you know, move the ball forward on that initiative. Matt Koranda: Got it. Maybe just last one for me. I guess if we just run rate, which may be a little bit of a dumb way to do it, but if we just run rate the adjusted EBITDA from the third quarter here for a full year, tracking ahead of the $25 million in adjusted EBITDA target that you set out. Maybe help us understand maybe either Paul or Jordan, if he's on the call, can help us understand sort of what to expect in terms of legal fees and professional fees over the next several quarters that might kind of touch that down, that won't be adjusted. Any help on sort of where we are in the trajectory toward the putting up a full year, the $25 million that you set out several months ago? Steve Urban: Sure. Paul, you want to take that one? Paul Kaczowski: Sure. You know, certainly, Matt, there's still work to do. I think the indication here is that, you know, there will still be some expenses. For items that are not settled and won't be pulled in. It's hard to say on the pure trajectory. I think, you know, some of those costs were lower than expected in Q3. And so just wanted to give you a heads up that, hey, you know, it may not always trend that same direction. Jordan Christensen: Matt, this is Jordan. Just to add to that. Legal costs are never straight line. So we budget them straight line, but they ebb and they flow. And we, of course, hope that we resolve as many legal issues as quickly as we can because spending money on legal fees is not a value add to us whatsoever. So we're constantly trying to get these things resolved. But there may be quarters where it's higher than expected, and there may be quarters where it's lower than expected. But the overall goal is just to knock those things out as quickly as possible. Matt Koranda: Okay, guys. I'll leave it over to someone else here. Thank you. Operator: And the next question comes from Mark Smith with Lake Street. Please go ahead. Mark Smith: Hi, guys. Wanted to ask first off just as we look at solid firearms sales and revenue across the board. Is there anything to call out for instance Florida with the tax holiday? Was that a driver of increased sales or anything else that you can point to that helped kind of the outperformance? Paul Kaczowski: Yes. We did look at that. It was up, but it was not a large driver of the overall performance. And it was a combination of new and used firearms both that were up versus the same quarter a year ago. Okay. With used leading the way. But both categories were higher. Mark Smith: Okay. And looking forward, I would assume maybe similar thoughts around kind of NSA items with tax stamp going away, you know, sounds like this could be a positive for you. Here, especially in this next quarter. But is it big enough to really move the needle? Curious if you have any thoughts on that. Steve Urban: So I think it's a good question. And obviously, requires me to dust off my crystal ball. But I think that there's no question NSSF just put out adjusted mix numbers and obviously a lot of people were just holding off on NSA items for the tax to go away. So there's been kind of a burst of that activity around there. And I think that, you know, that same burst of activity specifically in NSA kind of drives interest in general in firearms. So, you know, I think that, you know, if this isn't a I wouldn't say this is a 2020 COVID situation or whatever, but I think the market's a little better than it was, you know, since the first of the year. Than it has been prior. Mark Smith: Okay. And then I did want to hit operating expenses again, you know, a good step down in operating expenses. This quarter. Does a lot of this feel like, and I know Paul just talked about, you know, some legal, some things that are still happening. But, you know, any thoughts as we look forward at when or where we get to kind of a mobile call, normalized quarterly OpEx. Steve Urban: Know, it's still off in the future. One of the biggest and actually, let me delineate, you know, OpEx versus things that are adjusted. In terms of OpEx, we are working to reduce our OpEx every day. There were certain requirements in our settlement with the SEC. There were certain requirements that require us to also just we want to make sure that we're doing everything by the book, you know, because we're under additional scrutiny here, just from, you know, having been under the SEC's eyes. For a long period of time. So we're really working hard to make sure that we do everything. We have, you know, a lot more that we are looking at things a lot closer than, you know, we're everything we do, we're just looking at it. Make sure that everything is right. We want to, you know, we don't want to make any mistakes. And so that increases our costs. We have, we're spending more money on legal, we're spending more money on compliance. We're spending more money on internal auditing. And so we're trying to kind of cost reduce that over time. But as we pointed out in the past, there's really, you know, it's twelve to eighteen months out in the future. It's been a few months since then. Was kind of the point at which, you know, we expect that stuff to drop off appreciably. And then from an adjusted standpoint, from a cash flow standpoint, the indemnification of, you know, former officers is one of the, it's just we spend a lot of money on legal fees indemnifying former officers and that won't end until such time as, you know, they settle with the or that they go through, you know, their process with the SEC and there's some resolution on that. And so we see the light at the end of the tunnel but we're not in control of, you know, when those things are gonna occur. Mark Smith: Okay. And the last one for me is just as we think about cash generation and capital allocation. And Steve, you talked a little bit about in your closing remarks. But you've got the buyback authorization that's out there now. Anything else that we think of that we should be thinking about that maybe takes a more significant investment here in the near term? And then if you want to talk at all about your thoughts maybe around the preferred later this year. Steve Urban: Sure. So, you know, we invest in the company we invest in our website every day. You know, most of what our engineering team does is really CapEx. You know, we're developing new software. We're developing new features. Developing new functionality, developing new processes. All of that is an investment. And so we have a substantial budget for, you know, investment in the platform. And we spend that money every day, and we've always done that. In terms of new things outside of that, we are looking at a number of initiatives. AI has come on the scene the last three years, and, you know, we're always looking at we use AI internally right now. We do a lot of things with AI, but we're always looking at ways to, you know, improve and streamline and, you know, improve the, again, the buying experience, improve the internal operations, what have you. And so we're looking at focused areas to potentially invest some money. But when you look at the pile of cash that we have, those investments would not be that significant compared to the amount of cash we generate, the amount of cash that we have on our balance sheet. So right now, I mentioned we were in a blackout period. Right now we consider our shares highly undervalued and we're going to be out executing on our repurchase plan now that the blackout has ended. And in terms of other things we're just always looking at what we can do with that cash and trying to be smart about it. We don't want to squander the cash. It's not that easy to make. We want to make smart decisions and we want to always drive shareholder value and so we're always looking at ways to deploy that capital to achieve those goals. Mark Smith: Excellent. That's helpful. Thank you, guys. Operator: And the next question comes from David Cannon with Cannon Wealth Management. Please go ahead. David Cannon: Hi, good morning. Congratulations and thank you, Steve, and your entire team for your hard work and execution. One more thing because I know you're not going to highlight this is you being so aligned with the shareholders is very welcome. By myself and probably the majority of shareholders. Some may not know that you've forgotten salary that essentially you're making $1 a year and you're aligned with us with the stock to a very high magnitude. So thank you for that. So first question, is in regard to the investment that you're making in FFL. And the impact that it had on COGS, if you could just quantify that for us? For the quarter? And then also for the twelve-month period, what you anticipate that to be in total? Steve Urban: You mean Master FFL. Correct? David Cannon: Yes. You had said that you were investing. My apologies. You in the prepared remarks, you said that you were investing and I guess it was a consultant or a vendor that was helping in there and that there was a cost that impacted COGS. Steve Urban: Correct. I'll let Paul talk about the cost. But in terms of, you know, the Master FFL announcement, again, this is, you know, this is an attempt to streamline a point of friction in the buying process. Firearms have to be shipped to a licensed dealer in the US. You can't just ship a gun to your house. It has to be shipped to a licensed dealer and the buyer has to pick it up from a licensed dealer. And so there's a whole, there's paperwork that needs to change hands. There's things that need to be done to facilitate that. And we identified that as a point of friction again and with the goal of improving the buyer experience we are making an investment in that area and we expect it to be something that generates revenue over time. But there is a little bit of an initial investment. And I'll let Paul address that right now. Paul Kaczowski: Yeah. So it's about, you know, $60,000 to $120,000 a month here in terms of the nominal investment, and it's really intended to get all the plumbing working coordination, to make the tool really seamless. The long run. Like Steve said, at a be a center and an opportunity to generate additional sales. David Cannon: Paul, did you say $60,000 to $120,000 a month? Paul Kaczowski: That's correct. David Cannon: Okay. Okay. So probably maybe up to $400,000 or $500,000 for the quarter. Was the impact, which at some point we'll get back and then also as Steve mentioned, it should improve conversion. David Cannon: Right. Okay? And then on another subject as it relates to the bank, could you give us an update on what you think is happening in terms of regulation and banks potentially offering traditional financing. So for reason I'm asking is, you know, you're paying eight and three-quarters on your preferred. You know, with the strong cash generation, I mean, we would if you were a regular company, you banks would be lining up to give you $50 million that probably sulfur plus two. And we could arb that and we could also thoughtfully opportunistically deploy that into, you know, other initiatives like share buybacks or whatever increases shareholder value. So could you talk a little bit about that landscape and what's happening and if this is an opportunity in the forward twelve months? Steve Urban: Yeah. I'll be happy to do that. So just in the last week or two, JPMorgan sent a letter to the NSSS and basically rescinded their policies that prohibited them from doing business with the gun industry. I think it was kind of veiled in the modern sporting rifles category. But, you know, I think under Trump, he signed an executive order. They've put out some additional requirements that they're prohibiting banks from discriminating against the number of categories of businesses including fossil fuels and what have you, but firearms was kind of very high up the list. And I think that what that does, you know, change the landscape in terms of being able to get bank debt sizable amounts of bank debt at a reasonable price. In the past, if you look at the top 100 banks, you know, maybe there were five or six that would do business with companies that were, you know, gun companies. We're not really a gun company. We're a technology company, but firearms are sold through our site. And I think that, you know, the executive orders and the change in attitude by the regulators is changing that, changing that attitude toward the gun industry and opening up avenues that were previously closed to us. And so I do agree with your thesis that, you know, the company probably has the ability to raise a substantial amount of reasonably priced debt from banks if we care to do that. Then obviously we could look at intelligent ways to deploy it including potentially paying off the preferred, potentially share buybacks, whatever intelligent capital allocation strategies that we wish to pursue. So, I believe very much that that avenue is much more accessible than it has been in the past. David Cannon: Okay. Is that something that I'm sorry, is that something that you're currently engaged in? Are you in conversations with banks at this present time to get reasonable debt? Steve Urban: We are not. But you know, we're kicking I mean, we're always looking at capital allocation strategies and I've done a number of debt deals in my life. I don't like to be over-levered but a certain amount of leverage that we can easily service is a good thing and so we are always looking at these things. David Cannon: Okay. And then I see take was up about 10 basis points. Can you talk to some of the levers that you think you have? And is there opportunity to move take up a little bit more? And then my last question is in regards to the progress that you've made in used over the next twelve to twenty-four months do you guys have an internal target as to the percentage that you'd like to see in GMV per use? Steve Urban: So I think in terms of moving take rate around, I'll let Paul give you some more details here. But in terms of moving take rate around, you know, things like the universal payments, potentially even the deal with Master FFL. These have the ability to, you know, increase our take rates over time. And we, you know, as these things roll in, you know, we're always trying to drive that number to our best of our ability. We're trying to drive it through, you know, new services, as opposed to straight fee increases. And so, we're trying to be very thoughtful and find ways to create more value and to be able to charge for it. And, you know, those the two examples I just gave are solid examples of that. Paul, do you want to talk some more about our kind of the other question David asked about where we expect to use to go? Paul Kaczowski: Sorry. It was of where we expect I missed the last part of the Zotto question. David Cannon: Just an internal target over the next twelve to twenty-four months that you'd like to see used become as a percent? Paul Kaczowski: We have not set an internal target on used. I think some of the marketing programs kind of address users on the site by kind of profile is the goal. So we did not set a target on used GMV sales. Steve Urban: We are continually, we're always trying to drive more used product through the site. And we may not have quantified it, but that's a goal is to continue to get more used product on the site. Used product has a great sell-through rate. Margins to the person who's actually selling the product. So it's just always a push for us. David Cannon: You know what? One more question. My apologies. So you had mentioned that to start the year probably given what's happening with, you know, ICE and some of this protesting. You had implied that there was an increase in activity that the year started off more positively. Could you just touch on that a little bit? And share with us what you're seeing? I mean, we check the traffic, and we do see it improving, but we don't see anything. Anything like, you know, really meaningful. But I'll, yeah, I'd like to hear what you're saying. Steve Urban: You know, I said, the NSSF, you know, does the adjusted mix and obviously, you know, the suppressor, the tax is going away on NFL items. Has driven activity. And I think NFA has probably more than, you know, the Minnesota occurrences, probably more so than that. It's just, you know, as of January 1, no more NSA tax and that's driving activity and that's driving interest. Not just in the restricted items, but, you know, across the board. I think that's probably your biggest driver is just the tax going away. It's caused renewed interest in the space. David Cannon: Okay. That's helpful. Again, thank you for your hard work. Congrats to you and your entire team. Operator: Thank you. This concludes our question and answer session. I would like to turn the conference back over to Steve Urban for any closing remarks. Steve Urban: I want to thank you for participating in today's call. For your interest in Outdoor Holding Company. We look forward to sharing our ongoing progress when we report our fiscal fourth quarter and full year 2026 results in June. Operator: Thank you. Have a good day. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Clint Tomlinson: Good morning, everyone. And welcome to the Anavex Life Sciences Corp. fiscal 2026 first quarter conference call. My name is Clint Tomlinson. I will be your host for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the session, if you would like to ask a question, please use the Q&A box or raise your hand. Please note this conference is being recorded, and the call will be available on Anavex's website at www.anavex.com. With us today is Dr. Christopher Missling, President and Chief Executive Officer, and Sandra Boenisch, Principal Financial Officer. Before we begin, please note that during this conference call, the company will make some projections and forward-looking statements. These statements are only predictions based on current information and expectations and involve a number of risks and uncertainties. We encourage you to review the company's filings with the SEC, including, without limitation, the company's forms 10-K and 10-Q, to identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements. These factors may include, without limitation, risks inherent in the development and/or commercialization of potential products, uncertainty in the results of clinical trials or regulatory approvals, the need and ability to obtain future capital, and maintenance of intellectual property rights. This conference call discusses investigational uses of agents in development and is not intended to convey conclusions about efficacy or safety. There is no guarantee that any investigational uses of such products will successfully complete clinical development or gain health authority approval. And with that, I would like to turn the call over to Dr. Missling. Christopher Missling: Thank you, Clint, and good morning, everyone. Thank you for being with us today to review our first quarter financial results and quarterly business update. As we enter 2026, we continue to progress our innovative clinical pipeline with a particular focus on our lead candidate, oral blarcamesine, in early Alzheimer's disease. Based on our commitment to improving the lives of patients with neurological disorders, we remain excited about the therapeutic potential of oral blarcamesine. We look forward to working with the regulatory agencies in Europe and in the US to advance blarcamesine as a potential new treatment option for patients. We recently announced Anavex's participation as a key industry partner in Access AD, a major new European initiative designed to accelerate the adoption of innovative diagnostic and therapeutic approaches for Alzheimer's disease across real-world clinical settings. The multiyear program is funded by the European Commission's Innovative Health Initiative and unites leading academic centers, technology developers, industry innovators, and patient organizations to strengthen equitable access to timely and effective Alzheimer's disease care. As part of the consortium, blarcamesine will be evaluated in a clinical prediction study. As an update to our regulatory pathway, in January, we announced feedback from an FDA Type C meeting in which the FDA shared their feedback on Anavex's development plans. The meeting discussed the potential pathways to support blarcamesine for Alzheimer's disease. In order to move forward, it is expected that existing data from the Phase 2b/3 Anavex 2-73 AD-004 program be submitted to the FDA. In December, as expected, the CHMP adopted a negative opinion on the marketing authorization application for blarcamesine. Subsequently, on December 18, Anavex announced it had requested the EMA to reexamine its opinion. We are working closely with the EMA during this process, which is being led by a different rapporteur and co-rapporteur. In November, we announced presentations at the 18th CTAD conference in San Diego. The oral late-breaking communication on oral blarcamesine Phase 2b/3 trial confirms identified precision medicine patient population, significant broad clinical and quality of life improvements for early Alzheimer's disease patients, and two poster presentations featuring blarcamesine. Looking forward, we will provide both regulatory and clinical trial updates on blarcamesine in other indications such as Parkinson's disease and fragile X. This will include disclosure of planned future clinical trial designs as we continue to advance our therapeutic pipeline. Additionally, new scientific findings will be presented at upcoming conferences or in upcoming publications. An oral presentation at the 16th Intrinsic Capacity Frailty and Sarcopenia Research Conference for Healthy Longevity to be held March 12 at Johns Hopkins University Bloomberg Center in Washington DC. The new findings on a clinical relationship with a biomarker correlation between clinical endpoints and reduced brain region atrophy with blarcamesine in early Alzheimer's disease. A publication on Alzheimer's disease regarding precision medicine AB-clear populations of the Anavex 2-73 AD-004 Phase 2b/3 trial. Another publication on Alzheimer's disease on the precision medicine gene, collagen 24A1, which with an estimated over 70% prevalence in the early Alzheimer's disease population, has the potential to establish effective treatment of early Alzheimer's disease through the effectiveness of autophagy-enhancing blarcamesine. And a publication regarding fragile X, blarcamesine corrects EEG biomarkers of cortical dysfunction in a mouse model of fragile X syndrome. With regard to Anavex 3-71, we will be advancing Anavex 3-71 towards pivotal clinical studies for the treatment of schizophrenia-related disorders. And now I would like to direct the call to Sandra Boenisch, Principal Financial Officer of Anavex, for a financial summary of the recently reported quarter. Sandra Boenisch: Thanks, Christopher. Good morning to everyone. I am pleased to share with you today our first quarter financial results. Our cash position at December 31 was $131.7 million with no debt. During the quarter, we utilized cash and cash equivalents of $7.1 million in operating activities after taking into account changes in non-cash working capital accounts. As of today, we anticipate that at the current cash utilization rate, our cash runway is more than three years. Our research and development expenses for the quarter were $4.7 million as compared to $10.4 million for the comparable quarter of last year. General and administrative expenses were $2.1 million as compared to $3.1 million for the comparable quarter of last year. And compared to the same quarter of fiscal 2025, we saw a decrease in operating expenses, mostly driven by the completion of a large manufacturing campaign of blarcamesine conducted in fiscal 2025, and a decrease in clinical trial activities as a result of the completion of our Anavex 3-71 Phase II study in schizophrenia. And lastly, we reported a net loss of $5.7 million for the quarter or $0.06 per share. Thanks, and I will turn it back to you, Christopher. Christopher Missling: Thank you, Sandra. In summary, we are focused on continuing to advance the development of our precision medicine compounds and are excited to be potentially making a difference to individuals suffering from neurological diseases by presenting scalable treatment options alongside the ease of oral administration. I would now like to turn the call back to Clint for Q&A. Clint Tomlinson: Thank you, Christopher. We will now begin the Q&A session. If you have a question, please raise your hand or enter it in the Q&A box. And our first question will come from Ram Selvajara from HC Wainwright. You should be connected now, Ram. But I see you muted. Hello? Can you hear me? Ram Selvajara: Yes. Thanks so much for taking our questions. Firstly, I was wondering if you could, at this juncture, provide us with some additional information regarding who the rapporteur and co-rapporteur are for the reexamination of the CHMP opinion on blarcamesine. Christopher Missling: The 27 countries of the EU decide on two rapporteurs. One of the two countries of the 27 will be rapporteurs. Ram Selvajara: Okay. Can you provide us with additional information regarding the timeline with which the reexamination is likely to occur? My understanding is that, in effect, it starts a new clock, but that this might be as short as six months. Can you confirm that? Christopher Missling: That is correct. It is a sixty plus sixty day period where we respond to the reexamination request. And then the review by the two rapporteurs will take another sixty days. So that's why we stated that we expect this process to last for the first half of this year. Can you provide a timeline regarding when you anticipate potentially filing a formal NDA submission with the FDA? This is a plan we will advance once we are getting closer. But the last meeting was very productive we had with the FDA. And so we continue with this request, which we were given that we will provide the full data package to the FDA for addressing their review and expecting next steps from there. Ram Selvajara: Can you just remind us what type of meeting this was that you held with the FDA, the most recent one? Christopher Missling: That was a Type C meeting. Ram Selvajara: Okay. Thank you. Clint Tomlinson: Thank you, Ram. Next question comes from Tom Bishop of BI Research. Tom, you should be on now. Tom Bishop: Ring. Can you hear me? Clint Tomlinson: Yes. Go ahead. Tom Bishop: Can you go into a little bit more detail about what additional information will be in the resubmission to the EMA in terms of will ABC clear data be in there, varying volume data, follow 24A1, and OLE. Can you just give us a little bit more meat on the bone? Christopher Missling: That's absolutely possible. So for background, in the resubmission, we are able to address and provide feedback on the arguments why this drug should be reexamined for approval for EMA review. And as a reminder, there is a requirement for granting conditional approval if the disease is serious, if there's a major unmet need, if the data shows clinically meaningful effects, if there's a strong mechanistic rationale especially linking genetic variants, and if the supporting evidence from translational data is available and the sponsor is then also committing to a study in executing it and confirming the efficacy during the approval process. And we are including the data of the AD-004 study, the open-label study, the data on the AB-clear study population, as well as the correlation of the efficacy of the clinical efficacy with the brain atrophy reduction. Tom Bishop: Now was none of that actually in the, you know, those last few that you mentioned in the original submission such that this could potentially be more persuasive as it is for me. Christopher Missling: Yeah. It's really like a process, I would say, and we also understand that is something which a counterparty has to digest. And maybe that is the reason also we've seen now in the past several cases where even with drugs which were prior approved already, and with very large companies submitting those, you know, trial data, well, ended up at the same situation where we ended up today as well. But, we can, of course, not guarantee the approval in this reexamination procedure. But it seems to be a question of how to repackage or rearticulate the strength of the package or of the data. Tom Bishop: Okay. And with the FDA, I know the question was asked when might you file this data with the FDA. I mean, it kinda already exists, so I'm was just wondering if you can be any more clear about why we can't they can't why you can't get that data to the FDA very soon? Christopher Missling: It's in process, and you have to also understand the FDA has a certain meeting request which requires some time to schedule. And this is in the process as well. So that's why it's not like you just ship something over, and then you get feedback you have to make it in consistency with a meeting request. And that's what will happen. Tom Bishop: Okay. Are there any correct me if I'm getting the scene out here, but are there any trials currently in progress? The only trial we have ongoing is right now the compassionate use program for Rett syndrome. In three countries, in three continents. In Canada, in the UK, in Australia, and we have also the compassionate use ongoing for Alzheimer's disease. So we are planning now the studies in Parkinson's disease, in fragile X, and another indication which is not disclosed yet, and we also will proceed with the Alzheimer trial which we I mentioned before. Tom Bishop: Okay. Well, is the it's been a little while since the Rett trial finished, the Parkinson's trial was finished several years now, and I'm just wondering if you can give us any near-term timeline for first trial. Some of these schizophrenia, just wrapped up that. Christopher Missling: Yeah. Tom Bishop: As to when something we'll we'll we'll get something in this clinic. Yeah. Yep. Absolutely good question. We also plan a schizophrenia program to continue. As I mentioned this morning, so we are really gonna be very busy with trials, and we are very excited about it. And just to let you know, the Parkinson's disease trial has not been started yet. It was Parkinson's disease dementia. But it's the basis of which we are executing the Parkinson's disease trial. Tom Bishop: Okay. I guess that's it for me for now. Thank you. Clint Tomlinson: Thank you, Tom. The next question will come from Jesse Silveira from Spirit of the Coast Analytics. You can go ahead, Jesse. Hear me alright? Jesse Silveira: Yes. Thank you. Hi. Good morning. This is Jesse Silveira with Spirit of the Coast Analytics. Thank you for taking my questions today. Before we get into some of my, I guess, more elaborate questions, maybe we can start with some quicker pitches. First up, something a lot of people have been kind of scratching their heads on is clarity for CHMP rejection, in particular, we know that blarcamesine works better for patients with sigma-1 wild type. As a part of the CHMP rejection, the agency stated, and I quote, the main study failed to demonstrate effectiveness and safety of blarcamesine Anavex, in patients with early Alzheimer's disease who do not have a mutation in the sigma-1 gene, end quote. So this statement appears contrary to the facts because the drug is effective for patients, who do not have a mutation in the sigma-1 gene, also known as sigma-1 wild type. So is it the company's opinion that the CHMP made an error in how they phrased their rejection, or can you clarify the company's understanding of this statement in particular? Christopher Missling: Yeah. We would not criticize the regulatory bodies, but we would say that in consistency with our interpretation of the trial, we met the ADAS-cog 13 and there was more significant in the wild type sigma-1 population as well as in the from the boxes which also was superior to the ITT in the wild type compared to the ITT population. The ADL ADCS ADL endpoint, was the only one which was not significant, although it was trending positively. And as we and the academic world found out that this scale is not sensitive enough to pick up the changes of activities of the living in forty-eight weeks in an early Alzheimer's population. So that is the maybe the only difference in interpretation of the trial. That that was, maybe differently evaluated. But now when you go to the AB-clear population, you will see, and we submitted that for publication. It's already publicly available a preprint that the AB-clear population, which includes sigma-1 wild type, carriers with the collagen 24A1 wild type, gene that those patients have significance reached significance across the board. So for ADAS-cog 13, for ADCS ADL, and for CDR Sum of the Boxes. And they're not only achieving significance, but they're also achieved this with highly clinically meaningful effect sizes, which are sometimes two to three times larger than, what we have seen so far from other compounds. In the pipeline or on the market. So that's kind of, like, why this is intriguing now to also point that out and and have that discussion put that forward. Jesse Silveira: Okay. Thank you for that. And I'm gonna have I'm gonna skip around a minute just because you kind of led into it. So stated in your Borrow Capital interview with Jason a few weeks ago that the reexamination would be under a CMA path and not a full market authorization. And in the interview, you explained that ADCS ADL one of your co-primary endpoints had been invalidated as a reliable measure during your trial analysis phase due to a lack of sensitivity found within the community despite its previous status as the gold standard in Alzheimer's trials. You then went into detail about new statistical methodology that the company was looking to use featuring a higher p-value threshold of 0.0167. And I know that the company has met ADAS-cog 13 and CDR Sum of the Boxes across all genetic cohorts with this p-value or better. So the question is, does using this new threshold allow the company to circumnavigate the ADCS ADL miss, and will regulators in your view, accept the scientific invalidation of ADCS ADL combined with your new gatekeeping strategy? If you can give any on that. Christopher Missling: Yeah. As I just stated, this is exactly the discussion which is probably ongoing if this ADL is 4. And if you follow science, you would agree with that. Because it's an endpoint which has been earmarked as being useful for overt Alzheimer, for moderate and severe Alzheimer, but not sensitive enough for the early Alzheimer population. And that was confirmed actually in guidances from the regulatory bodies. So you would assume that that is a fair argument to have, and, we stated that argument and to make that argument as well. Jesse Silveira: Okay. Thank you for that. And, with that said, you went over the sixty plus sixty day timeline earlier for this reevaluation. We should be, I believe, near sixty days now. Have you already submitted the new strategy and package to CHMP and has a SAG been appointed yet? Christopher Missling: We will update everybody once we have the result of this process. We will not comment on the ongoing process. But the SEC will be part of the review process since we requested that, and we will expect this to be given to us a dialogue involving the SAG, the Scientific Advisory Group from the EMA for from the neurology team. Jesse Silveira: Okay. Thank you. And if I have it correct, you have committed to running a confirmatory phase four trial if approved for CMA using paying patients as a real-world cohort. Isn't is that correct? Christopher Missling: Sorry. What patients? Jesse Silveira: Like, paying patients in the EU. So assuming you are actually approved under CMA, will you be running a phase four trial with these patients? We will. Or how would that look, I guess? Christopher Missling: Yeah. We would run a trial as the regulatory body the CHM guidelines, provides for. That you get approved, and then in parallel, you will run a confirmatory study. Yes. Jesse Silveira: Okay. And I think relevant to additional Alzheimer's trials, is on January 28th of this year, Alzheimer Europe launched the prevalence of dementia in Europe 2025 report which projected a 64% surge in dementia across Europe by 2050. Based on our research, it appears that Europe is not on course to meet projected health strategies, especially those centered on dementia. And it looks like they're kind of, as a as the EU, moving away from social work and dimension favor of defense and economy. In light of these statements, it's our understanding that Anavex is set to participate in Access AD, funded by the European Commission. Can you please give more detail on how blarcamesine, a currently unapproved drug, is to be involved in this program? Like, is the company running this trial? Are endpoints and objectives of this trial? When will the first patient be dosed, or anything else you'd like to offer. Christopher Missling: The Access AD program is really a great opportunity for acknowledging Anavex as a participant and being part of the ecosystem in Europe for Alzheimer's disease, which involves both academic institutions as well as government entities and advocacy groups within Europe. So we're very pleased and excited about being part of that. A specific carve-out or not carve-out, especially part of this very large grant, if you like, is a dedicated clinical trial of blarcamesine as a placebo-controlled trial to look for data of prediction of the effect of blarcamesine in Alzheimer patients, in early Alzheimer patients, and that involves, review of biomarkers, and novel biomarkers, looking at autophagy signals, and, also including efficacy. And we're planning to use this trial also for a regulatory, specific, goal. So we will make this trial part of our package for confirming the efficacy of blarcamesine in early Alzheimer's disease. So it's a very intriguing project to be part of. And the Access AD program consists of multiple features. Among them is also a review of healthy diet. Also, a supplement diet is part of that. And, they're all separate. They're not together. And as I just mentioned, one part is explicitly a trial of blarcamesine. In our placebo-controlled clinical trial. Jesse Silveira: I'm sorry if you mentioned is this an early Alzheimer's patients, or is this is there, like, a preventative component to this trial? Christopher Missling: Yeah. So it's a good question. It could end up being a preventative also, but right now, it's consistent with an early Alzheimer's population as a target population. Jesse Silveira: Okay. And this would be considered AD-006 on your pipeline chart. Is that correct? Christopher Missling: That's correct. Yes. Jesse Silveira: Okay. AD-006. Okay. Great. And I think I'm finishing up here. Is the atrophy to clinical improvement analysis or paper complete? And maybe if you could give any expectations on when we could get eyes on that. Christopher Missling: The yeah. So we have submitted now three papers. We I mentioned this morning. And the atrophy paper is still not submitted, but will be submitted soon as well. Jesse Silveira: Okay. Great. And okay. That's pretty much all I have. Kudos on your JPM presentation and the new website format. They look great. And it's striking how little to lose I think, the CHMP has by granting a CMA considerably considering this, you know, the soundly claimed safety and efficacy the drug on cognition, objective brain atrophy markers, not to mention patient-assessed improvements. Measured by the quality of life AD survey. So we have no further questions, and thank you again for having us. Christopher Missling: We appreciate that. Thank you. Clint Tomlinson: Thank you, Jesse. Christopher Missling: Doctor Missling, we have no more questions at this time. Clint Tomlinson: Thank you. So in closing, we continue to focus on execution as we advance our therapeutic pipeline to potentially improve patients' lives living with these devastating conditions. We are energized by the possibility of making a meaningful impact for people living with neurological diseases offering treatment options that are not only scalable, but also far easier to administer through an oral route. By lowering barriers to access and simplifying delivery, we hope to bring innovative therapies to a broader population and improve quality of life in a tangible way. Thank you. Christopher Missling: Thank you, ladies and gentlemen, for participating in the call today. We appreciate it. And this will conclude the conference. You may now disconnect.
Operator: Greetings. Welcome to PowerFleet's third quarter 2026 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please note this conference is being recorded. I will now turn the conference over to your host, Carolyn Capaccio of Alliance Advisors IR. You may begin. Carolyn Capaccio: Thanks, operator. Good morning, everyone. This presentation contains forward-looking statements within the meaning of federal securities laws. Forward-looking statements include statements with respect to PowerFleet's belief, plans, goals, objectives, expectations, anticipation, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties, and other factors which may be beyond PowerFleet's control. These may cause its actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical facts are statements that could be forward-looking statements. For example, forward-looking statements include statements regarding prospects for additional customers, potential contract values, market forecasts, projections of earnings, revenue, synergies, accretion, or other financial information, emerging new products and plans, strategies, and objectives of management for future operations, including growing revenue, controlling operating costs, increasing production volume, and expanding business with core customers. The risks and uncertainties referred to above are not limited to risks detailed from time to time in PowerFleet's filings with the Securities and Exchange Commission, including PowerFleet's annual report on Form 10-K for the year ended 03/31/2025. These risks could also cause results to differ materially from those expressed in any forward-looking statements made by or on behalf of PowerFleet. Unless otherwise required by applicable law, PowerFleet assumes no obligation to update the information contained in this presentation and expressly disclaims any obligation to do so as a result of new information, future events, or otherwise. Now I'll turn the call over to PowerFleet's CEO, Steve Towe. Steve? Steve Towe: Good morning, everyone, and thank you for joining us today. From an execution standpoint, Q3 was another strong quarter and an important one in demonstrating the consistency of delivery we are now seeing across the total combined business. We continue to make progress in the areas that matter most: accelerating high-margin recurring revenue growth, expanding profitability, and strengthening our balance sheet, all while maintaining disciplined execution. This quarter clearly shows the operating model we are building: focused, disciplined, and designed to deliver profitable accelerated growth scale. As we previously articulated, the heavy lift of integration is fundamentally behind us. We have been clear in recent earnings calls about the growth milestones we have set for ourselves. For some time, we have been signaling a Q4 exit run rate for FY '26 of 10% total revenue growth north of 10% growth in recurring revenue. Based on our performance exiting Q3, we feel confident in achieving those milestones, which gives us the desired momentum to press our foot on the growth accelerator in FY '27. Next slide, please. It's important to note that it's the first quarter in which our year-over-year results reflect the combined businesses. Stepping back and looking at the quarter, the key themes are increasing ARR growth, consistency, and balance to our performance. Service revenue grew 11% year over year and now represents 80% of total revenue. Total revenue increased 7% year over year, reflecting solid underlying organic performance with the prior year comp benefiting from $2 million in accelerated product revenue as per the US GAAP change communicated on the Q4 FY '25 earnings call. This means on an apples-to-apples basis, total revenue growth was 9% year over year. At the same time, adjusted EBITDA increased 20% year over year, driven by top-line growth with adjusted EBITDA margins expanding by 4% to 23%. Moving to the balance sheet, where net debt to adjusted EBITDA continues to strengthen as we exited the quarter at 2.7 times. This combination of growth, margin expansion, and balance sheet improvement reflects a business that is scaling and executing against clear priorities, and it reinforces the strength of our Unity strategy and the scalability of our Unity platform, giving us clear line of sight to accelerating growth in FY '27. Next slide, please. In Q3, we secured a truly landmark win for a highly meaningful South African public sector contract to deliver AI video and visibility services to government fleets collectively operating more than 100,000 total assets. The agreement is anticipated to represent one of the largest deployments in our history and is expected to generate meaningful recurring SaaS and services revenue with solid margins over a multiyear term. Following a phased implementation, preliminary department enrollments are highly encouraging and ahead of initial internal expectations. This award reflects the increasing scale at which government agencies are adopting data-driven fleet technologies in partnership with tier-one providers. Programs of this size typically anchor long-duration customer relationships and create a foundation for additional software and analytics adoption over time. Under this program, we will deploy Unity, including advanced visibility and AI video capabilities, to enhance safety, security, and situational awareness across a large-scale operational estate. A key differentiator in winning this contract was our partnership with MTN, which provides the scale, connectivity, and platform support required for a deployment of this magnitude. This award underscores our ability to meet the demanding requirements of tier-one customers and highlights the strength of our partner ecosystem in delivering reliable, scalable solutions. With that, I'll hand over to Jeff Lautenbach to walk through our commercial momentum and customer execution. Jeff Lautenbach: Thanks, Steve. Great to be here. Turning to customer momentum, what stands out most to me is the impetus we're building due to our key differentiators. We're seeing continued acceleration across closed wins, pipeline growth, and our selection by some of the world's leading enterprise brands. This momentum is being driven by the unique end-to-end capabilities of the Unity platform and a much more focused enterprise sales motion. I believe we're still in the early stages of what's coming next. During the quarter, we secured multiple enterprise wins with total contract values ranging from $500,000 to more than $5 million. These include statement wins with national services, logistics, and infrastructure leaders, as well as multimillion-dollar contracts with Fortune 500 manufacturing and food and beverage companies. These are meaningful enterprise deployments, and they reinforce that great brands are choosing PowerFleet to solve real complex operational and safety challenges at scale. Increasingly, customers are engaging with us around AI-based safety and compliance solutions, on-site with AI pedestrian proximity, and on-road with our advanced safety-as-a-service AI video portfolio. Our unique ability to offer connected AI video intelligence both on-road and on-site through a single unified platform is a true differentiator and increasingly is winning us big deals. Customers are looking for enterprise-grade outcomes across their enterprise end-to-end estates, and we're uniquely positioned to deliver safety and compliance across the full operational environment. That momentum is also clearly showing up in our pipeline. Our AI video pipe build increased 71% sequentially, driven by strong demand for advanced safety, compliance, and visibility solutions across global accounts. We recorded our third consecutive quarter of in-warehouse pipeline growth in North America, reflecting sustained demand for on-site safety and AI pedestrian protection use cases. In addition, our ARR pipeline increased 13% sequentially, which gives me even more confidence in the durability and quality of our subscription-led growth profile. PowerFleet is exceptionally well-positioned to capture this momentum and carry it forward into FY '27 and beyond. Next slide, please. This slide really captures the scale and quality of our global key account momentum. Today, Unity is deployed across a wide range of industries, including energy, mining, industrial, humanitarian, security, and construction, supporting multinational, multi-continental Fortune 500 organizations around the world. These customers are operating some of the most complex and demanding on-site plus on-road environments anywhere and are using Unity to manage tens of thousands of assets and billions of miles driven annually across both on-road and on-site operations. What's most compelling to me is what we're seeing inside these global accounts: delivering measurable improvements in safety outcomes, operational efficiency, and enterprise-wide standardization. That success is driving deeper multiproduct adoption across regions and use cases. In particular, customers are increasingly expanding their use of our highly differentiated AI video SaaS solutions, leveraging our unique ability to deliver video intelligence on-road and on-site within a single platform. This is a core strength of PowerFleet. We are mission-critical to some of the world's largest and most sophisticated enterprises. As these customers expand globally and consolidate their vendors increasingly into Unity's ecosystem, we see a clear path to continued growth, deeper penetration, and long-term strategic relationships. Next slide, please. Before we dive into the specifics of this slide, I want to frame it in the context of our data highway strategy and share with you some great examples of how that strategy is coming to light in the real world. At its core, the data highway is about connecting fragmented data across the enterprise, harmonizing it, and then enabling it to be consumed, acted on, and monetized in multiple ways. Our customers depend on us to deliver unified real-time connected intelligence that transforms data into operational decisions, safety outcomes, and measurable business value. Unity is that connective tissue. What you're seeing on this slide is how that connected intelligence is surfaced through one of Unity's key consumption methods: unified operations, where people, assets, vehicles, and business processes are brought together into a single connected operational layer across fleets, warehouses, and end-to-end operational environments. Across Fortune 500 automotive, retail, logistics, mining, energy, and construction customers, we are integrating Unity with core enterprise systems. ERP platforms like SAP and Oracle, HR systems, learning and training platforms, maintenance systems, and IoT infrastructure. The objective is to automate compliance, improve asset utilization, enhance safety, and fundamentally digitally transform how work gets done at scale. I'll give you a couple of examples of how this plays out. In one common use case, customers are focused on operator safety and compliance in warehouse and industrial environments. Operator training and certification data typically lives in learning systems. Employment status and role information sits in HR platforms. And physical access to equipment is enforced through badges, gateways, and IoT-enabled machinery. Historically, these systems operate independently, creating manual processes, compliance gaps, and real risk. Unity sits in the middle as the data highway. We ingest operator-level data from HR and training systems, harmonize it into a single, real-time compliance record, and connect it directly to the operational access point. Every access request becomes an automated policy-driven decision. Instant approval or denial based on certification status, role, and location, with a complete audit trail. This result is safer operations, faster workflows, and provable compliance in real-time. In another example, customers are using Unity to unify mission-critical transportation and logistic processes. Execution lives in TMS platforms. Shipment planning lives in ERP systems, and safety and visibility data is scattered across telematics and IoT systems. Without a unifying layer, no single system has a complete view of the shipment lifecycle or performance per job. Here again, Unity acts as the data highway. We ingest shipment demand from ERP, orchestrate execution through TMS integrations, and layer in real-time vehicle, driver, and IoT data. That unified data stream enables real-time shipment management, automated milestone events, and direct correlation of safety and performance metrics to individual shipments and jobs. All one connected operational workflow. Unity is becoming embedded at the heart of our customer operations, across people, assets, and processes. That makes us increasingly strategic for the customer, highly sticky, and difficult to displace. And as customers expand globally or add new use cases, the value of the data highway compounds. The unified operation capability is a key monetization engine for us by enabling multiple consumption paths, safety, compliance, operations, sustainability, analytics into a suite of customer business systems for a wide array of C-suite and operational stakeholders. All from the same integrated data foundation. We drive broader deployments, higher ARR per customer, and long-term enterprise partnerships. This is a powerful example of how the data highway strategy translates into real operational outcomes and sustained growth. Next slide, please. This slide illustrates a long-standing customer relationship with Origin Energy. A fourteen-year customer operating 2,000 vehicles. Through a phased multiproduct deployment, from compliance through to advanced AI video, Origin has delivered consistent reductions in risky driving events and has enhanced its public reputation as a direct result of the safety improvements PowerFleet has driven for them. Today, the relationship has evolved into a unified data ecosystem enabling more predictive and proactive safety management. This is a strong example of how Unity allows customers to expand value over time through a single platform. As I step back and look across the business, what gives me the most confidence is how all of these elements are coming together. Accelerated customer momentum, deeper enterprise engagement, and a data highway strategy that is translating into real operational outcomes and expanding monetization opportunities. We're seeing this play out across global accounts with Unity becoming increasingly embedded in the day-to-day operations of our customers. This is an exciting moment for PowerFleet. We're building on a strong foundation, winning with great brands, and landmark tier-one deals, positioning the company for sustained profitable growth. With that, I'll turn it over to David Wilson to walk through the financials. David Wilson: Thanks, Jeff. Before diving into the details for the quarter, a quick recap of the key pro forma adjustments. One-time expenses: This quarter's expenses include $2.3 million in one-time charges for restructuring, integrations, and transaction costs. Excluded from adjusted EBITDA and EPS for ongoing run rates. Amortization impact: Results include $5.7 million in non-cash amortization related to the MiX and Fleet Complete acquisitions impacting services gross margins by over 6%. Next slide, please. Now on to the detailed results. Where for the first time prior year comparison numbers fully reflect the impact of the MiX and Fleet Complete transactions. I'll start with services revenue. Our fleet's future is anchored in high-margin recurring SaaS revenue, and services grew 11% year over year, even as we continued to intentionally exit non-core revenue streams in line with our strategic focus. This progress is evident in our revenue mix, with services now accounting for 80% of total revenue, up from 77% in the prior year. Next slide. Turning to the full P&L, we continued to deliver strong top and bottom-line momentum. While headline total revenue grew 7% year over year, the prior year comparison included approximately $2 million of accelerated product revenue from contract and bundling at Fleet Complete, which ceased effective 04/01/2025. Normalizing for this, total revenue grew by 9% on an adjusted basis, underscoring solid underlying organic performance. Adjusted EBITDA increased 26% year over year to $25.7 million, driven by strong operating leverage and continued execution on integration and cost synergy initiatives. These results underscore the strategic rationale of our M&A actions supported by disciplined and consistent execution. Next slide. Adjusted EBITDA gross margins were stable at 67%, with a stronger services mix offset by higher services margin in the prior period. Product margins remained steady in the low 30% range. Turning to operating expenses, discipline remains a priority alongside continued investment to support growth. G&A as a percentage of revenue declined four percentage points, reflecting ongoing synergy realization and operating leverage. Sales and marketing expense increased as planned to support growth initiatives, while R&D remained stable at approximately 8% of revenue or 4% net of capitalized development costs. As investment continues in AI-enabled safety, compliance, and analytics. Looking at FY '26 as a whole, we expect the award of the large tier-one public sector tender that Steve discussed earlier to have a material positive impact on future revenue growth over time. Accordingly, we are maintaining operating expense investments to support the continued build-out of the business, which results in updated adjusted EBITDA guidance of annual growth of approximately 45% versus our prior guidance of 45% to 50%. Next slide. Closing on leverage, we exited Q3 with net debt to EBITDA of approximately 2.7 times. Based on current trends, we now expect leverage to decline to around 2.4 by year-end, compared to our prior expectation of approximately 2.25 times. With investments to support the landmark tier-one public sector win and working capital dynamics as key drivers. Last slide, please. To close, Q3 reinforces the progress PowerFleet is making as a focused integrated AIoT company that provides investors with a solid set of proof points that the accelerated growth trajectory planned for the business is coming into view. We are delivering consistent and improving high-value recurring revenue growth, expanding EBITDA margins, improving leverage, and deepening relationships with large, sophisticated customers. Importantly, we are doing so with discipline and operational consistency. Operator? Please open the line for questions. Operator: Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Your first question for today is from Scott Searle with ROTH Capital. Scott Searle: Hey, good morning. Thanks for taking the questions. Nice job on the quarter. It's nice to continue to see that double-digit SaaS growth. Hey. Maybe to dive right in, you know, could you provide a little bit more color in terms of the growth mix and contribution of new logos versus upsell and penetration of things like AI camera and warehouse? You gave some metrics, I think, in terms of the pipeline, but could you give a little bit more color in terms of the mix of the revenue stream, who's contributing? Also, as part of that, I don't know if I heard a number related to some of the MNO relationships, you know, what that's contributing now, how that's progressing across some of the different geographies? And maybe early thoughts on fiscal '27 SaaS growth. I know the target is 15%, but kind of how are you seeing that now as we're going into or getting close to going into '27, particularly with, you know, this large contract win in South Africa? And then I had one follow-up. Steve Towe: Thanks, Scott. I'll try and work through that as we get. So in terms of mix, no kind of real change. So, you know, 65-70% of our business from existing core customers, 30% from new. The new logo pipeline is developing nicely. I think Jeff showed you, you know, a lot of the wins that we'd had from existing accounts. But, you know, we're bringing over some new accounts, obviously, most notably the South African government, which I will talk about as we go. And if we talk about strength within the MNOs, then, you know, if you look at the profile of our revenue, and where we get strong, recurring revenue growth, that is through those channels. You know, there's a lot of that come through those channels, which is super positive. And in terms of that large win, then, you know, in partnership with MTN, the strength, the relationships that MTN has, you know, has really kind of, you know, I think given a lot of confidence to tier-one customers such as the South African government to look to place, you know, an absolute landmark, contract for the business. In, you know, in FY '27 and longer. So, overall, you know, that's for FY '27. I think we've pegged, you know, kind of 15% ARR growth, and that's before we kind of think about this new contract and this new opportunity that we have ahead of us. So we're very bullish. We're very excited. Both with the core business. I think, you know, if you you've heard Jeff talk about, you know, strong ARR growth. Large enterprise expansions, global accounts, you've heard a lot about the stickiness. From a retention perspective, our ability to, you know, really fuel that top line. And I think, you know, what's most pleasing is we're doing that responsibly. You know, that meets kind of double-digit team's growth is kind of where some of our larger competitors are pegged today, but we're doing it in a far more responsible way in terms of, you know, the ability for us to drive EBITDA at the same time. So we're very encouraged by the business as a whole. And I think if you think about where we started this strategy for the business of expanding partnerships, expanding into large Tier 1s, expanding our account base through AI video, and in warehouse solutions, which are those key drivers. I think it's undoubtedly that those drivers are now being seen, in reality in the numbers we're producing and, you know, our future opportunity. Scott Searle: Great. Very helpful. And, Steve, if I could just from a high level, certainly, the narrative of AI and the impact on the world and what's that doing to the software environment. I'm wondering if at a high level, you could address a few things. In terms of, you know, AI's impact in terms of the importance of fleet management unity type platforms going forward, competitive threat or complementary, obviously, since you're integrating it into the platform and the capabilities, but also things like autonomous vehicles, where they kind of fit into the equation and the long-term opportunity for PowerFleet and the industry. Steve Towe: Yeah. So we see AI as an enabler for our industry. So I think one of the challenges within the industry is it's produced too much data. And then it's been hard for customers to kind of wade through all of that data in order to understand how we can make business change. You know, the AI abilities we're bringing into the platform allow us to do that, provide very meaningful simple data to customers that they can access in real-time. The accuracy of the data and being able to kind of look to the raft of data to understand key trends in their business is only going to be helpful to what we do. So and we're seeing that in terms of the business impact that we're able to provide for customers. So on the whole, we see it as a net add. From that perspective. Then in terms of the world of autonomous vehicles, and robotics and all of that stuff, our place remains in, people need to understand what those vehicles are doing, where they are, how they're performing, etcetera, etcetera. So it will be an evolution just as technology is always an evolution for us. But we see that as one as the place where PowerFleet placed in the ecosystem will remain and potentially grow off the back of that. Scott Searle: Great. Thanks so much. I'll get back in the queue. Operator: Your next question is from Anthony Stoss with Craig Hallum. Anthony Stoss: Good morning, everybody. Steve, I'm just from a bigger picture standpoint, is the business environment better, the same, or worse now than it was six months ago? Then I have a couple follow-ups. Steve Towe: For us, it's improving. So I think, you know, that's a number of things. I think PowerFleet is improving, number one. I think six months ago, we were, you know, or a bit maybe a bit longer, we were still sort from tariffs. And I think we've been able to find our place to fight and our place to win in the market. Marketplace. So I think, you know, we've found our foothold in terms of, you know, where our solutions can be really effective. We're using our geographical spread in terms of being able to, you know, get growth across multiple verticals, multiple geographies, which I think is also helpful. And I think if you look at the compounding level of enterprise business we're doing, that's because we've been, you know, to our earlier point about can we create business change? Can we create impact on businesses? We're really doing that. So, you know, that is helping them with repeat business. You know, referenceability from our accounts. So that, you know, when you get tangible ROI, when you get the results, I mean, you remember some of the videos we put out in November about the tangibility of what our large customers are receiving. In terms of benefit from our solutions, then that brings a lot of confidence. Brings confidence in our sales teams, and we start to get that momentum. And that's really what we're seeing play out now is that momentum. Anthony Stoss: Got it. And then my last two questions. Can you maybe just provide us an update on the AT&T reps if they're fully trained and productive on all of your products now? And once it's fully ramped, how much revenue annually will the South Africa contract bring in? Steve Towe: Yeah. So I'll answer your second one first. So we're not allowed at this point to provide any financial information. But what I would suggest to analysts and investors is, if you look at bundled solutions, and you look at our ARPUs, that we get, what I would say is this contract is within our suite range in both our ARPU and margin, and then you multiply that by the number of vehicles, and, you know, we have an ability to do more than 100,000 vehicles, then I think, you know, the math speaks for itself in terms of what this will mean from a recurring ARR perspective for the business over the coming years. Five-year contract start off, and the majority of these, if you do a good job, continue. So it's super exciting for the business and a, you know, it's a material contract for the business. In terms of AT&T, then I think we mentioned last time with the government shutdown, there was a taken a little time in terms of some accreditations of some video solutions. That will all be through, and the Salesforce will have that extra part of the portfolio in their hands for the April. Anthony Stoss: Great. Thanks for the color, Steve. Operator: Your next question for today is from Dylan Becker with William Blair. Dylan Becker: Hey, gentlemen. Appreciate it. Maybe kind of double-clicking on the South African contract. You kind of just hinted at this as well too, but can you give us you're starting at or are you going to roll out to 100,000 customers or vehicles assets over time? You give us a sense to kind of look what that expansion opportunity could look like, how big of a slice or bite at the initial apple is this? And then maybe should we think about kind of the broader public sector opportunity within South Africa, but also kind of expanding across geographies over time as well. Steve Towe: Yeah. So, I mean, this will be the single largest deployment that this company has done in one go at scale. I think that's undoubtedly a fact for the company. Secondly, in terms of what this will do both with further opportunity, whether that is broader within South Africa, whether that is broader with MTN across Africa, or it's broader in terms of public sector business. These types of awards are tier-one. This is being centrally done by a treasury department because in the past, you know, there's been some challenges within individual departments doing individual deployments with, you know, different competitors that maybe didn't have the scale or the capability to manage tier-one requirements. So this could be an absolute force multiplier for us. A huge, you know, I think, landmark we call it a landmark win. In terms of its ability to show the new PowerFleet, its scale, its partners. So, highly encouraged about what this could mean to the broader business over time. Dylan Becker: Perfect. Thank you. And then maybe either for you or for David as well too, just kind of an update on where we are on the synergy road map here. Obviously, we've kind of recognized a significant amount that's allowing us to reinvest. And I know Jeff called out some pretty impressive pipeline statistics. So that's the right trade-off. But maybe how much room kind of on the synergy front versus now deployed and scaled leverage that you would see? And maybe a way to think about kind of some of the trade-off dynamics you're thinking about as we maybe think about sustaining kind of that growth acceleration into 2027? Thank you. David Wilson: Yeah, Dylan. So clearly, we've made great progress. So in terms of where we were, we're targeting $18 million for the year. There was a real opportunity, I think, to do more than that. And just based on the growth that's flowing through. We've decided not to sort of rearrange the OpEx piece as aggressively as we otherwise would. So we have, in essence, a base to grow from. So that's been important. But in terms of the 18 guide that we gave, pretty much there in terms of where we were exiting the year. In terms of where we are, if you look at OpEx as a percentage of revenue, in terms of SG&A, we guided to 40% or so for next year. We're pretty much at 40% for this quarter. So we're on track. And now it's really about how do we reengineer the cost base so we're taking more dollars out of G&A so we can invest in sales and marketing, but good progress. And real optionality. In terms of how we grow the business. But for now, the focus is much more on how do we build a firm foundation for accelerated growth. And, clearly, with the deals that we're landing, the size and the scale, very well positioned to do that. Dylan Becker: Fantastic. Thank you. Operator: As a reminder, if you would like to ask a question, please press 1. Your next question for today is from Gary Prestopino with Barrington Research. Gary Prestopino: Good morning, all. Hey, Steve. Could you maybe go into some of the expenses that you're going to be or some of the investments you're gonna have to make for this South African government contract just so we can get an idea of the magnitude of what you're spending to build the business as we go into twenty-seven. Steve Towe: Yeah. So, if you think about a deployment of that scale, which as I said, is, you know, is a major deployment for the business and supporting those types of operations. And we're doing that in a relatively short period. So as I think we noted, the enrollment has been stronger than we maybe even imagined it was going to be. These things take time. You know, we've got to get through, you know, a lot of work in terms of coordination, but you have to ramp up in terms of people, process, and systems in order to take that weight into the business while at the same time, obviously, we're growing very nicely in the main portion of the business. So, you know, there'll be a number of investments. These will be not investments just around, kind of this one project, but also very much looking at how we can optimize the business and how we can create the business model that can take this level of scale, not just on this particular deployment, but on others that are in our pipeline as well. So, you know, I think David's kind of aligned the fact that, you know, right now, we're not going to kind of cut operating expenses any further, and, you know, we'll talk in coming earnings calls in terms of, you know, that investment level. But, you know, it's not material in order for us to do, but important for us to do to make sure that we do this really, really well. And we can spin the plates of the growth that we have plus this, you know, this amazing contract ahead of us. So but what I like about it is, as I said, it's gonna be investment, which is going to support the future operating model of the business, the efficiency in that, the effectiveness of that, we just, in the short term, need to obviously make some initial investments to make sure that goes super well, and we can match the demand and, you know, really do a nice job for the customer. Gary Prestopino: Well, I guess what I'm getting at is it is it some is it a lot of it personnel related? Is it tech platform related? You know, not to lower your adjusted EBITDA guidance growth. And that's fine given the contract, but I'm just trying to get an idea or just think we need to get an idea of where that investment is coming from. What do you need more a lot more people to do this contract? Is it a tech platform issue? Is it what is? Steve Towe: Yeah. So I'll just not handle so as I said, it's people, process, and systems, internal systems. So it's the advancement of our automation capabilities. It's adding some people on the ground. You know, whether that's from a deployment perspective, a support perspective, a relationship perspective. And it's also then looking how we can optimize business processes for efficiency. So all of that costs a little bit of money. To do upfront. And, you know, if we look at the level of investment concern versus the return, it's minuscule in terms of that investment. But David, why don't you give your coat? Color and context? David Wilson: Yeah. Again, I think an important point to understand is really, what we're trading is a reduction in cost. So would it be more aggressive in terms of taking more cash cost out of the business in the fourth quarter? We're now, in essence, gonna repurpose that capacity. So as opposed to taking costs out, we have a great use for that cost base in terms of getting ready for faster growth than we had previously guided to. So you need to think about it through that lens as opposed to a lot of incremental investment going back into the business. There will be some but the vast majority of this is just really taking the dollars we're spending today because we now have a compelling use for them at putting it to use. And to see accelerated growth, you know, as we said in the November call as well, there is an opportunity we're willingly sort of sacrifice short-term EBITDA margin for accelerated growth because over time, if the accelerated growth that is the faster driver of shareholder returns. Gary Prestopino: No. That's good. That's a great explanation. And then would it be safe to assume that this contract, once it's fully implemented, will be one of your if not your largest single contract? Steve Towe: Yes. Operator: Okay. Gary Prestopino: Alright. And then just lastly, I saw the adjusted gross margin on the services side was down a little bit year over year. Was there any one-time benefits last year? Because as that services revenue starts to grow, we should get a pretty much a good continual expansion in the adjusted gross margin. David Wilson: Yeah. So a couple of points. In terms of bringing all these businesses together, over time, there is some harmonization in terms of where all the costs are mapped. So there's a degree of remapping that's happened, Gary, in terms of gross margin. In terms of year over year, there are if you think about some of the business we pulled out, in terms of some of that rationalization, it was good margin business. But it was a massive drag in terms of edge case developments, which caused a lot of friction in terms of the road map. So there's a degree of that that's going on as well. But remapping is certainly a driver in terms of the year-over-year comps. Gary Prestopino: Okay. Thank you. Operator: Your next question is from Alex Sklar with Raymond James. Alex Sklar: Great. Thank you. I got one more on the South Africa government contract. Just the mechanics of it. Can you just talk about is it an opt-in basis by municipal or department? Or is this a full commitment over time of the 100,000 vehicles? Is video safety and telematics both included? And is it kind of a fixed price per vehicle, or do you have to negotiate it by department or by municipality? Steve Towe: Yeah. So it is led by the National Treasury. In terms of commitment and cost and pricing and all that stuff. So that is all done. It is a directive, not and what people are doing now is enrolling into that, which is where we have that enrollment discussion that we had earlier. So it's not a mandate for everyone to have. It is an enrollment opportunity. The enrollment so far has been super strong, and therefore, that's the level of business that we feel confident to talk about. Alex Sklar: Okay. Perfect. And then we talked about some of the EBITDA cost from some of the higher growth investments. David, maybe just update us on free cash flow conversion of that EBITDA. Any other kind of cost that don't hit the EBITDA line that are kind of below the line just a factor for standing up some of the government contract or some of the faster growth investments fostering? David Wilson: Yeah. It shouldn't be anything significant, Alex. In terms of what we're doing. And so no major impact on that front. Alex Sklar: Alright. Thank you both. Operator: Your next question for today is from Greg Gibas with Northland Securities. Greg Gibas: Hey. Thanks, Steve and David. Thanks for taking the questions. Congrats on the recurring service growth. Wanted to follow-up on the South African Tier one win. If you could maybe speak to how competitive the contracting process was considering many providers aren't positioned to deliver on that level of scale and maybe any other key differentiators that are worth calling out that led to that win? Steve Towe: Yeah. So a number of suppliers bid for this contract. It came down to a few tier-one providers because as I said, this was a previously kind of, you know, each individual department was doing their own contract. So this was the biggest single award that had been done, you know, compared to the past. So that had to be, you know, organizations that had high levels of robustness, scale, product solution, ability to deploy, and just, you know, from an overall, I think, not only relationship perspective but governance perspective had the right capabilities to perform at a very, very top level. I mean, across our industry, this is a major, major win for the company. So MTN was a key we're very proud. And as I said, our partnership with part of that. And to have that dual relationship, I think, was a strengthener. So, you know, this is something in terms of the Unity capabilities, our referenceability, local market presence, domain knowledge, our abilities to really kind of drive, you know, data harmonization results and quality ultimately because if you think of some of these government departments that this will reach to, you have to have really, really strong quality in the data and services that you provide because a lot of them are mission-critical. So all around, I think a true test to the new PowerFleet that we've put together. And its capabilities and its strategy in terms of working with tier-one providers with, you know, levels of uniqueness in our joint propositions and scale. Greg Gibas: And to follow-up on kind of the cost side of it, you called out the initial investments associated with the deployment of the contract, you know, relating to people, processes, I think internal systems, kind of saying, hey. Trading down of a reduction of costs. But how much could you provide some color on how much is maybe recurring versus upfront that you expect those costs to be in Q4 versus recurring? David Wilson: Yeah. A lot of it is it's obviously a major, major contract. And in essence, we can now use that to build highly efficient scalable processes. So you have this opportunity to really build a template for the business as a whole. So that's what we're focused on doing. But a lot of it will leverage the existing systems that we have in place today. So it really is just reengineering how we do business, doing it in a more optimal, more efficient, better way from both a cost standpoint, customer experience standpoint. And having had that template built and baked, we can then use that template globally as well. So it's virtuous in many different ways in terms of driving incremental value. For shareholders over time. Steve Towe: And I'll just add to that that there's a lot more optimization that PowerFleet can do, is going to do across its operations. So we will continue over time to, you know, reduce costs across the business. It's just where our priority sits now. And we're actually, as I said, using this model and this deployment model to help scale that optimization across the business. It's just obviously, you know, with this growth opportunity, and the fact, I think, you know, we should also recognize we're ahead of the curve of where we thought we'd be in recurring revenue growth. Right? So that's another vector. I know we're focusing very much as we should do, on the South African contract. But, you know, the 11% growth, which is the first time that we've put out organic growth with an apples-for-apples 9% growth. And, you know, at the start of the call, I reiterated, you know, the 10% total growth and north of 10% ARR growth for Q4. So this is a business that is starting to flourish very nicely. And as we said all along, we need to make those, you know, really sound judgment calls of where to spend our time and where to put our dollars. And right now, with these kind of opportunities, we think it is a better value creation for shareholders to just throttle back a little bit on that true cost-saving exercise. As a trade-off for the growth opportunity that we have. Greg Gibas: That makes sense. Thanks very much. Operator: We have reached the end of the question and answer session, and I will now turn the call over to Steve Towe for closing remarks. Steve Towe: So thanks, everybody, for joining us again today. I'd like to thank our colleagues, our customers, our partners, and our shareholders. We look very much forward to our next earnings call and repeated updates as to our progress. You. Have a great day. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: To all sites on hold, we would like to thank you for your patience. Please continue to stand by. To all sites on hold, we would like to thank you for your patience. Please continue to stand by. Hello, and welcome to Becton, Dickinson and Company's First Fiscal Quarter 2026 Earnings Call. At the request of Becton, Dickinson and Company, today's call is being recorded and will be available for replay on Becton, Dickinson and Company's Investor Relations website at investors.bd.com. Or by phone at (800) 753-5212 for domestic calls and area code 11402220673 for international calls. For today's call, all parties have been placed in a listen-only mode until the question and answer session. I will now turn the call over to Sean Bevec, Senior Vice President, Investor Relations. Please go ahead. Sean Bevec: Good morning, welcome to Becton, Dickinson and Company's earnings call. Sean Bevec, Senior Vice President of Investor Relations, thank you for joining us. This call is being made available via audio webcast at bd.com. Earlier this morning, Becton, Dickinson and Company released its results for 2026. The press release and presentation can be accessed on the IR website at investors.bd.com. Leading today's call are Thomas E. Polen, Becton, Dickinson and Company's Chairman, Chief Executive Officer, and President, and Victor Roach, Senior Vice President and Interim Chief Financial Officer. Before we get started, I want to remind you that we will be making forward-looking statements. You can read the disclaimer in our earnings release and the disclosures in our SEC filings on our Investor Relations website. Unless otherwise specified, all comparisons will be made on a year-on-year basis versus the relevant fiscal period. Revenue percentage changes are on an FX-neutral basis unless otherwise noted. Also, references to adjusted EPS refer to adjusted diluted EPS. As a reminder, beginning October 1, we began operating under our previously disclosed new Becton, Dickinson and Company segment structure that includes Medical Essentials, Connected Care, Biopharma Systems, and Interventional, and a fifth Life Sciences segment comprised of Biosciences Diagnostic Solutions. The financials discussed here and included in the earnings release and 10-Q have been recast to reflect this reorganization. Reconciliations between GAAP and non-GAAP measures are included in the appendices of the earnings release and presentation. With that, I will turn it over to Thomas E. Polen. Thomas E. Polen: Thank you, Sean, and good morning, everyone. Before we get started, I would like to take a moment to welcome Sean to Becton, Dickinson and Company. We are very excited to have Sean join our team, and I look forward to partnering with him as we continue to communicate our strategy, performance, and growth opportunities. Turning to our Q1 performance, we delivered stronger-than-expected results, which reflect our disciplined execution, including accelerated commercial initiatives and strengthening our key growth platforms. Revenues of $5.3 billion increased 0.4%. New Becton, Dickinson and Company grew 2.5%, with broad-based growth across the markets where we have been doubling down on investments. This includes double-digit growth in biologic drug delivery, PureWick, advanced tissue regeneration, Pharmacy Automation, and high single-digit growth in APM. We delivered mid-single-digit growth across 90% of New Becton, Dickinson and Company's portfolio. Partially offset by 10% of our portfolio, Alaris vaccines in China undergoing challenging market dynamics that were in line with our expectations. We delivered an adjusted gross margin of 53.4% and adjusted EPS of $2.91, both of which were also ahead of our expectations on the strength of revenue performance and operational execution. Later this morning, we expect to close the combination of our life sciences business with Waters via a Reverse Morris Trust transaction. This is a significant milestone as we fully pivot to new Becton, Dickinson and Company and the next chapter of the company's growth. I want to thank both the Becton, Dickinson and Company and Waters teams whose exceptional hard work and transaction experience are enabling us to close nearly two months ahead of schedule. We believe this transaction unlocks significant value for our shareholders through both participation in the New Waters entity and value creation in the new Becton, Dickinson and Company. As part of the transaction, we will receive a $4 billion cash distribution. I am pleased to announce $2 billion will be deployed towards share repurchases through an ASR, and $2 billion will be deployed towards debt pay down. Both are expected to be executed in the near term, subject to market conditions. This is in line with our enhanced capital allocation strategy, which prioritizes share repurchases, reliable and growing dividends, and focused tuck-in M&A in targeted high-growth markets, all designed to steadily increase return on invested capital. With the completion of our Life Sciences transaction, Becton, Dickinson and Company enters this next chapter as a far more focused pure-play medtech company. This transformation builds on several years of deliberate portfolio shaping, including divesting three substantial non-core assets and the more than 20 strategic tuck-ins we have completed to strengthen our presence in some of the most attractive areas of healthcare. We recognized early on how the world of healthcare is changing rapidly. Providers everywhere are seeking partners who not only deliver high-quality products but who can help them transform care pathways, improve outcomes, and reduce costs. As we have previously discussed, we have identified three key trends shaping the future of healthcare that have guided our portfolio strategy. These include one, the rise of smart connected devices, robotics, AI, and informatics that transform the cost and quality of care; two, the shift of care towards lower-cost, more convenient settings, including outpatient facilities and the home; and three, rapid growth in technologies to address chronic disease, one of the fastest-growing segments in healthcare. Over the last several years, we have built multiple growth platforms, each with billion-dollar-plus potential, that position New Becton, Dickinson and Company squarely at the center of these trends. From our nearly $5 billion Connected Care business, with AI-driven advanced patient monitoring and connected medication management, to advanced pharmacy robotics, to leading platforms for biologic drug delivery at home, urinary incontinence, vascular disease, and tissue regeneration. New Becton, Dickinson and Company is positioned to lead in advancing the future of care. We have leading positions in more than 90% of the markets we serve, with over 90% of our revenues driven by recurring consumables. Every year, we manufacture more than 35 billion devices that reach healthcare providers across more than 190 countries. Few companies in healthcare are as foundational to the daily delivery of care, and that scale powers the strong free cash flow that underpins our strategy. While these trends guide where we innovate and invest, Becton, Dickinson and Company excellence guides how we execute. Together, they shape our strategy for the new Becton, Dickinson and Company. Excellence unleashed, which is expressed through our three strategic priorities: Compete, innovate, and deliver. We have begun executing on these priorities, enhancing the speed and agility of the company. I will share some examples of where we are seeing early positive momentum. Compete reflects how we are elevating our commercial capabilities to win in the fastest-growing parts of the market and deliver an exceptional customer experience. We made significant progress across our commercial initiatives this quarter, including planned sales force expansion in APM, PI, and advanced tissue regeneration, while accelerating initiatives to make PureWick at home available for our veterans. We are also seeing broad-based commercial success across the company. The Pyxis Pro launch is off to a good start, with 85% of initial orders coming from competitive conversions. Alaris delivered our strongest quarter of competitive wins since the relaunch, increasing our category share by approximately 100 basis points. Our medical essentials business also gained share across multiple categories and with major U.S. health systems, including in flush, picks, and catheters. Pharma Systems delivered significant GLP-one wins, with now over 80 novel and biosimilar GLP-one molecules contracted in Becton, Dickinson and Company delivery devices. And BDI saw continued strength with notable conversions in oncology and peripheral arterial disease and strong adoption of recent launches of PureWick Flex and Galaflex. These results reflect the strong execution of our teams and the growing impact of our commercial initiatives. Turning to our second priority, innovate. Innovate focuses on how we bring high-impact solutions to market, executing a pipeline that is now stronger, more focused, and more productivity-driven than ever. This quarter, we strengthened our innovation pipeline by completing the reallocation of $50 million of central R&D to the businesses to fund multiple new product innovations in our high-growth platforms. We also continued to scale Becton, Dickinson and Company excellence into R&D, reducing development times and accelerating future launches by six to twelve months across several areas. In surgery, we entered several new markets, increasing our served markets by over $550 million in categories that offer higher growth, higher margin, and long-term strategic value. This includes the U.S. launch of Avatene Flowable, a next-generation flowable hemostat that strengthens our position in biosurgery and enters us into a nearly $400 million market growing approximately 5% annually. We also advanced our global wound irrigation portfolio with the European launch of SurgiFor, a ready-to-use wound irrigation system that simplifies operating room workflows. In addition, we submitted SurgiFore Pulse to the FDA, a pulse lavage system that can expand Becton, Dickinson and Company's presence in this nearly $200 million market by approximately 40%. Finally, in connected care, HemoSphere Stream began targeted market release in the U.S. and Europe following October's 510 clearance. Stream's smart cable compatibility can expand its addressable market tenfold, and early feedback has been very positive. Finally, our third priority, deliver, represents our commitment to operational excellence across safety, quality, delivery, and cash flow. As a result of the Life Sciences transaction and the network consolidation initiative that we began in FY 2022, we have created a meaningfully simpler manufacturing network, reducing our network by nearly half to under 50 global sites, lowering costs, improving resiliency, and enabling scaled smart factories. We have actions underway to improve this even further. Becton, Dickinson and Company excellence continued to drive meaningful productivity improvements of 8% in the quarter, contributing to gross margin and cash flow. Finally, we achieved good progress on the $200 million cost-out program communicated last quarter, already executing actions representing $150 million or 75% of the target, with a clear line of sight to the balance. We are pleased with our strategic progress, yet we recognize there is more work to do. This is an exciting moment for the new Becton, Dickinson and Company, as we focus actions and raise our standards to outcompete, outinnovate, and outdeliver. With that, I will turn it over to Vitor. Vitor Roach: Thanks, Tom. Starting with revenue, total company revenue of $5.3 billion grew 0.4% with 2.5% growth in New Becton, Dickinson and Company. In Medical Essentials, MDS performance reflects expected order timing dynamics and volume-based procurement in China that was partially offset by continued share gains in the U.S. in our Vascular Access Management portfolio. Within specimen management, solid growth in Becton, Dickinson and Company vacutainer portfolio in the U.S. was offset by expected market dynamics in China, order timing, and a tough comparison to the prior year. Connected Care delivered solid mid-single-digit growth. Performance was led by APM, which grew high single digits on strong volume across the portfolio. MMS growth was led by pharmacy automation with double-digit growth in our LoRa platform. In our infusion business, growth was driven by sets, which were up strongly on increased utilization against last year's fluid supply shortage. Alaris pumps performance was slightly ahead of our expectations despite the expected revenue decline due to a tough comparison to the prior year. Biopharma systems grew low single digits with continued double-digit growth in biologics led by GLP-one. This was partially offset by lower demand for vaccine products in line with our expectation. Interventional delivered solid mid-single-digit growth. This includes high single-digit growth in UCC driven by double-digit growth in PureWick. In surgery, we delivered mid-single-digit growth led by strong performance in our advanced tissue regeneration and infection prevention portfolios. Low single-digit growth in PI reflects strength in peripheral vascular disease and oncology partially offset by China market dynamics. Life sciences declined in the quarter. In the U.S., results were impacted by U.S. point-of-care headwinds, a difficult prior year comparison, and market dynamics in China. In VDB, growth was pressured by market dynamics in China, lower life science research funding, and a difficult compare from prior year licensing revenue. Turning to the P&L, adjusted gross margin of 53.4% was down 140 basis points versus the prior year driven by approximately 170 basis points of tariffs, partially offset by productivity initiatives through Becton, Dickinson and Company excellence. Adjusted operating margin of 21.2% was down 240 basis points versus the prior year due to the impact of tariffs and increased commercial investments in key growth areas. Despite these declines, both adjusted gross and operating margins were ahead of our expectations. Adjusted EPS of $2.91 was down 15.2% driven primarily by the impact of tariffs. However, earnings exceeded our expectations on the strength of both revenue performance and operational execution. Free cash flow was $548 million in the quarter. Free cash flow conversion improved to 66% versus 59% in the prior year, driven by working capital discipline and capital efficiency. During the quarter, we returned approximately $550 million to shareholders, including dividends and $250 million in share buybacks. We ended the quarter with net leverage of 2.9 times and remain committed to our 2.5 times long-term net leverage target. Moving to our fiscal '26 guidance for new Becton, Dickinson and Company. All guidance we are providing today is on a continuing operations basis and reflects the expected closing of the combination of our life science business with Waters. Following the closing, the separated business will be treated as discontinued operations for the full fiscal year. Our guidance includes deployments of the $4 billion cash distribution we will receive as part of the transaction. For fiscal 2026, we continue to expect new Becton, Dickinson and Company to deliver low single-digit revenue growth. Based on current spot rates, currency is estimated to be a tailwind to revenue of about 120 basis points. Moving down to the P&L, we continue to expect adjusted operating margin of about 25% inclusive of the impact of tariffs. Interest other net is expected to be between $600 million and $620 million. Our adjusted effective tax rate is expected to be between 16-17%. Weighted shares outstanding for the full year are expected to be approximately 282 million shares. Given these considerations, we are establishing an adjusted EPS guidance for new Becton, Dickinson and Company in a range of $12.35 to $12.65. This reflects growth of approximately 6% at the midpoint, including an impact of 370 basis points from tariffs. The net estimated impact of the closing of the Waters transaction, including the deployment of the associated $4 billion cash distribution, is approximately $2.4. Therefore, our adjusted EPS guidance for new Becton, Dickinson and Company remains operationally unchanged. As we think about fiscal 2026 phasing, we expect Q2 revenue growth of approximately 2%, consistent with our full-year guidance assumption, with the balance of the year also expected to be within the low single-digit range. We expect Q2 adjusted EPS to be in the range of $2.72 to $2.82. Finally, we are pleased with our Q1 performance. However, with just one quarter behind us, we are maintaining a prudent approach to our guidance for new Becton, Dickinson and Company. Thomas E. Polen: With that, let's start the Q&A session. Operator, can you please assemble the queue? Operator: Absolutely. And at this time, lastly, to provide optimal sound quality, thank you. Our first question is coming from Travis Steed with Bank of America. Please go ahead. Your line is open. Travis Steed: Everybody. Congrats on the RMT and getting that done ahead of schedule. I wanted to ask about the guidance, both the Q2 revenue guide, the step down in Q2, and the EPS guide, as well as kind of the full year, some of the assumptions on the cadence of the year and how you are going Q2 to the second half on both revenue and earnings? Thomas E. Polen: Yes. Thanks for the question, Travis, good morning. So we are really pleased with the start of the year and Q1 performance. I think you saw our team executed well, and we saw strength across several of the high-growth areas of the portfolio. We can talk about those in just a bit. When it comes to Q2, nothing's fundamentally changed in our Q2 outlook. As you mentioned, the core growth driver supporting new Becton, Dickinson and Company growth in Q1, they all remain on, intact, and we feel really good about the trajectory of the business. Our Q2 outlook does reflect some modest timing benefits in biopharma systems and MMS that we saw in Q1. And if you adjust for that, basically Q1 and Q2 are in line with each other. I think a few things we are really pleased to be starting the year at our full-year run rate. Q2 has no ramp versus Q1. And really importantly, there's no ramp first half to second half either, right, which is a much better spot and something that we really wanted to have this year. That, as you know, we had that topic last year. And so just where we want to be, no ramp in the year, strong start to Q1, and executing, as you said, the RMT transaction ahead of schedule. Really excited about the new Becton, Dickinson and Company. Travis Steed: Great. Thanks a lot. Operator: Thank you. We will move next with Patrick Wood with Morgan Stanley. Please go ahead. Your line is open. Patrick Wood: Fabulous. Thank you so much. Tom, maybe just a midterm one around the categories you are looking at. Obviously, this year, a bit of a transition year. There are a few things like China VBP and Alaris that are kind of affecting numbers. But I guess as you look across NewCo Becton, Dickinson and Company's categories, is there any structural change that happened recently or in the past that would preclude you from sort of hitting that normalized mid-single-digit growth rate as a general framework? Anything that's changed way or the other that would make you feel better or worse about that and how you feel about that? Thanks. Thomas E. Polen: Yes. Patrick, and thanks for the question. Absolutely not. We feel really good about our portfolio. As we talked about, we have been extremely active over the last several years in very purposely reshaping our portfolio. We have done three significant divestitures starting with diabetes, obviously, Mueller, and most recently, our life science business. We have very purposely brought in 20 tuck-in acquisitions, everything from our Parata pharmacy automation to APM and a number of others. All reshaping the portfolio in those high-growth areas that we have been talking about that we identified some time ago. Today, as you mentioned, we do have some known headwinds that are in 10% of our portfolio. The fundamentals across the remaining 90% remain very strong, and they continue to perform at a solid mid-single-digit growth. We are continuing to lean in behind those areas. You are seeing us put meaningful commercial investment behind those, the $30 million of incremental sales investments, all 100% on track. You heard that update on the call, investing behind areas like VA, the Veterans Administration, PureWick now that's purely fully reimbursement for veterans. Launching a number of plastic surgery products in Europe and Brazil. Expanding our sales forces by 15% in PI and APM, right? All investing behind those growth areas. Which is again, you saw strong growth, double-digit growth, in fact, this past quarter in areas like PureWick, Biologics, tissue reconstruction, and others, you saw high single-digit growth in areas like APM, Pharmacy automation grew double digits in the quarter. So, again, we feel really good. Those are not slowing down. We do not expect them to, we expect them to continue strong through the year. We have got a great innovation pipeline that's going to continue to fuel growth in those over the next several. Patrick Wood: Love it. Thank you. Thanks for the question. Operator: Thank you. Our next comes from Larry Biegelsen with Wells Fargo. Please go ahead. Your line is open. Larry Biegelsen: Good morning. Thanks for taking the question. Congrats, Tom, on the closing of the Waters deal. Tom, maybe we could talk about the other 10% of the portfolio that's not growing mid-single digits. China VBP, what's the expected impact in fiscal 2026? When did these vaccine headwinds lap in farm systems? And any change to the Alaris expectation this year and next year that you gave us on the last call? Thomas E. Polen: Yeah. Thanks for the questions, Larry. Everything's playing out as we expected it in Q1, and we expect that to continue for the balance of the year. China was in line with our expectations in the quarter. Vaccines were relatively in line with expectations in the quarter, as was Alaris. Anything, we are seeing some really strong competitive momentum in Alaris. I think as we shared in the prepared remarks, we had a record in new competitive wins in the quarter. We gained about a full point of share just in the quarter. Those take some time to come through in our run rate as we implement those and see the consumables revenue pickup. But in terms of actual contract signed deals closed, it was a really strong quarter in Alaris, right, which is exactly what we want to see. We are coming to the tail end of, of course, remediation, so our whole sales force is focused now on competitive gains, just as we said. And so we are pleased with that. Vaccines, on the counter side of vaccines, we continue to see biologics grow very solidly. Vaccines, we expect that will continue to play out for the year as we expected, and we will have to look at that as we go into 2027. Certainly, it will be a smaller portion of our revenue, and biologic will be a larger portion of our revenue. So its absolute impact in 2027 likely will not be anywhere near what it would be in '26, but we will continue to monitor that very closely. And China, the market, I was just there in January. I think we have shared before that we expect that VOB will have gone through 80% of our portfolio by 2026. We do not see any change to that assumption. And we do continue to see positive volume growth happening in China despite the price compression in the few areas that we have discussed where VOBP is happening. So overall, we said at the beginning of the year when we gave guidance for the old Becton, Dickinson and Company, we expected those combined areas to be about 250 basis points of headwind in the full year, and that's consistent with what we outlined and how we think about it going forward. Larry Biegelsen: Thank you. Operator: Thank you. Next question comes from Robbie Marcus with JPMorgan. Please go ahead. Your line is open. Robbie Marcus: Great. Good morning and thanks for taking the questions. I will add my congratulations on the RMT going effective today. Two quick ones for me. I will ask them both upfront. One, just on the second quarter, it's the easiest comps of the year, both on a one and a two-year stack basis. So a lot of people just wanted to get help on why 2% is the right starting point for fiscal 2Q and any considerations there? And then as we get to the 25% operating, which I think is a touch better than people were thinking, you know, any one-time considerations or TSAs, MSAs, anything we should be aware of as we try and build up our models to get there? Thanks a lot. Vitor Roach: I will turn that to Vitor. Hi, Ravi. This is Vitor. So regarding Q2, so first, I think we were very pleased with Q1 performance. I think we started the year solidly, and it puts us in very sound grounds for the rest of the year. But for Q2, Tom mentioned in his remarks, nothing fundamentally changed in Q2. We have our core drivers supporting the new Becton, Dickinson and Company growth in Q1 actually continuing in Q2, and we expect that trajectory to continue for the rest of the year as well. In Q2, the only thing that happened is slight change timing situations in both farm systems and MMS. But if you normalize for those factors, you actually had a little bit of a more normalized growth between Q1 and Q2. I think the most important piece is that nothing fundamentally changed. On our Q2. We feel very confident about the numbers going forward as well. Thomas E. Polen: Both very much in line with our full-year guidance. Vitor Roach: Exactly. Very aligned with our full-year guidance. And from a margin perspective, there is no specific one-timers that we are expecting. So we are still holding the 25% as we committed before. And this is on the basis of our margin performance, which is the strongest execution of our Becton, Dickinson and Company excellence and also the favorable mix that we are driving through intentional investments in strategic areas like high growth, high margin areas like APM, UCC, surgery among others. So, we feel good about the 25 and there is nothing specific that changes the number from 25. Thomas E. Polen: And Ravi, maybe just to share a little bit more color on the margin performance. Right? We are continuing to be very focused. Our innovation pipeline, the areas where we are putting commercial investment, are all both the innovation pipeline has a notably higher gross margin than our average portfolio, and the areas that we are putting commercial behind that we have talked about also have a notably higher gross margin than our broader portfolio. So those help fuel margin. At the same time, obviously, Becton, Dickinson and Company Excellence in our operations organization is continuing to gain momentum. Right? We have been at it for a couple of years. We are still in relatively early innings. Saw us talk about 8% productivity improvements in the quarter. That's world-class levels. Really proud of the teams there and how they are executing. Also heard us talk about, I think, the first time, share some statistics around our plant network. We started the last phase of Becton, Dickinson and Company's strategy, we talked about investing behind the network. Simplification. And you are seeing the outputs of that combined with obviously the separation of our Life Science business. More than cutting our manufacturing network in half. So when we started the journey several years ago, we had a little over 90 manufacturing plants. Right? We are under 50 today. And so these are fewer plants, more scaled plants, where we are getting more leverage, more costs being spread over higher volume in these sites, also all helping to contribute to our operating margin. So that's been something systematic that we have been working on. We are really pleased with that. And when you think about that, that drop from nearly 90 to under 50 plants, about half of that, over 20, that's over 20 plant closures and a little over 20 plants going to Waters as part of the RMT, but a dramatically simplified network that we are investing behind as we go forward as well. It just helps us further on the op margin. Thanks a lot. Operator: Thank you. We will move next with Joanne Wuensch with Citibank. Good morning and congrats on getting to this phase. Two questions. The first one has to do more macro, if you are seeing anything in the quarter on things like nursing shortages, weather impacts, or anything on the ACA? And then I was hoping you could maybe flush out some of the contracts you have in for the GLPs and if there is anything noteworthy you can share with us there. Thank you. Thomas E. Polen: Morning, Joanne, and thanks for the question. So utilization as we think about just the broader hospital demand trends, we continue to see steady utilization levels in line with hospital surveys that we monitor. Say the CapEx environment, all also see remaining solid. We have not seen any weather effects through January and into February. Then I would just say, overall, too, as we think about utilization, over 90% of our revenue is consumables, particularly for New Becton, Dickinson and Company, which provides a very resilient base. And the portion that is CapEx, we are seeing that solid as well. You saw that come through very clearly in MMS. If you exclude kind of the dynamic of Alaris and the Grover, MMS grew nearly 6% in the quarter, and that includes CapEx there. So really strong. Pharmacy automation is actually one of our largest percent businesses of CapEx, and it grew double digits, 10% in the quarter. And that's a mix of both strong CapEx purchases in Europe and in the U.S. There as we think about pharmacy automation. Again, that's a big labor savings play, and that's a big part of our CapEx spending as well as helping where there are shortages of pharmacists or other clinicians. A lot of our solutions help in that environment. When it comes to GLP-1s, we are in a really good position there. Certainly, it's a modest portion of our business today, about 2% of our revenue. But it's a high-growth area and certainly a growth opportunity as we look forward. Today, we support some of the largest molecules that are on the market. We continue to have a very high win rate on both new novel molecules that are coming to market and on biosimilars. We updated some information today on the call. We now have more than 80 novel and biosimilar GLP-1s contracted in our devices. And we are continuing to see momentum in injectables. Obviously, there's always the question in the news. I know some investors of ours have asked a question about how do we think about oral injectables. Reality is, we are seeing continued momentum in injectable GLP-1s. We continue to see the largest pharma companies putting billions of dollars, some very recent announcement in multibillion-dollar investments in injectable capacity, including in the U.S. And people really view that, orals as complementary rather than displacing injectables at scale. So we are continuing to be bullish on that and continue to focus on having a very high win rate on both new novel and biosimilar molecules in the space. Thanks for the question. Operator: Thank you. We will move next with Matt Taylor with Jefferies. Please go ahead. Your line is open. Matt Taylor: Hi, thanks for taking the question. Tom, as a follow-up to that question, I think previously you had talked about the potential for the GLP-1 franchise within Becton, Dickinson and Company to get to about $1 billion by the end of the decade. Do you still feel the same way about the trajectory long term given all these deals that you signed? And maybe you could address that and where it is now, where and where it is today. Thomas E. Polen: Yeah. We still feel very much with that on track. Our growth rate continues to be very strong as we share double digits. We are nearing that halfway point on that journey now. So and again, you have not seen the number of new novel molecules coming to market that will be over the next several years. And of course, as you look at the back half of this decade, you start really hitting stride on the biosimilars. And when we talk about our biosimilar portfolio, it's very broad geographically. So our biosimilar portfolio includes biosimilars across China, Southeast Asia, Europe, Latin America, Canada, and the U.S. It's very broad globally. And so as you think about certain patent expiries, varying geographically, have good exposure across those different time points. Thank you for the question. Matt Taylor: Thank you, Tom. Operator: Thank you. We will move next with Matt Miksic with Barclays. Please go ahead. Your line is open. Matt Miksic: Good morning, Tom. Thanks so much for taking the questions and congrats on getting to the starting line, I guess, is one way to think about it. So when you mentioned just a question on the innovate part of your plan. And investments you are making in R&D. Maybe some sense of when I understand the commercial investments this year execute and compete, but when do you think we will start to see things come through the pipeline or maybe come through at a faster pace from these R&D investments that you are making in the kind of Innovate segment of strategy? Thomas E. Polen: Yes. Thank you. You are going to see those continue to come through. This year, we have got a lot of great launches happening. We talked about some of the very recent ones that are just ramping up like Pyxis Pro. We could not be more pleased with how that one's been going as we mentioned, really strong competitive share gain. Chemosphere Stream just launching now. You are going to continue to see throughout this year and into next 2027 is quite a big year for launches as is 2028. Across the portfolio. At the same time, we have shared we put $50 million that we took from efficiencies in and shifting from corporate expenses, moving that into R&D. And we just started quite a few new R&D programs as well. This fiscal year, not only what we would normally start with our traditional increase, but that bolus of money starting more projects in tissue regeneration, additional biologic drug delivery, some adjacencies in PureWick that we are really excited about, investments and also in the connected care space. The other thing that we are seeing some really positive, still early, but very positive results. As we shared, we are taking Becton, Dickinson and Company excellence commercial and into innovation. And we actually have some dedicated resources now that go across working with our different R&D teams doing kaizens to accelerate our innovation timelines. We have been doing quite a few of those. We started that really in late last year. We have been doing those throughout Q1. And we have seen a number of R&D projects where we have accelerated timelines to launch by six and even up to twelve months on that. So we are going to continue to get after that. We have got a goal to do all of our key development programs. We are focused on driving those Kaizens and accelerations. This year. They are all scheduled with the teams. And so that capability and that momentum that we saw in operations through Becton, Dickinson and Company Excellence, we are really pleased with some of the early signs that we are seeing taking those same processes and systems into innovation and also into our commercial organization. So we will continue to provide updates on that as it progresses. And we will look forward to sharing more through the year and eventually at an Analyst Day in the future on that innovation pipeline. Thanks for the question, Matt. Matt Miksic: Thank you. Operator: We will move next with Shagun Singh with RBC Capital Markets. Please go ahead. Shagun Singh: Thank you so much. I just wanted to get a better handle on the three areas of headwinds, Alaris, Vaccines, and China. It seems like vaccines in China will hopefully be behind us this year. But how should we think about Alaris beyond this year? Do you get to that 5% or mid-single digits next year? Or will Alaris be a headwind? And then just very quickly on M&A. Is there an opportunity for you guys to be more aggressive under the new Becton, Dickinson and Company strategy on M&A to help raise the weighted average market growth here? Thank you for taking the questions. Thomas E. Polen: Yes. Thank you for the question, Shagun. So on vaccines and China, I think you described those. Alaris, we communicated at the end of as we gave the guide to start this year, the Holco Becton, Dickinson and Company guide. We do expect Alaris to step up in 2027, 100 basis points headwind this year stepping up to a 200 basis point headwind in 2027. That's just again as we have fully completed the remediation. Expect to actually be at record share levels as that dynamic is happening, it's just the grow over from the remediation. That's happening there. But expect to be in a stronger than ever competitive position on Alaris. As it comes to tuck-in M&A, so as we have communicated, for new Becton, Dickinson and Company, we are very focused on a balanced capital allocation strategy. We are pleased obviously this year between the $2 billion plus share buyback that we did, $250 million buyback that we did in Q1. Plus the $2 billion buyback that we are doing now, through the ASR, but that's a significant return of capital to our shareholders. We are, as part of that balanced capital allocation strategy, we have communicated that we are focused on focused tuck-in M&A. Our focus remains on tuck-in M&A, not transformational M&A. And we do have a robust pipeline from that perspective. When it comes to the criteria for those tuck-in M&A, they remain unchanged versus what we have shared in the past. That means accretive to revenue growth and accretive from an EPS perspective. We are not looking at dilutive M&A. And we do see with the new Becton, Dickinson and Company, there are a number of very attractive high-growth sectors that we are in that we see the opportunity to supplement that WAMGR with tuck-in M&A. So more to come on that, but we will continue to do it in a focused way and very much aligned with that balanced capital allocation strategy that we have communicated. Thanks for the question. Vitor Roach: Thank you. Thomas E. Polen: Our next question, by the way, just for those who had congratulated earlier on, the deal with Waters is officially closed now. Operator? Operator: Thank you. Our next question comes from Rick Wise with Stifel. Please go ahead. Your line is open. Rick Wise: Good morning. Hi, Tom. Tom, you seem very well set up for the rest of the year. I think Vitor said it, and I apologize if these were not the exact words. But I think you said prudent guidance for fiscal 2026. You are well set up for a stable, predictable outlook without the usual second-half ramp we have seen in the past. That's great. And sort of a variation, a little bit of Matt's question. I can't believe you are investing in Salesforce the way you are. The M&A you have done, the focus on faster growth. Businesses, the cost-cutting. My question is, if there would be some upside to this thoughtfully prudent guidance, in the next two, four, six quarters. You think it would be from all the above? Is it more likely from the new products? Is it more likely to come from the expanded sales efforts? Is it that some of the growth drags are a little less? Just any color on how we should just reflect on that? And just as since this is not exactly one question, I will ask at a half. When are you going to where are you with your CFO search announcement timing and maybe talk to us a little bit about what you are looking for in your new partner. Thank you so much. Thomas E. Polen: Yes. Thank you for the questions. So when it comes to the CFO search, continue that is well underway, and we will look forward to providing an update when that is complete. In the meanwhile, of course, Vitor is doing a great job stewarding the company and obviously doing a great job here on the call. So more to come on that. But we are running a thoughtful process focused on, you know, continuity of execution and financial discipline. And obviously, it's a really important moment in the company's evolution, and we are going to make sure we get the right person there. When it comes to upsides, guidance for the year, look, again, we are really pleased with how we started the year. As we think about the areas that we are investing behind, those areas of high growth and higher margin urinary incontinence, pharmacy automation, connected care, APM. Tissue regeneration, biologics, right? Those are the areas that we are putting our investments behind, both commercially and disproportionately from an R&D perspective. And so those are areas that could be natural areas of opportunity for us. I think, you know, as Mike Feld now also as chief revenue officer, who's been running the Life Science segment, essentially as of today. He's now full-time in that role. We see opportunity the reason we created that role, it's never existed in the history of Becton, Dickinson and Company, is we have been very good commercially. You do not get to our category-leading shares in 90% of the markets in which we compete without being good commercially. We think there's another level of performance that we can reach, just like we have always been good operationally. But we are reaching and we are executing at levels that we have never executed at before operationally. We view that same opportunity exists commercially, and when we execute that, that will deliver higher growth. We are convinced of that. And so more to come there. As Mike's now fully in that role, we will provide more exposure to our investors on the programs that he's executing. It not only has to do with sales force expansion, but we have changed compensation plans for our selling organization around the world going into this year. We are putting in new tech stacks for our sales teams to help them be more effective. We are optimizing our management systems and processes with our selling organization, and Mike's leading that, working with our teams around the world. So, again, like we have seen in operations, we believe that there are opportunities, meaningful opportunities, to help accelerate growth as well through that commercial excellence and complementing that with our innovation pipeline, the growth areas that we have been focusing on and, of course, complementary tuck-in M&A over time as well. So thanks for the question, Rick. Rick Wise: Thank you, Tom. Operator: Thank you. We will move next with Josh Jennings with T.P. Cowen. Please go ahead. Your line is open. Josh Jennings: Hi, good morning. Thanks for taking the questions and congratulations on officially breaking through the tape there on the Waters transaction. Wanted to just get help thinking about the pricing environment hospitals, demands for concessions versus whether that's stepped up and just with all the innovation that's on tap for from Becton, Dickinson and Company, you know, can that help drive price premiums and pricing be a tailwind in fiscal 2026 and into the out years and help with organic revenue growth and gross margin expansion. Thanks for taking the question. Thomas E. Polen: Yeah. Thanks for the question, Josh. So we continue to see, I would say, a stable pricing environment, you know, relative there's always pressure from our customers for pricing. That's something that we have, you know, obviously navigated for quite some time. We are very focused on, obviously, articulating and delivering value to our customers and outcomes, both clinical outcomes and financial outcomes through the technologies that we provide. Pricing what we are seeing so far in Q1, details will come out further in the 10-Q that will be filed later today. But overall, pricing generally flat to slightly positive. That's up a little over 50 basis points ex China. Positive price. Offset by the pricing dynamic that we see in China. As we think about that going forward, we expect to continue to have positive pricing in the rest of the world. And as China VOBP abates as we move into 2027, we would expect and beyond that pricing dynamic to continue to be more of a positive for us as we go forward as VOBP lessens, from that perspective. I think as we think about new product innovations and pricing there, we are entering into a lot of new product categories with our products, probably more so than ever before. Historically, we have done a lot of serial innovations where we are upgrading base products. We are continuing to do that in a number of cases, but more so than ever before we are entering into new spaces. I think actually all of the new products that we shared today are brand new spaces for us. Avatene Flowable, brand new biosurgery space for us that we have never been in before, a $400 million market. Surgiaphor, which is complementary to Chloroprep, but it's for once you are in the surgery. Chloroprep's before the surgery. That's a whole new market for us. And Hemosphere Stream is really extending the hemisphere platform into the general ward. Expanding it to about 30,300 monitors, that we do not tap into today, so a brand new market. Space for us with Hemisphere Stream. So there, we make sure that pricing equals the value of the products and what they are delivering to our customers. I think the other thing is in areas, and we have a number of new products launching in pharmacy automation, for example, for central fill. Or the Pyxis Pro, which, by the way, Pyxis Pro launched at a premium to the base Pyxis. But it's all associated with very clear data that we have. That it's delivering greater economic value to our customers, right? Those areas, for example, it's meaningful helping with nursing workflow by reducing drug shortages on the floor. Or in the case of pharmacy automation, it's reducing labor costs associated with preparing medications and pills. And it's enabling many places, let's say like online pharmacies that are delivering to your home, for them to do that in warehouses, and they are starting from scratch, they never even hired in the first place there. They go straight to the robots and automation and the warehouses are delivering. Medications to home and able to do that in a cost-effective manner. So I think our solutions are well-tailored to this environment that we are in and expect we will continue to see. As is our innovation pipeline. Thanks for the question. Operator: Thank you. We will move next with Jason Bedford with Raymond James. Please go ahead. Your line is open. Jason Bedford: Good morning and congrats on the progress here. So I had a question on Alaris. Was down year over year, but you mentioned you gained 100 basis points of category share. I'm guessing the share commentary is on an installed base basis. So my questions are, one, is your expectation that you continue to gain share at this rate? And then two, just to level set what is your share position today? Thanks. Thomas E. Polen: Yes. Thanks, Jason, for the question and bringing us home here on the call. Our share position is nearing 60%. Overall. And yes, you are right. So obviously, through the remediation efforts that we have been doing over the last three years, we have been upgrading about 20% of the market per year. And so as this is now coming to the tail end of that and peaks last year, you physically can't even if we took all competitive share that's opening up, this year, we still would see declining growth and the same dynamic would happen next year just because of what it means for us in terms of the scale in which we just upgraded the marketplace. But yes, we are pleased with our performance on share capture in the first quarter. We have a very strong funnel as we go forward. And we continue to innovate very rapidly on Alaris, not only on the current platform, we have had of course, had new 510s approved since the original one that allowed us to relaunch the platform. But we are continuing to bring new features to Alaris. We have another one planned for submission late this year. That will add further new features to that. And of course, we also continue to have it and we have shared in the past a whole new Alaris platform which is moving forward very nicely through our innovation pipeline. And we will look forward to sharing more details on in the future. But we feel good about Alaris, feel good about our overall connected medication management platform. It's great to have Alaris and our new Pyxis Pro out there together as well, as we also shared Pyxis had a really strong competitive quarter in Q1 with the launch of Pyxis Pro. And has a really strong pipeline as we look forward as well. So thank you for the question, Jason. Jason Bedford: Thank you. Operator: And that will conclude today's question and answer session. At this time, I would like to turn the floor back over to Thomas E. Polen for any additional or closing comments. Thomas E. Polen: Okay. Thank you, operator. In summary, we delivered solid Q1 results that exceeded our expectations, which we believe positions us well to achieve our full-year guidance. As we navigate transitory headwinds in contained areas within our business, our broader portfolio continues to perform well, and we are actively investing in high-growth, high-margin areas. To our Biosciences and Diagnostic Solutions colleagues transitioning to Waters, I want to thank you for your passion, professionalism, and the tremendous contributions you have made to Becton, Dickinson and Company. You are stepping into an exciting new opportunity with a strong growth-driven life science leader, and we are proud of all you have accomplished and wish you every success in this next chapter. Of course, with the completion of the transaction this morning, we are very excited to fully pivot to our strategy for the new Becton, Dickinson and Company. We look forward to updating you on our progress next quarter. Thank you all for your time today. Operator: Thank you. This does conclude this audio webcast. On behalf of Becton, Dickinson and Company, thank you for joining today. Please disconnect your lines at this time. Have a wonderful day.
Operator: Greetings. Welcome to Pagaya Technologies Ltd.'s Fourth Quarter Full Year 2025 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. I will now turn the conference over to Josh Fagen, Head of Investor Relations and COO of Finance. Thank you. You may begin. Josh Fagen: Thank you, and welcome to Pagaya Technologies Ltd.'s fourth quarter and Full Year 2025 Earnings Conference Call. Joining me today to talk about our business and results are Gal Krubiner, Chief Executive Officer of Pagaya Technologies Ltd., Sanjiv Das, President, and Evangelos Perros, Chief Financial Officer. You can find the materials that accompany our prepared remarks and a replay of today's webcast on the Investor Relations section of our website at investor.pagaya.com. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts with respect to, among other things, our operations and financial performance, including our financial outlook for the first quarter and full year of 2026. Our actual results may differ materially from those contemplated by those forward-looking statements. Factors that could cause these results to differ materially from our expectations include, but are not limited to, those risks described in today's press release and our filings with the US Securities and Exchange Commission. We undertake no obligation to update any forward-looking statements as a result of new information or future events. Please refer to the documents we file from time to time with the SEC, including our 10-K, 10-Q, and other reports for a more detailed discussion of these factors. Additionally, non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, adjusted net income, fee revenue less production costs, or FRLPC, FRLPC percentage of network volume, and core operating expenses will be discussed on the call. Reconciliations to the most directly comparable GAAP financial measures are available to the extent available without unreasonable efforts in our earnings release and other materials which are posted on our Investor Relations website. We encourage you to review the shareholder letter, which was furnished with the SEC on Form 8-K today for detailed commentary on our business and performance in conjunction with the accompanying earnings supplement and press release. With that, let me turn the call over to Gal. Gal Krubiner: Thank you, and welcome, everyone. 2025 was a hallmark year for Pagaya Technologies Ltd. In Q4, we achieved $34 million of GAAP net income and $80 million in operating cash flow. In the beginning of 2024, we set the goal to become GAAP net income and cash flow positive, which we continue to accelerate in the fourth quarter this year. For the full year, we achieved revenues of $1.3 billion, up 26% year over year, adjusted EBITDA of $371 million, up 76% year over year, and GAAP net income of $81 million, up $483 million versus 2024 with an EPS of $0.93. More importantly, these results and achievements were the outcome of growing and investing in our business across verticals, further expansion into first look and second look loans, and optimizing our unit economics and balance sheets. Before discussing our results and outlook, it is important to recall that 2025 was a year of discipline for Pagaya Technologies Ltd. We fine-tuned the foundations of our business and approach towards risk management and underwriting. In turn, this drives further consistency for our investors as we continue to serve our lending partner needs. All of that while being an enterprise focused on sustainable through-the-cycle growth. This discipline drove us to proactively take action later in the fourth quarter in face of persistent consumer uncertainty and trends. While our data does not indicate consumer deterioration, we have the privilege of being able to pivot our production to focus on prudent and disciplined credit performance across asset classes remain in line with our expectations. However, we pulled back our exposure to higher risk and less profitable credit deals which have potential for higher relative losses in a downside scenario. As we mature as a company, we are shifting more and more of our focus to achieve the best long-term outcomes for our stakeholders, and to avoid any downside that could arise from potential tail risks. We have built a business that is highly scalable, with key inflection points in our operating and capital structure that results in standalone operating efficiencies. We have a robust list of onboarding partners and a healthy funding position. As important, with our data moat, leadership, and commercial momentum, we are positioned to continue to take share in this vast market. A market that Pagaya Technologies Ltd. creates and one that Pagaya Technologies Ltd. leads in an increasingly profitable manner. Let me now talk about the long-term fundamentals of our business. It is clear that we have momentum and are executing on all of our business. As we have talked about throughout 2025, future growth will continue to come from the combination of recently onboarded partners, and deepening our existing relationships. Our pipeline remains robust, a testament to our product suites becoming industry standards. In the latest quarter and the months that followed, we onboarded Achieve GLS and a leading fast-growing buy now pay later provider in North America. And we expect to announce additional partner launches in the coming quarters. GLS or Global Lending Services is a leading auto finance provider that offers financial solutions to almost 20,000 franchises and independent dealerships nationwide. As I look ahead, I'm excited about more consumer lenders joining the Pagaya Technologies Ltd. network, further highlighting the potential and value added of our enterprise platform. For our existing partners, we continue to innovate meeting our partners where they are to drive higher partner usage, certification, and engagement. For instance, LendingClub recently adopted our marketing affiliate offering and became a multiproduct partner for us. We expect to end the first quarter with multiple large personal loan partners fully onboarded into our prescreen offering. Our earning power and cash flow generation will become more robust as partners continue maturing into multiproduct relationships. At the same time, we continue to institutionalize and diversify our business through long-term agreements with fee and application flow commitments, creating additional partner alignment and business stabilization. This quarter, we entered into long-term agreements with two of our largest partners in auto and personal loans. While we were to continue growing our application volume, from new and existing partners, our decision to reduce our exposure is firmly grounded in portfolio proposition, rather than growing just for the sake of growth. In fact, we are comfortable having a lower conversion rate when it is appropriate to reduce the likelihood of adverse outcomes. As a maturing business, a core pillar of our culture is to deliberately balance long-term growth and profitability against short-term metrics. Our focus on top-of-funnel growth and expansion is designed for the future, as we prioritize building an enterprise platform for the long term. As a B2B2C enabler, our partners depend on Pagaya Technologies Ltd. to manage the business for long-term strengths, and stability. And they appreciate our ability and willingness to make such proactive risk-based decisions. Turning to funding. We continue to leverage favorable market dynamics to create longer-term committed capital that enhances our capacity while reducing exposure to funding volatility. This year, and in the months that followed, we made strides in diversifying our funding sources with forward flow arrangements across all three core asset classes, personal loan, auto loans, and point of sale. Building on this momentum, we further enhanced our funding stability with the expansion into revolving ABSs across point of sale and personal loan, creating almost $3 billion of revolving capacity. As we enter 2026, our guidance and business plan are driven first and foremost by the disciplined risk framework we have developed over the years. Our accomplishments in 2024 and 2025 set us up for efficient and durable growth. We stabilized the business as we scaled, optimized our operating costs, and balance sheet, and diversified our sources of revenues and funding. Going forward, we are in the right place for balanced efficient growth. In 2026, investors should expect more measured volume thus revenue growth, as we prioritize reducing credit exposure over our market share gains at the moment. Our strategy reflects a business that is in control of its long-term growth trajectory while deploying measured risks. With our ten-year anniversary approaching, we believe this strategy reflects a company that is building an enduring platform that maximizes value creation over time. We are building a B2B2C platform. There will be a cornerstone of the US financial ecosystem that should be embedded within every US consumer lender. Leveraging intelligent AI quant decisioning as its core, our platform will operate wherever our partners are through the cycle while powering products that meet the needs of our customers. The first decade proves our model and secured our place in the market. The next decade is about scaling that foundation with greater ambition, durability, and impact. Sanjiv Das: Thank you, Gal. As we wrap up the year with our fourth consecutive quarter of GAAP net income profitability and look ahead, our growth strategy is clear. Continue to build a sustainable and profitable business, that is increasingly embedded in the US financial ecosystem, Pagaya Technologies Ltd.'s growth continues to be driven by institutional-grade scaling of existing partner relationships as well as new partner additions. In fact, we just added three new partners to our platform. Achieve, GLS or Global Lending Services, and a leading fast-growth buy now pay later provider in North America. Our onboarding process is becoming industrial grade. Minimizing partner resource requirements. All new partners have a prebuilt API integration for the Pagaya Technologies Ltd. product suite. Prebuilt product APIs along with an eighteen-month joint roadmap will enable accelerated scaling. We also established long-term agreements with all of them that encompass volumes, fees, and all other protections. Our onboarding pipeline remains the busiest in Pagaya Technologies Ltd.'s history with demand and traction from leading lenders in the country across banks, fintechs, and other lenders. In fact, a lot of these leading lenders are proactively engaging with us on all which is a testament to Pagaya Technologies Ltd.'s relevance and strong product-driven value proposition. We are planning to announce some new names in the coming quarters. With our existing partners, we've been consistently delivering and diversifying across products, including the direct marketing engine, affiliate optimizer engine, and dual look. This diversification provides Pagaya Technologies Ltd. with new volume beyond decline monetization, increased value and stickiness with existing lending partners, and most importantly, provides future growth for Pagaya Technologies Ltd. without expanding our own risk appetite. Existing partners continue to actively adopt our products. In fact, our largest existing partners signed definitive term sheets and adopted the direct marketing engine after a series of tests. And are now scaling with us across direct mail and email prescreen campaigns. Within our affiliate optimizer engine, we recently onboarded LendingClub onto Credit Karma where they will be presenting personal loan offers to consumers in partnership with Pagaya Technologies Ltd. Additionally, we are currently expanding our affiliate optimizer engine to include Experian's activate platform with the launch of our first partner and several more in the onboarding queue. Lastly, we signed several long-term agreements with leading partners to establish commitments across application flow size, quality, and controls to provide further visibility through the cycle. Turning to funding. We continue to diversify from prefunded ABS funding structure to include more committed capital structures that reduce our exposure to funding volatility. In the last few months, we have expanded our forward flow agreements into all three core asset classes. Including inaugural agreements with Castlelake and SoundPoint in auto and point of sale respectively. This broadens our Castlelake agreement into both personal loans and auto. We continue to innovate across our various ABS shelves. We introduced revolving structures, first in POS, and then in personal loans. We inked our inaugural POS ABS deal and our inaugural paid revolving ABS with twenty-six North which gives us a more diverse set of financing options and more visibility hence, greater consistency in our funding construct in the face of potential capital market cyclicality. I'd like to reflect broadly on the capital markets environment. Which remains very supportive for Pagaya Technologies Ltd. We see continued strong demand from across insurance funds, along with traditional asset managers while we are witnessing a higher level of rationality than we saw in 2025, from private credit. Overall, we would view the current environment as more of a steady state with healthy demand and execution particularly for quality assets. Turning to credit performance, we remain disciplined in our underwriting our core focus centered around gaining access to more high-quality flow from existing and new partners. We continue to leverage our unique ability to assess risk in real-time. Based on the data from over 30 lenders across three asset classes with agile decision-making. We continue to prioritize prudent risk management. While credit risk performance of our portfolio remains in line with expectations, we took proactive steps late in the year to reduce exposure to select higher volatility segments. These actions had a direct impact on our network volumes revenues, and profit in the fourth quarter. Our decision was primarily driven by the changes in risk appetite that we observed across multiple lending partners of ours in light of market uncertainty. As we discussed in our outlook, the impact of these actions will restrain growth to a measured degree in the first quarter. We expect a ramp in growth through the year due to several factors that we will discuss. Including the onboarding of new partners and continued penetration into existing relationships. Before I hand the call to EP for a detailed review of our financial performance and outlook, I'd like to reflect on the successes we've had across the business this past year. In summary, 2025 was a year of innovation, optimization, and profitability across all aspects of the business, laying the groundwork for growth in 2026 and the years beyond. Evangelos Perros: Thanks, Sanjiv. I will start with the big picture. In 2025, we achieved several important milestones that position Pagaya Technologies Ltd. up for sustainable profitable growth. Over the last few years, we have been deliberately reshaping this company, strengthening the foundation tightening the operating model, improving the capital structure, and most importantly, building a much more resilient scalable, and differentiated technology platform in consumer lending. In this past year, we made sustained investment in our data and risk infrastructure combined with intentional decisions around risk management balance sheet optimization, and how we grow. The cumulative result of all that work became evident in the financials as we're exiting 2025 with four consecutive quarters of GAAP profitability. As it relates to our 2026 growth outlook, it reflects our long-term objective to grow the platform, while remaining disciplined and adaptive in how we manage risk. And even more so in an uncertain environment. We actively manage the business as a portfolio of products partners, and risk bands adjusting exposure as conditions evolve. When uncertainty increases, the appropriate response is to reduce exposure to higher risk segments. When conditions improve, we will reassess and reallocate accordingly. We remain focused on growth from increased product usage penetration and new partners. Let me walk through the numbers. For the full year 2025, we delivered $1.3 billion of revenue, up 26% year over year, $512 million of FRLPC, also up 26%, $371 million of adjusted EBITDA, up 76% and $81 million of GAAP net income representing a $483 million improvement versus last year. This reflects meaningful progress in profitability and operating leverage showing up at scale. For the fourth quarter specifically, revenue was $335 million FRAPC was $131 million, and adjusted EBITDA was $98 million. Representing a 29% margin. We reported GAAP net income of $34 million compared to a loss of $238 million a year ago. FR EPC as a percentage of network volume was 4.9% demonstrating strong monetization while remaining disciplined on risk. Turning to network volume, we reported $2.7 billion for the fourth quarter up 3% year over year. Personal loan, auto and POS volume combined grew at a double-digit rate and was partially offset by zero SFR volume in the quarter. Personal loans remain our largest vertical at approximately 65% of total volume and grew 10% year over year. Auto and POS represented 19% and 16% of quarterly network volume, respectively. For the full year, network volume was $10.5 billion, up 9%. Excluding SFR, volume growth was substantially higher. Late in the quarter, we proactively tightened production in certain areas that remain profitable, but could exhibit higher variability of credit outcomes and maybe the first to show deterioration in a downside scenario. This was a dynamic reallocation within the portfolio away from higher risk segments with a plan to be redeployed in volume from new application flow and new products. And therefore, more balanced risk. Given our visibility into new partner onboarding, new partner and product monetization, and the operating leverage in the business, we are well positioned to make these adjustments. The decision reduced fourth quarter volume by approximately $100 million to $150 million without impacting the quarter's profitability targets. When risk moves and persists, we will adjust. We will not stretch. We are dynamic. We calibrate and continue compounding returns. Fourth quarter total revenue and other income was $335 million, up 20% year over year. Fee revenue grew 16% to $321 million and made up 96% of total revenue. Interest and investment income grew to $14 million Importantly, revenue growth continued to outpace volume growth underscoring two key trends. Improved monetization and higher revenue and profit per unit of volume and risk. Full year revenue grew 26% and interest and investment income reached approximately $40 million. FRLPC in the fourth quarter was $131 million up 12% year over year, again meaningfully outpacing volume growth. FR LPC margin expanded to 4.9% driven primarily by partner and funding mix. For the full year, FRAPC totaled $512 million also 4.9% of network volume, up 70 basis points from 2024. I want to spend a moment on a subset of fee revenue, fees from capital markets execution. This is an area where we have progressed in a very intentional way. These fees were a negative $6 million for the quarter and a negative $21 million for the year, reflecting the pricing agreements with our forward flow partners and the risk-adjusted pricing of our ABS transactions. Specifically on ABS, negative fees reflect additional cash contribution we put in our securitization structures in addition to our purchase of securities reflected in our investments in loans and securities. These cash contributions are accounted for as an upfront reduction in fee revenues and provide additional support against potential future credit loss While this does not change the underlying credit performance of the asset, it reduces downside exposure and earnings volatility associated with investments we hold on our balance sheet. Most importantly though, it also creates a clear and a tighter risk boundary for our investors. To put this into context, for every $1 billion of ABS funding, we are required to contribute a minimum of approximately $50 million of capital, i.e. 5% in line with risk retention rules. Illustratively, a 100 basis points discount in ABS pricing translates into roughly $10 million of lower upfront fees but also implies $10 million less in future impairments or up to $10 million more income, all else being equal. Now let's talk about what we view as a differentiated feature of the business, our operating leverage. Adjusted EBITDA in the fourth quarter was $98 million up 53% year over year with a 29% margin. Core operating expenses declined to 36% of FRLPC a 13% improvement year over year. Incremental EBITDA margin exceeded 100% meaning nearly every incremental dollar of FRLPC flowed through to EBITDA. The modest miss versus guidance was driven by the late quarter production adjustment. For the full year, adjusted EBITDA was $371 million, up 76% and margin expanded to 28.5% up 800 basis points. Turning to GAAP net income, we reported a record $34 million our fourth consecutive quarter of profitability compared to a net loss of $238 million a year ago. Fourth quarter GAAP net income included the positive impact of $9 million from the extinguishment of corporate notes and a nonrecurring tax-related benefit. For the full year, GAAP net income was $81 million compared to a $401 million loss in 2024. This largely reflects higher fee revenue alongside lower operating expenses, interest expense and impairments resulting in a 10% margin in the fourth quarter compared to a 6% last quarter and a negative 85% a year ago. Credit related fair value adjustments were $107 million for the year. Adjusted net income was $275 million. Diving into credit performance, results across personal loan, auto and point of sale remain in line with and within our risk tolerance. Demand for our assets remains strong as evidenced by new forward flow agreement our first ortho certificate sale since 2021, and the demand that we're seeing in the first few weeks of the year. 2025 vintages represent a more normalized product compared to 2024, particularly given the lower cost of funding from investors relative to prior years. As it relates to new production, rating agencies also validated that cumulative net losses are expected to be lower relative to prior production after reflecting our recent risk actions. Let's go to the specifics. Personal loan CNLs for the 2024 through the 2025 vintages are running 30-40% better than 2021 peak levels. Auto CNLs are running 50 to 70% better than 2022 vintages. While auto 60 plus delinquencies are higher than '24, following the year's pullback and broadly in line with 2023 levels, recoveries enroll rates are better than both 2023 and 2024, pointing to a normalized level of expected losses. For point of sale, credit rents remain stable and in line with expectations. As I mentioned earlier, realized credit performance remains in line with expectations. And our late quarter actions reflect increased uncertainty rather than observed deterioration. When uncertainty increases, even if losses have not materialized, the platform is designed to reduce exposure to the tails of the distribution. When conditions improve, we will adjust again. Palting remains robust. In the fourth quarter, issued $2 billion in our ABS program across seven transactions. Last week, we closed an $800 million ABS deal that was oversubscribed even after upside from an initial size of $600 million. With the recent announcement of our inaugural POS forward flow with SoundPoint Capital, we now have forward flow agreements across all three asset classes. We also closed our first $350 million revolving personal loan ABS with twenty-six North and combined with our two point of sale ABS revolvers, we now have about $3 billion of revolving capacity from those three transactions. Turning to the balance sheet, asset quality and mix have improved materially over the past twenty-four months, providing increased liquidity and flexibility. We ended the quarter with approximately $288 million in cash and cash equivalents, up $62 million from a year ago, and $945 million in investments, loan, and securities. As we have stated over the past year, we're leveraging our improved liquidity to make opportunistic investments to lower our cost of funding and increase profitability. In the fourth quarter, new investments in loan and securities were about $271 million of which $47 million was opportunistic in the form of ABS bonds. And we received $170 million in return of capital from prior deals. In December, we also repurchased $7 million of our corporate notes at an approximate 12.5% discount to par consistent with our stated objective of opportunistic capital deployment. Last week, we repurchased an additional $7 million of our corporate notes. Throughout 2025, discretionary investments in ABS structures, all in the form of rated loans, totaled approximately $171 million representing about 27% of the total investments in loan and securities. Combined with cash, we now hold a healthy liquidity position under a wide range of scenarios. Our objective is no longer just liquidity. We are maturing and increasingly pursuing optionality. Optionality allows us to be conservative on credit opportunistic on capital deployment, and patient on growth. In the fourth quarter, the fair value of the investment portfolio was adjusted down by approximately $50 million and we added $97 million of new investments net of pay downs. Our guidance continues to reflect $100 to $150 million of rolling twelve-month forward credit-related impairments. I want to remind everyone that this is not a forecast of losses, it's a governance on risk embedded in our guidance It reflects uncertainty and remains consistent with prior guidance. Let me close with our 2026 outlook. We remain cautious in the near term given persistent macro and credit uncertainty. We expect volume growth throughout the year driven by new application flow new partners, and increased penetration of our products. FR LPC margin is expected to be between 4-5% for the year and to revert lower within that range from current levels as a result of continued expansion in POS, contribution from new partners, and our funding mix. As just mentioned, guidance reflects the credit-related impairments, if any, of $100-150 million. Both first quarter and full year guidance reflect the full impact of last quarter's exit rate volume reduction, of approximately $100 to $150 million per month. Illustratively, the midpoint of that range represents approximately $375 million first quarter impact and $1.5 billion on a full year baseline essentially assuming current uncertainty persists, and leading to consumer and performance deterioration. If uncertainty recedes, we will adjust accordingly and swiftly. This is an important point, so let me explain. We are exiting the year with $10.8 billion of fourth quarter annualized volume. Deliberately shrinking high-risk volume by $1.5 billion on an annualized basis while still delivering year-over-year volume growth. The reduction in certain credit tiers and new volume growth are not contradictory. There are two sides of the same optimization process. For 2026, we expect network volume in the range of $2.5 to $2.7 billion, total revenue and other income in the range of $315 million to $335 million and adjusted EBITDA in the range of $80 million to $95 million We expect GAAP net income for the quarter of $15 million to $35 million For the full year 2026, we are expecting network volume in the range of $11.25 to $13 billion total revenue and other income in the range of $1.4 billion to $1.575 billion and adjusted EBITDA in the range of $410 million to $460 million We expect GAAP net income for the year to range from $100 to $150 million. With that, let me turn it back to the operator for questions. Operator: Thank you. We will now be conducting a question and answer session. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from John Hecht with Jefferies. Please proceed. John Hecht: Good morning, guys, and thanks for taking my questions. Maybe just go a little deeper, you know, in this concept of moving away from variable outcomes. Is it pricing in the market? Are you seeing something change with respect to payment trends? Or is this, you know, is it related to certain channel partners or certain types of products? Maybe just another layer of details on this. Gal Krubiner: Definitely, John. Appreciate the question. So before I'm going into the market dynamics, I want just to start with reiterating that that message that we gave from Pagaya Technologies Ltd.'s perspective has been the same for the last year. That we will always prioritize prudent risk management over short-term growth. And that principle that we have it you drew call it a year, a year and a half back, is now fully embedded in the way we run the company. Now the main reason for that is that we are a different type of animal. And we are not like many consumer finance platforms, that rely on marketing spend to generate volume. We don't need to grow at any cost to justify our expense base. And this structural advantage is obviously giving us more flexibility to be disciplined, especially when we see early signs of different market softness. Now when you think about that and the data we collect, it's really come to the core strengths of our platform, which is the ability to remove what we describe as tail risk or the reliability outcomes, as you pointed out, in real-time. Through the fact that we see signals across 30 plus different three asset classes, that are a lot of data that allows us to be proactive rather than to be reactive. Now the first point I would point out to your question is the market dynamics. So from a market perspective, there is just a lot of volatility. You don't need to look very hard to see that in the last period, mainly since Q4, the amount of volatility and declining rationality that we have seen has just reached a new level. Financial markets are demonstrating much volatility driven by geopolitical, private credit. You see notable shifts in sentiment. And despite the fact that the consumer performance in our production remains strong, and the ABS market are functioning well, it's definitely giving you a pause as a risk manager to ask the question of, like, what's your risk appetite and where you wanna be? Now, as I mentioned, the consumer behavior data front, we don't see a deterioration, so nothing on the CNL or the CPR. And, therefore, our 2026 outlook of the impact of credit-related impairments, if any, is in line with our 2025 guide, which is the $100 to $150 million. We did see a clear shift in our partner behavior. Several partners have moved away from expansion to cautious as they have progressed. And the early signal is exactly what our operating model is designed to capture. If you will talk with our lenders, call it Q1, Q2 last year, everyone will tell you that yeah, this is a year of going very strongly, aggressively growing 40, 50%, When you spoke with the same folks, by the end of the year, the posture the understanding of the situation was much more balanced. And as we saw that, we decide to take even one step further and to be what we call ahead of the curve. Now the way we operate and the way we do it, we do it very quickly and swiftly. Because of the technology agile advantage that we have, the fact that we can do these things real-time, so literally a decision in the middle to late of Q4, can be related to all of that, and that's becoming our basis as we think about 2026. And EP will talk a little bit more about how we think about the guidance in that respect. I think before we close the question, I just wanna emphasize that from an enterprise progression, execution perspective, what the team has done and is planning for 2026 is really exceptional. We And we are becoming a better Pagaya Technologies Ltd., not just a bigger one. So think about it that only in Q4, we added forward flow in two new asset classes, included the revolver capacity in personal loan, and onboarded two more partners. So when I think about it, from a CEO perspective, and frankly, I think you should think about it too, is that I'm very pleased with the team outcome despite the short-term reduction in risk decision that is trying very hard to avoid with any potential of downside because of a tail risk. And when I'm looking ahead on 2026, remain very focused about executing on the things we can influence in our long-term structure which is expanding our partner network, deepening our existing relationships, and proactively cutting off tail risk rather than chasing short-term volume. So to end that part, I just wanna leave you with two small nits. The first one, the fact that we have been more conservative is obviously retaining our ability to scale quickly, which is why our guide range is intentionally wide. And the second is that even in what we describe as volatile environment, the we don't wanna be over risk on, we expect to deliver a meaningful GAAP net income profitability of over $100 million in 2026. So in other words, our entire 2026 guidance range especially assume current uncertainty persists, and lead to consumer and performance deterioration that we are kind of, like, taking as part of our plan. So if uncertainty recedes, we will definitely adjust accordingly and swiftly. Evangelos Perros: Yeah. And maybe, I'll jump in so as we know to try this this action translates somewhere between $100 million and $150 million volume cut in the fourth quarter. So effectively, that's a $1.5 billion of volume into 2026. And remember, we're more than offsetting that with new with the volume from new and new products. So, effectively, what we're doing is we're replacing higher credit risk volume with volume from new products and new partners that come in as a much more balanced risk. And if you think about I'm sure you're wondering, like, okay. To jump ahead, what's next for 2026? What does that mean for the guidance? What needs to happen for that to change? I would say, you know, these reflect we we are assuming this decision does not reverse. For purpose of our guidance in 2026. And, if we are right, we would not be chasing our tail for the year. And if we're wrong, will reverse. And in that case, we would have left some money on the table for a few quarters. So something has to really dramatically change really in 2020 to go below, the guidance that we have provided. The other thing I want to point out, though, and to close the question is, just just think about in the long term, there is no real impact in the long term of the business. We're still looking at the 15-20% growth of this business, especially if you start thinking about the annualization of the new volume that comes 2027 into 2028. And the last thing is obviously to keep in mind and let that sink in, is this is still a business that's generating a $100 million plus of GAAP net even in that scenario. John Hecht: Okay. And then your follow-up question, which I think is somewhat similar to the last question in terms of where your focus is. It seems like there's more commentary about being focused on volume outside of decline monetization. Maybe talk about what products might have, like, increased momentum there and do the economics of those transactions differ from the decline monetization? Sanjiv Das: Sure, John. I'll take it. This is Sanjiv. Absolutely, I think you got it you hit the nail on its head with your question. So essentially, what's diversifying our products into the direct marketing engine that we've talked about before. We talked about the affiliate optimizer engine before. Of course, dual or concurrent look in auto where we look at loans at the same time that our partners do essentially first look. The dynamics of the direct marketing engine where we essentially help our partners grow their originations is very, very strong and very positive. And the performance is also substantially better. Same with the Affiliate Optimizer engine. We've essentially a business that has about a third of its dependency on Credit Karma and Experian continues to grow very, very strongly similar to what credit card businesses do. We are doing the same thing in personal loans. And we are substantially improving our partner presence with our existing partners in both of those both of those platforms. So that is something that has done extremely well for us. This is where the shift in the business is happening. And this is exactly where we are we are emphasizing that because of because of the performance of these products, the economics in these are substantially better. Than what we have traditionally provided because of better risk performance and better ability to charge better economics. So that's something that we definitely want to talk about. We have, as you know, 31 existing partners. Our top five partners are already on these new products. We have signed agreements on our prescreen product, which is our direct marketing product. As well as agreements on Credit Karma and the affiliate channels and we are starting to increase our our dual look performance very substantially. I do wanna emphasize one other thing that is extremely important, which is that we have also onboarded a record number of new partners. Carl talked about two that are onboarding right now. There's a third that's in process. And I fully expect that by the end of the second quarter, we will have onboarded maybe seven, potentially eight new partners, which will be like a record for Pagaya Technologies Ltd. What EP, Gal, and I are trying to do is emphasize is that we are focusing more on the shift in the business our existing 31 lenders to more profitable partners. We're also focusing substantially more on getting new partners, essentially demonstrating that we are becoming part of the financial ecosystem in US consumer lending, and we are managing the risk in a very thoughtful, responsible way as a growing franchise in the long term. John Hecht: Great. Thank you very much. Operator: Our next question is from Kyle Joseph with Stephens. Please proceed. Kyle Joseph: Hey, good morning, guys. Thanks for taking my questions. Been a lot of headlines on private credit and the alts recently. Just wanted to get you guys gave an update on the funding side, of business, but, you know, how you're thinking about funding in into your 'twenty-six outlook given all the headlines we've seen in that world recently? Thanks. Evangelos Perros: Yes. Thanks, Kyle. Thanks for the question. I'll take it. I mean, look, the demand for our product and production is very robust. Look at Q4, a couple of the things that we announced, you know, a new deal with twenty-six North, which combined with the post deals generates more than $3 billion of capacity across these two products from in in from the revolver structure of these, the sale of the certificate in auto, new forward flows in auto, and POS, the sale of the certificate that we set on OWS. So generally very strong demand and validated by the execution that we're delivering for our investors. What I would say is if you step back, 2025 was a year where you had the very frothy sort of private credit market deploying capital. And now it's becoming a little bit more normal and much more disciplined and we're actually benefiting from that. I take it I would take it a step further and say that some of the actions that we took is actually fueling more demand for our product and production You look at the last ABS deal that we did a few days ago, market with $600 million of size. And it got upsized, by 30% and still oversubscribed. So I think what you see is the platforms that have a very robust and very diversified set of investors, working that they work with, like Pagaya Technologies Ltd., we're benefiting from all of this. We'll continue to obviously, continue to try and diversify our funding further. I know that is on our pipeline. So I think we feel very good about the funding environment relative to our positioning in the marketplace. Gal Krubiner: And maybe one thing to add is that a lot of the colleagues around, which obviously, impacting this the full funding world, but, like, it's much more around the corporate side of the world. And specifically around SaaS, etcetera, and companies that have been in the sphere of trying to grab market share there. I think on the consumer side, which is a byproduct of that, but, like, you don't see that level of volatility or or or kind of, like, changes in the last quarter, but it is calling for everything to be. Kyle Joseph: Great. Thank you. And then just a just a quick follow-up, a a modeling question. For you. On on the impairment side of things, you know, given the underwriting changes you guys have made, you know, what what sort of level should we expect, you know, to get to your your GAAP EPS guidance for '26? Thanks. Evangelos Perros: Yes. Thanks. No change on that. We're still guiding to the call it under scenario in our guidance of a $100 million to $150 million range for the year. Same as it was in 2025. So no changes there, given the, ongoing credit performance. Kyle Joseph: Great. Thanks for taking my questions. Operator: Our next question is from Hal Ghosh with B. Riley Securities. Please proceed. Hal Ghosh: Hey. Thank you, guys. Got a question. Yeah. It's it's a bit counterintuitive given the macro trends we've seen. Over the year with falling inflation. Rates coming down, job market generally good, And I think EP mentioned, hey. You know? Your action in the last quarter was based on increased uncertainty not an increase in in credit losses. So just wanted to you know, could you give us any more qualitative or quantitative color on what you saw your partners doing in in in your in your response. It it just seemed a little counterintuitive. It seems like things are going in the consumer's direction to be better credits. And this is just a little bit it's a little bit need a little more flushing out. Thanks. Sanjiv Das: Hello. Hi. I think it's a it's a great observation. In fact, those are some of the countervailing forces that we had in our mind as well. At the end of Q4. On one hand, the macro was what it was in terms of inflation and rates coming down. As you pointed out, on the other hand, we're observing very specifically from our 31 lending partner platform was some of the partners that had been talking about credit expansion in the middle of the year were feeling less certain about credit expansion by the third, fourth, fourth, so the the sheer uncertainty in the market. And by that, as Gal outlined in his his opening comments, there's clearly know, geopolitical uncertainty, which was causing some uncertainty in the financial markets. There was there was some stuff going on at the at the tail end of certain certain businesses. Certain markets. And so we felt that the most responsible thing for us to do, and and that's the beauty of being a B2B2C market is that in some ways, we are shielded from the c. The b that's between the c and us responds or gives us signals that based on which we were able to take actions at what we thought would be the most marginal risk tier in the business. And it is this theme of uncertainty in the potent potential uncertainty in the credit markets that drives us to think, that we should be responsible and prudent rather than aggressive And but, you know, having said that, our ability to scale and be nimble is extremely high. So if things change in the market, which could change I mean, rates could change, the market could change by the second half of the year, But we all we need to do is basically prudently turn that back on And that's just the reason why our guidance range is is wide. But having said that, we as a management team have very, very high conviction that we will deliver profitable volumes, which is why our gas net income number, it will get. Don't even add anything to it. Or It's it's Gal Krubiner: I think the new one. Okay. One one point to take in mind, like, when you see losses, it's a little bit too late. And when you are taking a proactive before, that the way to be disciplined. So, like, you don't need always to look on the duration of your outcomes on the CNL to say, now I need to take action, and I think again, it's given where we stand and what we see. It's enough to actually say, you know what? I'm gonna be more conservative on that part of the spectrum, and that's it. Hal Ghosh: Okay. And unlike maybe 2023 when you're still building the relationships with the with the lending partners, Your your pullback in in the in some of those riskier tiers, that you know, your your your lending partners were were okay with that as well. You know, there wasn't a a relationship issue. Because I think was key in 2023, 2024 to build a platform build those relationships. In the in in this case, it was this kind of pullback is is is okay with the partner. Gal Krubiner: So a, it's a good question. B, it exactly what we told you that in 2022, it's a different situation. Yeah. Okay. And c, the answer is no. They appreciate that. From them, you know, 15% growth in the midpoint and a stronger Pagaya Technologies Ltd. is much better than 20, 25% growth. But then in three months, six months, nine months, we take it down all that. So stability is key for the actual gross number. Hal Ghosh: Yeah. That makes sense. Thank you. Operator: Our next question is from Rayna Kumar with Oppenheimer and Company. Please proceed. Rayna Kumar: Good morning. Thanks for taking my question. Could you just talk about like where you started to pull back? Like, was it a particular asset class, or was the actual taken across the board? Evangelos Perros: Hi, Reyna. It's primarily across like the entire portfolio. With a little bit more focus on the personal and auto side, because of the secular growth that we see in POS. And that was obviously the later part of the quarter, And, effectively, that's why you see that sort of as an exit rate change into 2026. Rayna Kumar: Understood. That's helpful. And then, just on your target four to 5%, FRLPC margin for '26, obviously, it's a very, wide, range that, you highlighted earlier. Can you just talk about, like, you know, how much conservatism is baked in at the low end and like, what are the puts and takes to get from the bottom to the top? And then if I can just sneak in one modeling question, if you can just tell us your assumption for 26 gap tax rate. Thank you. Evangelos Perros: Yeah. So as we have said before, as it relates to FRPC rate, appreciate obviously that is a wide range and we look to narrow that down going forward at some point. But ultimately, the way to think about think focus on FR LPC in dollar terms. So the more volume you get from your partners and newer products that come in at a lower rate, you may see sort of dilutive impact on the actual rate, but still coming in at higher volumes and therefore higher dollars, at the top line. And then vice versa, if there is potentially, let's call it, the slow run when you think about the mix of the portfolio, If you see a slow ramp for the new product, new partners, you may end up with call it, the low range of the of the rate of the guidance on volume, but obviously achieving a relatively higher FRPC. That's how a little bit how to think about that across the board. So it shouldn't materially change sort of the key dollar amounts. All the, on the, tax rate question, generally speaking, I would point to call it a 20% type of, tax rate. But, obviously, there's a lot of moving parts there because, obviously, the business is coming out from a period where it was two years ago losing money now into getting to capital and profitability. But that's what I would assume for, going forward. Rayna Kumar: Thanks for the color. Operator: Our next question is from David Scharf with Citizens Capital Markets. Please proceed. David Scharf: Hi, good morning. Thanks for taking my questions. Maybe just to sort of dive in a little more to Hal's question and and perhaps what your kind of behavior you're you're seeing from lending partners. You know, that this was you know, so far, an earning season where a lot of lenders you know, pretty much said, things are stable. There are no certainly no rush to widen their credit boxes, but there there certainly weren't indications that things were tightening either. You know, just just so we understand, did you start to see by the end of the quarter you know, more evidence of of turndowns, of of loan application by your partners that may have been approved by your partners six months earlier? Is that how we should sort of interpret the behavioral changes you're seeing? Gal Krubiner: I think the best way to look on it is many more expansion that were in play. Or in plan became not in play. So it's not to say that people are not saying, hey, we are going to continue to grow, but it has been shifted much more towards how do we do more asset classes, how do we get more to our customers rather than oh, the pricing are high and just wanna make it more aggressive. Or the losses are too low, and therefore, we're approve more type of population. So you definitely see a difference And and by the way, I think you will see on the gross numbers of all of the reporting companies. We talked about that the growth going forward from top line is not what it used to be. Last year, especially on the personal loan and other side of the business. David Scharf: Got it. No. That that's helpful. I mean, obviously, you're as you noted, your your business is in a unique position to kinda see the activities of multiple lenders as opposed to just observing your own portfolio. So that that's helpful. And then just as a follow-up, should we think about maybe the recalibration on credit extending to in reducing tail risk, does that extend to how you approach your discretionary investing in securities in addition to originations or loan approvals? Evangelos Perros: Dave. This CP. No, I think these are two different aspects, right, two sides of the network. One doesn't necessarily tie to the other. David Scharf: Got it. Understood. Thank you. Operator: We have reached the end of our question and answer session. I would like to turn the conference back over to Gal for closing remarks. Gal Krubiner: So I want to thank everyone for joining us today. As you can tell, our results demonstrate the power of the B2B2C model we have worked so hard to build at Pagaya Technologies Ltd. Increasingly diversified growth, with an underlinking focus on disciplined underwriting along with a growing list of partners and funding mechanism that keeps evolving, and improving. I look forward for 2026 and to share journey with you as we grow Pagaya Technologies Ltd. to a key partner for all US consumer lending solutions, continuingly optimizing our product suite value proposition to maximize the value we provide to our partners. We remain laser focused on the long-term potential of Pagaya Technologies Ltd. as we penetrate this enormous market opportunity a market that we created and that we lead. Thank you very much for your time today. Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Welcome to Dynatrace, Inc.'s Fiscal Third Quarter 2026 Earnings Call. At this time, all participants will be in listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. At this time, I will turn the conference over to Noelle Faris, Vice President, Investor Relations. You may now begin. Noelle Faris: Good morning, and thank you for joining Dynatrace, Inc.'s third quarter Fiscal 2026 earnings conference call. Joining me today are Rick McConnell, Chief Executive Officer, and James Benson, Chief Financial Officer. Before we get started, note that today's comments include forward-looking statements such as statements regarding revenue, earnings guidance, and economic conditions. Actual results may differ materially from our expectations due to a number of risks and uncertainties discussed in Dynatrace, Inc.'s SEC filings, including our most recent quarterly report on Form 10-Q and annual report on Form 10-K. The forward-looking statements contained in this call represent the company's views on February 9, 2026. We assume no obligation to update these statements as a result of new information, future events, or circumstances. Unless otherwise noted, the growth rates we discuss today are year-over-year and non-GAAP, reflecting constant currency growth. And per share amounts are on a diluted basis. We will also discuss other non-GAAP financial measures on today's call. To see reconciliations between non-GAAP and GAAP measures, please refer to today's earnings press release and supplemental presentation, which are both posted in the financial results section of our IR website. And with that, let me turn the call over to our Chief Executive Officer, Rick McConnell. Rick McConnell: Thanks, Noelle, and good morning, everyone. Thank you for joining today's call. Dynatrace, Inc. delivered very strong third quarter fiscal 2026 results, exceeding our guidance across every metric. Through this fiscal year, we have driven a stabilization of ARR growth at 16%, three quarters of consistent double-digit net new ARR growth, annualized logs consumption that has now surpassed $100 million, a strong balance sheet, and healthy cash flow generation that have allowed us to double the size of our share repurchase program while still investing aggressively in innovation and finally, an increased ARR of 125 basis points at the midpoint that puts us on track to achieve $2 billion in ARR by 2026. Our sustained strength underscores the increasing importance of observability to the software ecosystem, accelerated demand for our end-to-end platform, and successful execution of our go-to-market strategy. James Benson will share more details about our Q3 financial performance and guidance in a moment. In the meantime, I would like to start with some highlights from our annual customer conference, Perform, illustrating the substantial evolution and differentiation of the Dynatrace, Inc. platform in capturing the AI opportunity, along with several customer and partner advancements. Perform 2026, which took place just two weeks ago, was an invigorating event where we hosted roughly 2,000 people in person, including customers, prospects, and partners, plus thousands more virtually. If you were not able to join us, I encourage you to watch the replay of our main stage presentations. Each year, Perform offers the opportunity to examine the larger forces shaping our industry. And this year, the shift is more profound than ever. I shared two primary takeaways from my opening keynote. First, observability is entering a new era, one in which it is foundational to resilient software and dependable AI environments. Second, Dynatrace, Inc. is unique in its ability to combine trustworthy deterministic AI with agentic AI to deliver reliable autonomous outcomes. And this is why we see Dynatrace, Inc. as the AI-powered observability platform for autonomous operations. Let's unpack this a bit. To start, in 2023, the AI market was estimated to be less than $200 billion, and it is now on a path to be nearly $5 trillion in the next seven years. Meanwhile, cloud and AI-native workloads are exploding. Hyperscaler growth continues to climb, now approaching $300 billion in annualized revenue from AWS, Azure, and GCP alone, growing in the high twenties. That level of growth at this kind of scale is simply unprecedented. But this astonishing scale and growth are also accelerating the challenges our customers face every day. As we have often stated in the past, workloads and data are exploding along with a massive increase in their complexity. Tools are fragmented, and it is often difficult to know whether AI results can be trusted. And without trustworthy insights, organizations understandably are hesitant to automate. One ramification of all this has become abundantly clear: AI-powered observability has become essential in an AI-first world. The question then becomes, how do organizations harness the value of observability to help deliver on the promise of AI? Dynatrace, Inc. exists for this moment. We are already helping organizations realize increased value from AI. We have been driving to this point for many years, from initially enabling organizations to be reactive to issues, to proactive through automated root cause analysis, to predictive by adding machine learning and anomaly detection, allowing customers to anticipate and resolve issues before they become customer impacting. This is our quest to help customers deliver software that works perfectly. Our third-generation platform is fully available and built for the complexity and incredible scale of modern cloud and AI-native environments. Its advancements allow us to look ahead, predict issues, and build resilience directly into the fabric of an organization. So what makes Dynatrace, Inc. unique? Our differentiation is integrated deeply into the platform's architecture. And it comes down to three things: Grail, SmartScape, and AI. First is Grail, our massively parallel processing data lakehouse and the only analytics engine purpose-built to process exabytes of observability and security data in real-time while preserving full context. This is not a general-purpose data store retrofitted for observability. Grail was architected from the ground up for modern software, where a single transaction can traverse hundreds of services across multiple clouds. In the agentic era, where every AI-driven transaction can be unique and unpredictable, real-time contextual processing is essential. Logs are a great example of why this architecture matters. When logs are unified with traces, metrics, events, sessions, and other telemetry in the same platform, they do not just add volume. They add decisive context. Once customers experience the increased value and lower cost of having logs in context with other data types, they are eager to replace their legacy logs tooling. That is why we are delighted to have exceeded the $100 million logs consumption threshold with current growth of over 100% year-over-year. Our second major differentiator is SmartScape, our real-time dependency graph that continuously maps the entire technology stack. SmartScape builds a living topology model that understands not just what exists, but how everything connects and impacts everything else. So the platform always has the current context of the environment itself. And third is AI. And this is where the first two converge. Grail provides unified data at scale, and SmartScape provides the topology and context. Together, they enable our causal and predictive AI, proven in the most demanding enterprise environments and continuously evolving to deliver optimal outcomes. This leads to our announcement at Perform of Dynatrace Intelligence, one of the biggest innovations in our history. Dynatrace Intelligence is the industry's first agentic operation system built for modern software ecosystems. By fusing our deterministic AI foundation with agentic AI across an ecosystem of agents, Dynatrace Intelligence delivers AI-powered observability that organizations can trust. With Dynatrace Intelligence at its core, our platform is purpose-built for the agentic era, enabling a future where AI-powered observability can help customers auto-prevent, auto-remediate, and auto-optimize. Similar to Grail, Dynatrace Intelligence is embedded in the platform and is not sold as a separate SKU. It is available to every customer today. We expect to monetize it in two ways. First, through increased platform usage as customers adopt AI assistance across teams, driving greater use of Grail. And second, through usage-based agentic execution, where AI-driven actions are delivered through workflows and ecosystem integrations. The durability of infrastructure software comes from deeply engineered data planes and AI control planes that operate in highly dynamic production environments. Dynatrace, Inc. has developed broad domain expertise and is uniquely positioned with Grail, SmartScape, and Dynatrace Intelligence that is built directly into the back of the platform. Each of these capabilities is complex in its own right but magnified in the Dynatrace, Inc. platform as they are designed to operate as one system, applying AI to deliver answers and automation in environments that constantly shift in composition and workflow. This foundation has been built over years of operating at scale in real-world production environments, making the Dynatrace, Inc. platform both highly differentiated and difficult to reproduce quickly or safely. We therefore strongly view broad-based AI expansion as a tailwind for Dynatrace, Inc. AI-assisted development with our Vibe coding code copilots, AI-driven software delivery compresses release cycles and increases the rate of change across already complex enterprise stacks. That raises operational risk unless teams have an observability control plane with closed-loop feedback to protect reliability and user experience. And as AI-driven systems become more probabilistic, outputs vary and issues can be harder to reproduce. AI does not reduce the need for observability. Rather, it makes observability essential for trusted insights and automation so organizations can operate with confidence. I would like to turn next to our customers. At Perform, more than 70 customers shared how the Dynatrace, Inc. platform has become an indispensable component of their software environments. Here are just a few of their incredible stories. One of the largest airlines shared how they are using Dynatrace, Inc. to help them deliver 31% better reliability, 75% fewer incidents, and a 10% reduction in mean time to resolution, leading the industry in on-time departures and arrivals for two years in a row. Canadian communications giant Telus shared how they are using AI to move from firefighting to proactive reliability, reducing the average time to resolve issues from forty minutes to five minutes. Vodafone shared how they are using AI to modernize operations at massive scale, migrating more than 2,500 users, 8,500 dashboards, and eight terabytes of daily log ingest from their legacy log provider to Dynatrace, Inc. in just two months. And Nationwide shared how Dynatrace, Inc. has helped them reduce priority one incidents by 74%. In addition, customers expressed very strong interest in our strategic collaboration with ServiceNow to advance autonomous IT operations and scale intelligent automation. At Perform, ServiceNow's EVP and GM of technology workflow products reinforced our better together vision, highlighting use cases of how customers can integrate with Dynatrace, Inc. to get greater efficiencies in their teams, accelerate agentic initiatives, and drive automation with confidence. In an agentic world, engaging in and integrating with an ecosystem of partners, including our long-standing relationships with global system integrators and hyperscalers, will be mandatory. And we are investing to deepen and broaden those relationships. In Q3, we announced deeper technical engagements with all of the major hyperscalers. We are integrating with Amazon Bedrock agent core, embedding Dynatrace, Inc. with Azure's SRE agent, and serving as the launch partner for GCP Gemini command line interface extensions and Gemini Enterprise. Finally, as the velocity of software development continues to accelerate, we have advanced our strategy to extend left to developers with the acquisition of DevCycle last month. Built on open feature, an open-source initiative originally created by Dynatrace, Inc., DevCycle is a feature management platform that helps developers, SREs, and platform teams bring progressive delivery for AI-native applications directly into the Dynatrace, Inc. platform. This solution will enable customers to accelerate their ability to release features in a controlled manner and remediate issues faster. To wrap up, we have seen impressive customer momentum over the last several quarters with dozens of 7-figure wins, rapid logs expansion, and customers standardizing on our platform for end-to-end observability. And we have delivered extraordinary innovation with Dynatrace Intelligence and the evolution of the Dynatrace, Inc. platform to deliver significant customer value. This momentum is a testament to our unique ability to provide precise and trustworthy answers that serve as the foundation for autonomous operations in delivering resilient software and reliable AI. As I hope you can tell from my remarks, we are highly enthusiastic about our opportunity ahead. James, over to you. James Benson: Thank you, Rick. And good morning, everyone. Q3 marked another quarter of strong execution as we once again surpassed the high end of guidance across all our key metrics, showcasing the growing demand for our leading AI-powered observability platform and the durability of our balanced business model. As Rick mentioned, we achieved three consecutive quarters of double-digit net new ARR growth, record new logo ARR, and we surpassed our goal of $100 million in annualized consumption for our log management solution. The combination of our ongoing go-to-market maturity and execution, the increasing necessity of observability in an agentic AI world, our leadership position in the market, and our unified platform differentiation give us confidence that the momentum in the business will continue as we look ahead. Our conviction in the business is further evident in the board's authorization of a new $1 billion share repurchase program. That is double the size of our inaugural program. I will share more information on that later in my remarks. Now let's review the third quarter results in more detail. As the business has evolved with the introduction of DPS, we have continued to look for ways to provide investors with the best KPIs of our performance. Given what we have learned as DPS has matured, and with the changes in the on-demand consumption accounting treatment, going forward, we will focus on ARR and its underlying growth driver, net new ARR. This is the primary metric that drives our subscription revenue, and it's how we measure and track the business internally. Turning now to ARR, we ended the quarter at $1.97 billion, representing 16% growth and demonstrating stabilization of ARR growth for three straight quarters. Q3 net new ARR was $75 million adjusted for foreign exchange movements, coming in well above our expectations. Net new ARR was up 11% from a year ago and represents the third consecutive quarter of double-digit growth. This strong performance was driven by both new logo ARR and steady expansion ARR, including a number of 7-figure end-to-end observability deals. In Q3, we added 164 new logos to the Dynatrace, Inc. platform. The average ARR per new logo was over $160,000 on a trailing twelve-month basis. We continue to target landing with high-quality new logos that have a greater propensity to expand. The average land size in Q3 was particularly robust at over $200,000 and helped drive new logo ARR over 21% of a robust Q3 of fiscal 2025. Our value proposition continues to resonate with enterprise customers that are outgrowing their existing DIY or commercial tooling solutions. They are seeking business value from tool consolidation and coming to Dynatrace, Inc. for the depth, breadth, and automation of our unified AI-powered observability platform. Once customers experience the benefits of the Dynatrace, Inc. platform, they are often quick to expand their usage. Average ARR per customer continues to grow and is now nearly $500,000, highlighting the continued adoption of the platform and value we provide to customers. As we have said in the past, given the significant cross-sell and upsell opportunities in our enterprise customer base, we believe the average ARR per customer opportunity could be $1 million or more over the medium to long term. Gross retention rate in Q3 remained in the mid-90s, demonstrating the strategic relevance of the Dynatrace, Inc. platform. The platform is mission-critical to our customers' operations. Net retention rate or NRR on a trailing twelve-month basis was 111% in the third quarter, consistent with the prior two quarters. As Rick mentioned, we continue to see broader usage and deeper penetration of capabilities across the platform. Notably in log management, which remains our fastest-growing product category and surpassing the $100 million annualized consumption milestone we set for ourselves. With our log strike team in place now for nine months, and our selling motion continuing to mature, we expect logs to be an ongoing source of significant ARR growth. Moving on to revenue. Total revenue for Q3 was $515 million, and subscription revenue was $493 million, both up 16% and exceeding the high end of guidance by 150 basis points driven by strong net new ARR. Turning to profitability, Non-GAAP operating margin was 30%, exceeding the top end of guidance by nearly 100 basis points driven mostly by revenue upside flowing through to the bottom line. Non-GAAP net income was $135 million or $0.44 per diluted share, $0.02 above the high end of our guidance. We generated $27 million of free cash flow in the third quarter. Due to seasonality and variability in billings quarter to quarter, we believe it is best to view free cash flow over a trailing twelve-month period. On a trailing twelve-month basis, free cash flow was $463 million or 24% of revenue. As a reminder, this includes over a 600 basis point impact related to cash taxes. Pre-tax free cash flow on a trailing twelve-month basis was 30% of revenue. Finally, as of today, we have substantially completed the $500 million share repurchase program announced in May 2024. In Q3, we increased the pace of our repurchases, buying back 3.5 million shares for $160 million at an average price of just over $45 per share. We believe the strength of our balance sheet and cash flow generation afford us the ability to continue to strategically invest in R&D innovation for our customers while also returning capital to shareholders. We announced today our board has authorized a new $1 billion share repurchase program. This program is the largest in our company's history and double the size of our previous program. And underscores our confidence in the business, our conviction in the long-term growth opportunities, and view that our shares are undervalued. We intend to be active buyers in the market at current levels. Moving now to guidance. The demand environment for observability remains robust, and the growth drivers fueling the business continue to trend positively. The landscape is benefiting from secular tailwinds of end-to-end observability, cloud modernization, and AI workload proliferation. Our go-to-market strategy continues to build momentum and consistency as evidenced by three consecutive quarters of consistent double-digit net new ARR growth. Our DPS licensing model continues to enable broader adoption and increased usage of the platform. Logs continue to be a significant source of growth for both our installed base and new logos. The combination of these strong underlying growth trends gives us conviction in the ongoing momentum of the business. As a result, we are raising full-year guidance across the board. Starting with ARR, we are raising ARR growth guidance 125 basis points to a range of 15.5% to 16%. And expect to surpass our next milestone of delivering over $2 billion in ARR. The high end of this ARR range implies another quarter of double-digit net new ARR growth. Moving to revenue. We are raising total revenue and subscription revenue growth guidance by 75 basis points at the midpoint to 16% growth. Turning to the bottom line, we are raising full-year non-GAAP operating income guidance by $9 million and free cash flow by $13 million. This translates to a non-GAAP operating margin of 29% and free cash flow margin of 26%. Finally, we are raising non-GAAP EPS guidance to a range of $1.67 to $1.69 per diluted share, representing an increase of $0.05 at the midpoint of the range. This non-GAAP EPS is based on an expected diluted share count of 304 million shares. In summary, we are very pleased with our Q3 and continued momentum through fiscal 2026. We are focused on executing to close the year out strong. And with that, we will open the line for questions. Operator? Operator: Thank you. We will now be conducting a question and answer session. I ask you to please limit yourself to one question to allow as many analysts as possible to ask questions. Thank you. Our first question is from the line of Raimo Lenschow with Barclays. Please proceed with your question. Raimo Lenschow: Hey, good morning, and congrats on a great quarter. My question was if you think about what you see in the client base in terms of understanding how your automation story is coming together, how it's important to kind of bring all the different data sources together in one place. What does it mean in terms of engagement level with clients, etcetera? Are we seeing an ongoing kind of bigger kind of debate about, like, or a bigger momentum they are building? What do you see in the pipeline in terms of deal size, etcetera? Just kind of seeing how that momentum is ongoing. Thank you. Rick McConnell: Hey, Raimo. Thanks so much for the question. I guess where I would start is end-to-end observability is what we are seeing as being very, very strong in terms of a sales play and momentum at the moment. This is where our customers are looking to expand. They are realizing that there are extraordinary tools for all. That there is a lack of expense management in that and poor outcomes. And so this is, I would say, the number one area where we are seeing momentum in the business is precisely that. And as you look to an AI-first world that's coming, it becomes even more pervasive. The end-to-end observability is a mandatory foundation to be driving those kinds of outcomes. Operator: Our next question comes from the line of Sanjit Singh with Morgan Stanley. Please proceed with your question. Sanjit Singh: Yes. Thank you for taking the question. Congrats on the stabilization in ARR growth for the last several quarters. I wanted to ask a follow-up on Raimo's question. In a world where agents are doing a lot of the investigating and the triaging on incidents versus human site reliability engineers, there's sort of two questions there. What's the pace of that change? Like, how realistic are we going to see that sort of environment in the next couple of years? And then two, from a product perspective, how does that change observability and how does that change, you know, how customers will use Dynatrace, Inc.? Rick McConnell: Hey, Sanjit. So in terms of pace of change, I think that there is still a lot of apprehension about just how much conviction organizations have in driving AI and AI outcomes. So I think it's going to evolve over a period of time. Having said that, I do think that there is a significant change in observability as we look to the future and that it really becomes, in our view, the control plane for enterprise AI. And what I mean by that is simply that observability becomes foundational to this agentic action. Without deterministic AI, without assuredness of understanding what the baseline problem is, and, of course, we use the notion of answers, not guesses here, you simply cannot take agentic action. So the steps that we see that organizations have to go through are, number one, you have to get the end-to-end observability because that's where you get the broadest, most concrete outcomes and answers. Number two, you then use that deterministic AI to develop an understanding of what actions need to be taken. And then number three, and only then, can agentic AI take over, cut some action, and probably only with a portion of the actions required for auto-protection, auto-remediation, and auto-optimization. So it is going to be a journey, but that journey is beginning today, and that journey begins with end-to-end observability followed by leverage of deterministic AI as a mission foundation for agentic AI to follow. Operator: Our next question comes from the line of Gray Powell with BTIG. Please proceed with your question. Gray Powell: Okay. Great. Thanks for taking the question. So, yeah, it was really good to see log monitoring consumption past the $100 million mark this quarter. I guess a couple of questions there. Like, how quickly has that materialized over the last year? I know that there was sort of a new iteration that you came out with in late 2024. And then what are your next milestones for the product? Rick McConnell: Thanks for the question, Gray. Again, we're very pleased. We told you last quarter that we were on the precipice of hitting this milestone, and we exceeded it. Our logs business is continuing to grow north of 100%. So by far the fastest-growing product category in the business. You're right that we've seen a significant step function increase in the acceleration of the business from last fall to now. Last fall was when we were able to get the logs product use case complete. We had the product packaging and pricing right. That evolved a little bit in the following quarter. So you saw our step function increase, and it continues to exceed our expectations. Relative to the next milestone, we have initially set our next milestone publicly. I can tell you that it will be a significant source of new ARR. We're seeing this already. Rick mentioned these end-to-end observability deals. Nearly all of them have logs embedded with them. So we expect this to be a huge source of ARR growth for the business going forward. Operator: Our next question is from the line of Will Power with Baird. Please proceed with your question. Will Power: Great. Thank you. Yes, I guess I'd echo the congratulations on the results. Great to see the ARR growth stabilizing, the strength in net new ARR. As we think about the net new ARR trends, the consumption commentary you just provided, the logs opportunity, the AI opportunity. Maybe help us think about the puts and takes that could contribute to ARR perhaps accelerating as we move into fiscal 2027? How do we think about that? James Benson: I'll take that, Will. Good question. Again, we're focused on continuing the momentum. As I said in my prepared remarks, third consecutive quarter of double-digit net new ARR growth, stabilizing ARR at 16%. If you look at the high end of our guide, it suggests that continues into Q4. So four quarters of stabilizing growth for ARR and four quarters of double-digit ARR growth. We've said that our objective is to show an in ARR. Obviously, we'll have to continue to execute like we have. The go-to-market momentum continues. We continue to benefit from large-scale end-to-end observability deals. So the changes we made are manifesting themselves in the results. We're seeing traction with partners. I'm not going to provide guidance on this call. I can tell you we're very optimistic about the momentum in the business. We'll have to see. Come May, what the guide is, but our objective is to build an acceleration in the top-line growth. Operator: The next question is from the line of Koji Ikeda with Bank of America. Please proceed with your question. Koji Ikeda: Yes. Hey, guys. Thanks so much for taking the question here. Jim, in your prepared remarks, you mentioned net new ARR and ARR are the core foundations and the building blocks of growth. But last quarter, you did give a new metric, you know, annualized platform consumption dollar growth rate of 20% plus. I wonder if you could share how that metric compared this quarter compared to fiscal second quarter. Is it directionally higher? Is it the same? Or is it lower than the 20% plus that you gave last quarter? Thank you. James Benson: It's a good question. We've shared a lot of KPIs, and we've tried to share KPIs as investors try to understand our journey with DPS. Which was certainly get them on the platform, allow them to access the platform, all offerings, and that's playing out nicely. So relative to consumption, consumption continues to grow north of 20%. So consumption is growing very healthy, consistently higher than ARR growth. Operator: The next question is from the line of Ryan MacWilliams with Wells Fargo. Please proceed with your question. Ryan MacWilliams: Hey, it's Deshaun on for Ryan MacWilliams. This year you've talked about some of the strength in large deals and large deal pipeline. Is there any update you could provide on how those large deals are progressing? And maybe whether your incremental confidence on those deals coming through has changed in the past couple of months? James Benson: Sure. I'll take that. I think what I talked about in Q2 was we continue to see a robust pipeline. That pipeline is very weighted to large deals, deals over half a million, deals over a million. And that makes sense relative to the go-to-market changes we made last year. That we were focused on these accounts that had a large or high propensity to spend. I think what you're seeing, you saw in the Q3 results that we built consistency in close rates of these large deals. Our expectation in Q4 is you'll see that again. So I think what we've done is we build consistency in our execution. You're seeing that through the first three quarters. The expectation in the fourth quarter at the high end of our guidance, you'll see that again. And it's heavily driven by this continued trend of very large enterprises looking to vendors to consolidate on, and Dynatrace, Inc. is in a very good position. You saw even new logos, new logos, five of our new logos were over a million dollars. So this is bold things existing customers and new logos, looking to Dynatrace, Inc. to be their provider of choice as this trend continues. Rick McConnell: I would just add to that also that we see AI as an enormous tailwind to the observability business overall. You have to have observability in order to drive an AI-first world. We believe that fundamentally. And the result of that is that you have to have end-to-end observability to get the best outcomes, the best underlying analytics, and insights to be able to take agentic action. So as the world shifts toward a move of autonomous operations, observability becomes foundational, and end-to-end observability is fundamental to maximizing the success of that type of deployment. Operator: Our next question comes from the line of Eric Heath with KeyBanc. Proceed with your question. Eric Heath: Hey, Rick, Jim, thanks for taking the question. I guess what stood out to me that was most impressive was the fiscal 4Q net new ARR guidance, a strong lift from what you're expecting previously. So just maybe an extension of the prior question. Hey, Eric. Could you just speak up a little bit? James Benson: Yeah. Any better? Eric Heath: That's a little bit better. Thank you. Eric Heath: Okay. Yeah. So just to the question. So the fiscal 4Q, net new ARR guide was a strong lift from what you were expecting previously. Just an extension from the prior question, your response there, any more detail you could share on what has given you the confidence in the outlook, maybe some assumptions on the close rates in those large end-to-end deals? Thanks. James Benson: Yeah. I mean, one of the things I talked about in the last call is we had very healthy close rates in the first half of the year. We saw healthy close rates in Q3. I'd say our visibility of the pipeline here, especially near term, is quite strong. That doesn't mean we expect to get every deal. But we do believe that we have very good line of sight to be able to deliver against this guide, the range that we're providing. So I think some of it is visibility. And I think it's also what I think is a continued improvement in our go-to-market maturity around having an ability to call the ball on some of these large deals. I think our ability to do that continues to improve. Operator: The next question is from the line of Keith Bachman with BMO Capital Markets. Please proceed with your question. Keith Bachman: Thank you. Good morning. I wanted to ask about new logo growth. Jim, you had called out that I think you had 164 new logos. Solid growth there. And yet if I look at the numbers, it appears you're still getting about 70% of your ARR coming from existing clients, 30% is coming from new logos. And I'm just wondering, is that the way we should be thinking about it as we look out over the next year? I think investors have some worry that, you know, the existing customer base may not sustain growth for a period of time. And so trying to understand how you might be able to expand your new logo growth and particularly maybe going not to small business, but maybe expanding the TAM a little bit. As you talked about, AI is foundational, so maybe that presents some opportunities for a broader customer audience. At the same time, there are solutions out there that are less expensive that require more work, and I'm not sure how DPS would fit into, you know, that a facilitator of new logos or is it a hindrance in that you got to make a little bit larger commitment? But just maybe talk about how we should be thinking about new logo growth over the next couple of years? Thank you. James Benson: So I'd say near term, Keith, one, I would say we're very pleased with the new logo momentum that we're having. In particular, there is a lot of momentum with just customers that are looking to Dynatrace, Inc. to consolidate fragmented tools on. So we continue to make good traction there. You should expect in the near term, kind of over the next year, that it'll be a call it roughly one-third new logo, two-thirds expansions. I would clarify. We are not even close to exhausting our ability to expand within our installed base. You know, we continue to grow. We almost have a half a million dollars now per customer. So and we have many, many million-dollar customers. So the propensity to expand is still pretty material. But near term, I think we're going to be roughly one-third, two-thirds. We do look at that, Keith, relative to what are the different velocity motions you can do to maybe land a little bit lower. I think in this cloud AI-native world, that's probably an area we continue to get some traction in. But near term, you should expect kind of the mix that I just mentioned. Rick McConnell: I would just add that with sensibly the completion of the third-generation platform that is now out there, it does enable us to do a much better job of tuning and targeting to different personas, SRE, platform engineering, particular developers. At our Perform conference a couple of weeks ago, we had a full developer day, with a ton of developers working on the product and the solution overall. We just did the DevCycle transaction, which enables us to extend left further with regard to feature management. So you can expect us to be leaning into development teams and developers as an added persona with a primary intent of generating over the course of time new logo momentum and unit volume. Not just in ACV, which is what Jim was referring to, by way of a record quarter in Q3. Operator: The next question comes from the line of Matthew Hedberg with RBC Capital Markets. Please proceed with your question. Matthew Hedberg: Great. Thanks for taking my questions, guys. Congrats on the consistency. Really good to see. I guess for either of you, I wanted to ask about the competitive environment. I guess both from smaller vendors like Cronosphere getting acquired, but I know investors are also worried that large language model providers, at some point, might do everything in software. I mean, just given that concern, you know, how do you think about the competitive risk from some of these frontier model providers as well? Rick McConnell: Hi, Matt. A lot in that question. Let me start with the first part, which is some of the acquisitions in the industry. And I would just say as we look at Cronosphere and Observe others, we really don't see them in the market very often on a direct competitive basis for us. Simply because of our target segment typically being in the global 15,000 largest accounts on the planet, and what they're looking for is end-to-end observability. And many of these solutions that you mentioned really have point solutions either focused on logs or focused on metrics. But really not an end-to-end solution that's at all comprehensive to be able to compete against Dynatrace, Inc. at that level. So we always are paranoid about competition. We're looking at moving chess pieces, especially as larger players get into the market. And so we're very observant of that, but at the same time, these smaller players haven't really been competitive in the past. With respect to this dialogue around LLMs replicating observability, that's a longer answer and something that we've been spending a lot of time thinking about to try to give you a succinct response to it. I would say number one, we view there to be a very sizable difference between enterprise software with standard workflows and infrastructure software like ours with highly dynamic workflows requiring variable evaluation of billions of interconnected data points. Secondly, as I mentioned earlier, we really do see observability as the control plane for enterprise AI. We don't believe that you can easily replace observability through vibe coding or an LLM instantiation. That can do the same thing that we do. Third, we really see our focus and our moat really as being architectural and that code-based. We have a platform with SmartScape, with Grail, with Dynatrace Intelligence, not just individual point products, and the interaction of those becomes quite sophisticated. We have AI increasing complexity across LLMs and agentic systems, not reducing it. And then finally, we built an extraordinary amount of domain expertise over more than a decade of evaluation of AI workflows or work based upon the AI analytics that we complete. And we do believe that grounding AI actions in a deterministic and explainable system is much more powerful than using and relying only on probabilistic models. So there's a lot to be had in there in terms of additional conversation, but the net of that is we see Dynatrace, Inc. as a very, very durable solution over the course of the long term for the overall environment we see for managing enterprise AI instantiations. Operator: The next question comes from the line of Patrick Edwin Colville with Scotiabank. Please proceed with your question. Patrick Edwin Colville: Thanks. Rick and Jim. And I thought your answer just then was really fascinating. I guess I just want to pivot back to the question earlier on the 4Q guide. I mean, I'm calculating the updated guide implies 22% net new ARR growth in constant currency in 4Q, which if I'm calculating that correctly, I mean, that would be the biggest net new ARR guide for a long, long time. So just can you just circle back? What gives you confidence there? Because I know that's the number one question we're going to be receiving. Like, why does Dynatrace, Inc. have confidence in that number? James Benson: Well, I'll start with why we have confidence in the number and then clarify what the guide is as far as the growth rate. We have confidence in the number because our pipeline is incredibly robust. We continue to have significant demand for durability. And so the change we made on the go-to-market side is playing out. So we have good visibility. So our visibility is what drives our conviction. That's one. I'd say relative to the guide, and this probably is just, you know, puts and takes relative to FX, that at the high end of the guide, it would imply another quarter of double-digit growth. It's not twenty, it's like in the kind of a 10 or 11% in the fourth quarter. Relative to the guide. But still quite robust, again, four quarters of double-digit net new ARR growth, which has continued in building momentum in the business. Operator: Our next question is from the line of Ittai Kidron with Oppenheimer. Please proceed with your question. Ittai Kidron: Thanks. Couple of small ones. First of all, you could give us an update on how your security strike teams are doing, if there's any progress there? And then Rick, I want to go back to your answer about LLMs and what they can do to observability. So the opportunity is very clear. Again, just on the cost side, you just announced Dynatrace Intelligence, which sounds fascinating. I guess, logically speaking, it would seem that customers would find this as the way to interact with your system longer term. I guess the question is, again, could agents, third-party agents, disintermediate you and actually replace Dynatrace Intelligence, and third-party agents can do that. And somehow again, get step removed from the customer system working in the background, and the customer is only engaging with third-party agents to interact with your system. Wouldn't that disintermediate the value that you bring to your customers? Rick McConnell: Hey, Ittai. On security, it continues to be an important business for us. It's growing nicely. We said that it would take us to get to the $100 million level than logs. A few quarters back. But we see ongoing progress there. We do see the ongoing convergence of security and observability, so no change there. And our security strategy remains to be focused on the observability buyer as opposed to the CISO where we have relationships today. So that continues to be our strategy, our focus, and our evolution of security and the security strike team. On the overall LLM environment, I think I covered it relatively completely. I would only add that no, we don't see it as highly likely that an LLM is going to be able to replicate Dynatrace, Inc. for all the reasons I described. In particular, we see that in a highly variable environment that is playing out on a day-to-day basis with all of these interconnections within that environment in large enterprises that it would be very, very difficult for any AI piece of solution or piece of software to replicate that environment for all the reasons I described. Operator: The next question is from the line of Michael Joseph Cikos with Needham. Please proceed with your question. Michael Joseph Cikos: Great. Thanks for taking the questions here, guys. It was great to get some of the data points around average land and new logo growth, etcetera. But maybe for Jim, I want to ask about DBNRR with the stabilization we've been able to demonstrate here at the 111. Can you help us think through where we are in driving an improvement in this metric just given the go-to-market maturity that you are talking to and these end-to-end observability deals as well as where are we in that DPS renewal cycle? That would be terrific. Thank you so much. James Benson: Thanks, Mike. So again, we're pleased to see a continued stabilization in dollar-based net retention rate at 1.11. I think I mentioned this in the past that our sales organization is focused on maximizing bookings. So you're going to have some quarters where you're more new logo heavy. You're going to have some quarters where you're expansion heavy. But I would say, Mike, we are still in the building phase. You mentioned DPS. That in fiscal 2027 will be kind of your first full three-year cohort classes coming, you know, your, you know, so that you'll have a one-year, two-year, and three-year cohort classes. So there is a building momentum going into fiscal 2027. That to the extent we can continue to execute, you should see an inflection in that metric. Operator: The next question is from the line of Brad Reback with Stifel. Please proceed with your question. Brad Reback: Great. Thanks. Rick, in an increasingly agentic world, do you feel you'll need to evolve your pricing kind of paradigm in order to properly monetize? Thanks. Rick McConnell: It's a good question, Brad. You know, the way that, the way that articulated in my prepared remarks and the way that we see it evolving is that we monitor the agentic world in two ways. Number one, through increased workloads and increased overall usage of the platform through Grail, through SmartScape, and in delivery of the analytics that we provide on an all-day, everyday basis. Secondly, is we do expect to monetize directly agentic workloads. So with a combination of those two elements, we do believe that there is direct monetization of the agentic AI element. If you look at Dynatrace Intelligence overall, it really does have both components. Number one, it has the component deterministic AI to evaluate what's happening in your environment with certainty and through causation and context. We then take those answers and then deliver those into an AI environment that is agentic in nature, where either a Dynatrace agent or a third-party agent through an ecosystem that is essentially orchestrated by Dynatrace, Inc. can take action, and it is through that agentic workflow that we can provide additional monetization. Operator: Our next question is from the line of William Miller Jump with Choice Securities. Please proceed with your question. William Miller Jump: Hey, great. Thank you for taking my question. I know you are guiding to 27% right now, but I was just hoping to understand how you're thinking about hiring as we zoom out. Specifically, curious if there's AI efficiencies that you're potentially getting on headcount or if some of the initiatives you've talked about are causing you to lean in further on hiring maybe in the year ahead? Thanks. James Benson: Yeah. We're not going to guide here for fiscal 2027, but I can tell you that your point about leveraging AI for internal productivity is something we continue to leverage within Dynatrace, Inc. And so in that regard, that will continue. That will certainly be a source of kind of moderating hiring in certain areas, whether they be customer support, G&A, driving more sales productivity. I think it's necessarily going to be a driver of us not hiring in the R&D space, even though we're leveraging heavily AI within that realm as well to make our developers more productive. So we'll continue to hire in R&D notably. And then I'd say hiring thereafter is going to be kind of more moderated. Operator: The next question is from the line of Andrew Michael Sherman with TD Cowen. Please proceed with your question. Andrew Michael Sherman: Hey, guys. Thanks. Jim, great to hear of the 20% plus consumption growth continued. How should we think about the gap of that between ARR and revenue growth? What drives the convergence of those two over and what timeframe would that look like? James Benson: Yeah. It's a good question. We've gotten that. That was one of the reasons why in our prepared remarks I didn't comment on consumption growth. It's very healthy, DPS is playing out the way we expected. I would say there is going to be there is certainly a lag between growing at those rates and seeing it manifest itself in an expansion. Sometimes you see an early expansion. Sometimes you do not. So I'd say that, you know, there's no simple answer to that. I'd say there isn't an elongated time period between consumption growth and then seeing ARR acceleration that comes thereafter. But, you know, again, the whole premise of getting customers onto the platform for DPS is get them to consume more. Consuming more means they're getting more value. More value means likely an early expansion because they're trialing something that maybe they weren't using before. And so even when consumption growth is healthy, there are other reasons why customers expand. They expand because there's entirely new use cases that they're looking at. And so you again look at our performance around driving double-digit net new ARR growth. Our expectation is we want to continue to do that going into fiscal 2027. Operator: Thank you. Our final question will be from the line of Brent Thill with Jefferies. Please proceed with your question. Brent Thill: Great. Thanks. Just on the go-to-market side, if you can maybe talk through the plans on the sales hiring front, rep capacity, how you're seeing, obviously, you're getting great productivity, good to see the good results. But maybe you could just walk through what you're seeing there and what you're expecting to do in terms of the overall distribution adds over the next year? James Benson: I'll take that. We continue to drive improvements in sales rep productivity. So we will continue to hire reps. It's important to remind investors that it's not just reps that drive this productivity. We've continued to get significant traction with leveraging our partner channels, notably GSIs, and the hyperscalers continue to be a source of continued improvement in productivity per rep. So hiring will continue. Have more to say about what we're going to do in that space in the Q4 call, but that's what you should expect as you think about fiscal 2027. Rick McConnell: Thanks very much to you all. That brings us to the end of our call. We very much appreciate your engaged questions, your ongoing support. To close, we believe that observability is becoming increasingly critical to the overall software ecosystem. And delivering reliable software and AI. We have very strong conviction as we entered Q4 with momentum headed into FY27. We are enthusiastic about what we see ahead from a customer standpoint and from the number of personas engaged in and requiring observability solutions to deliver the outcomes they seek. We very much look forward to connecting with you at IR events over the coming months. And we wish you all a very good day. Thank you. Operator: Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.
Operator: Thank you for standing by, and welcome to the Curbline Fourth Quarter 2025 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star. If you would like to withdraw your question, again, star one. Thank you. I'd now like to turn the call over to Stephanie Rosteperez, Vice President of Capital Markets. You may begin. Thank you. Stephanie Rosteperez: Good morning, and welcome to Curbline Properties fourth quarter 2025 earnings conference call. Joining me today are Chief Executive Officer, David Lukes, and Chief Financial Officer, Conor Fennerty. In addition to the press release distributed this morning, we have posted our quarterly financial supplement and slide presentation on our website, at curbline.com, which are intended to support our prepared remarks during today's call. Please be aware that certain of our statements today may contain forward-looking statements within the meaning of federal securities laws. These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from our forward-looking statements. Additional information may be found in our earnings press release and our filings with the SEC, including our most recent reports on Forms 10-K and 10-Q. In addition, we will be discussing non-GAAP financial measures on today's call, including FFO, operating FFO, and same property net operating income. Descriptions and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's quarterly financial supplement and investor presentation. At this time, it is my pleasure to introduce our Chief Executive Officer, David Lukes. David Lukes: Good morning, and welcome to Curbline Properties fourth quarter conference call. The fourth quarter capped an incredible first year as a public company for Curbline, and I could not be more pleased with our results. Let me start by thanking the entire team for their tireless efforts to position the company for outperformance. We continue to lead in this unique capital-efficient sector with a clear first-mover advantage as the only public company exclusively focused on acquiring top-tier convenience retail assets across the United States. Before Conor walks through the quarterly results and our 2026 guidance in detail, I'd like to take a moment to reflect on our first year as a public company along with our expectations going forward. In 2025, we acquired just under $800 million of assets, through a combination of individual acquisitions and portfolio deals. We signed over 400,000 square feet of new leases and renewals, with new lease spreads averaging 20% and our renewal spreads just under 10%. We generated over 3% same property growth on top of 5.8% growth the prior year. And importantly, our capital expenditures were just 7% of NOI, placing us among the most capital-efficient operators in the entire public REIT sector, an important hallmark of the convenience asset class. We believe that these results are not just reflective of a single year, but are representative of the asset class and the opportunities in front of us and help explain our confidence in delivering superior risk-adjusted returns. Specifically, one, we believe that there remains a significant addressable investment market that provides an opportunity to scale this business. Two, we believe that the convenient sector with simple and flexible buildings is aligned with consumer behavior. And three, we believe that we have the team and the balance sheet to support our growth and drive compelling returns. In a little more detail, first, our investments. We believe we currently own the largest high-quality portfolio of convenience properties in the US, totaling almost 5 million square feet. The total US market for this asset class is 950 million square feet, 190 times larger than our current footprint. Not all of that inventory meets our standards, but our criteria are clear: primary corridors, strong demographics, high traffic counts, and creditworthy tenants. And our track record demonstrates the liquidity of assets that match those, allowing us to grow via a mixture of one-off deals and portfolios while maintaining our industry leadership by acquiring only the best real estate. Even the top quartile of the convenience sector itself is 50 times larger than our current portfolio, providing a very long runway to grow. To achieve this growth in a highly fragmented sector, the company must build a significant network of relationships with sellers and brokers across our target markets. We've built that organization over the past seven years, and the results are showing. As an example, of the $1 billion of acquisitions we've completed since the spin-off of Curbline, 27% of those deals were direct and off-market with sellers, and 73% were marketed through the brokerage community. Even within those marketed deals, there were 24 different brokerage companies involved in the listing of individual properties, which highlights not only the highly fractured market but the importance of a national network of relationships that Curbline has built. Second, we invest in simple, flexible buildings that are the nexus of consumer behavior. Our strategy is clear: provide convenient access to customers running errands woven into their daily lives and leased to tenants with strong credit who are willing to pay top rent to access those customers. Unlike traditional shopping centers built for destination retailers, our properties serve customers running daily errands. According to third-party geolocation data, two-thirds of our visitors stay less than seven minutes on our properties, often returning multiple times a day. As a result, rather than purpose-built structures, we favor straightforward rows of shops that support a wide variety of uses. This flexibility drives tenant demand from an extremely wide pool of tenants, rising rents, and minimal capital outlay. On page 13 of our supplemental, you'll notice that we completed a total of 67 new leases over the course of 2025. 64 of those leases were with unique tenants, and 70% were national credit operators, both of which highlight the incredibly deep market for leasing to a wide variety of uses in our simple buildings and that credit tenants are seeking high-traffic intersections. The result for our portfolio is a highly diversified tenant base with only nine tenants contributing more than 1% of base rent and only one tenant more than 2%. Third, our team and our balance sheet are built to support our growth and structured to scale. Curbline has all of the pieces on hand to generate double-digit cash flow growth for a number of years to come. Based on our 2026 FFO guidance, we're forecasting 12% year-over-year FFO growth, which is well above the REIT sector average and is driven not just by external growth but by the capital efficiency of the business allowing us to reinvest, retain cash flow, into additional investments. In summary, I couldn't be more optimistic about the opportunity ahead for Curbline as we exclusively focus on scaling the fragmented convenience marketplace and delivering compelling, relative, and absolute growth for stakeholders. And with that, I'll turn it over to Conor. Conor Fennerty: Thanks, David. I'll start with fourth quarter earnings and operating metrics before shifting to the company's 2026 guidance and then concluding with the balance sheet. Fourth quarter results were ahead of budget largely due to higher than forecast NOI driven in part by rent commencement timing, along with higher acquisition volume and lease termination fees partially offset by G&A. NOI was up 16% sequentially, and almost 60% year over year driven by acquisitions along with organic growth. Outside of the quarterly operational outperformance, there are no other material variances for the quarter, highlighting the simplicity of the Curbline income statement and business plan. Will note that in the fourth quarter, we recorded a gross up of $1 million of noncash G&A expense, which was offset by $1 million of noncash other income. This gross up, which is a function of the shared services agreement, and nets to zero net income will continue as long as the agreement is in place and is excluded from any G&A figures or targets. In terms of other operating metrics, the lease rate was unchanged from the third quarter, at 96.7%, with occupancy up 20 basis points. Leasing volume in the fourth quarter decelerated from the third quarter but that is simply a function of less available space as overall leasing activity remains elevated. We remain encouraged by the depth of demand and the economics for available space, which we believe is a differentiator for Curbline as compared to other property types. Same property NOI was up 3.3% for the full year, and 1.5% for the fourth quarter despite a 50 basis point headwind from uncollectible revenue. Importantly, this growth was generated by limited capital expenditures, with fourth quarter CapEx as a percentage of NOI of 8.9% and full year CapEx as a percentage of NOI of just under 7%. Moving to our outlook for 2026. We are introducing FFO guidance a range between $1.17 and $1.21 per share which at the midpoint represents 12% growth. We believe that this level of growth will be the highest certainly in the retail space, and amongst the highest in the entire REIT sector. Underpinning the midpoint of the range is one, roughly $700 million of full year investments two, a 3.25% return on cash with interest income declining over the course of the year as cash is invested. Three, CapEx as a percentage of NOI of less than 10%. And four, G&A of roughly $32 million which includes fees paid to site centers as part of the shared services agreement. Those fees totaled $970,000 in the fourth quarter. In terms of same property NOI, we are forecasting growth of 3% at the midpoint in 2026. As I have noted previously, the same property pool is growing but small. And it includes only assets owned for at least twelve months as of November 12/31/2025 resulting in a large non-same property pool. That said, we don't expect as large of a gap in terms of relative growth between the two pools in 2026. Though uncollectible revenue will remain a year-over-year headwind to the same property pool, despite limited forecast bad debt activity. Moving pieces between the 2025 and the 2026, as a result of the funding of the private placement offering in January interest expense is set to increase to about $8 million in the first quarter. Additionally, we do not expect the $1.3 million of lease termination fees recorded in the fourth quarter to reoccur in the first quarter. G&A is also expected to remain roughly flat quarter over quarter. Details on 2026 guidance and expectations can be found on page 11 of the earnings slides. Ending on the balance sheet, Curbline was spun off with a unique capital structure aligned with the company's business plan. In the fourth quarter, Curbline closed on the first tranche a $200 million private placement offering with the balance funding in January. The offering brings total debt capital raised since formation to $600 million at a weighted average rate of roughly 5%. Additionally, the fourth quarter and first quarter to date, the company sold 5.2 million shares on a forward basis with $120 million of expected gross proceeds which we expect to settle in 2026. Including cash on hand at year-end of $290 million along with the debt and equity proceeds, Curbline had $582 million immediate liquidity available to fund investments, leaving a balance of less than $100 million to fund the investments included in guidance after taking account retained cash flow. Curbline's proven access to unsecured fixed-rate debt and now the ATM is a key differentiator from the largely private buyer universe acquiring convenience properties. The net result of the capital markets activity since formation is that the company ended the year with a leverage ratio of less than 20% providing substantial dry powder and liquidity to continue to acquire assets. And scale resulting in significant earnings, and cash flow growth well in excess of the REIT average. With that, I'll turn it back to David. David Lukes: Thank you, Conor. Operator, we are now ready to take questions. Operator: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. If you like to withdraw your question, simply press 1 again. Your first question today comes from the line of Ronald Kamdem from Morgan Stanley. Your line is open. Ronald Kamdem: Hey. Thanks so much. Can you talk about the acquisition pipeline how it's building? And I know you mentioned $700 million in the guidance. What sort of cap rate is assumed into that and how has that been trending? David Lukes: Good morning, Ron. It's David. I'll let Conor talk about the pipeline. But I would say cap rates have remained, averaging just north of 6% as they have the last couple of quarters. I'll remind you, as we've said in previous quarters, that the range can actually be quite wide between mid-fives to high sixes. That really depends a lot on occupancy, the rent roll, mark to market, and so forth. But when you blend all these deals together, we're still in low sixes. Conor Fennerty: And, Ron, just on the pipeline. So as you know, our initial expectations prior to spin-off would require about $500 million of assets on an annual basis. Obviously, we've ramped that up quite a bit to $700 million this year. And at this point, for what we've either closed, under contract, or have been awarded, it's about half or we have visibility about half of that pipeline today. So there's quite a bit of visibility on closings for 2026 already. Only thing I would just caveat is there's risk to that, right, until they get through diligence. On each of those assets. But, again, I just would frame it versus either even a year ago have a much higher level of visibility on the pipeline today than we did at any point. Ronald Kamdem: Great. My second question was just, I think the same store NOI had a tough comp. And it looks like leasing spreads decelerated a little bit. Maybe could you just talk a little bit more about what happened in the quarter? And then looking forward on the 3% same store NOI guidance, presumably, that's all sort of based on renewals and no occupancy gains. But any sort of other details was baked into that in terms of bad debt and so forth? Conor Fennerty: Sure. It's Conor again, Ron. So on the leasing spreads first, you know, as I always caveat, I encourage folks to look at trailing twelve months just given how small a denominator is. And if we look at the pipeline for leasing activity in the first quarter and the second quarter of this year, would expect our newly spreads to be right back in the low twenties, which was where they were for the full year. And then I would say a similar comment on renewals. Look at TTM as opposed to just one quarter. For same property, similar response. Very small pool. We've got 50% of the assets are in the non-same store pool. So a couple shops moving out can create some volatility. It's clear that if you look at our lease rate, it's up year over year. It's effectively unchanged quarter over quarter. So the fewer spaces we got back in the fourth quarter have already leased, and we expect to rent commence in the second, third quarter for 2026. The only other thing I would just say on 2026 same property NOI it's a pretty wide range for all the reasons I just laid out of two to 4%. We do expect a pretty big acceleration over the course of the year. Because of the least occupied gap compressing. And again, that speaks to the fact that these releases just signed over the last couple months. Doesn't take a lot of it's it's a tighter timeline than a larger format center. To get those leases rent paying, which speaks to the to the property type, which is of the reasons we love it. Ronald Kamdem: And that that sorry. Conor Fennerty: Oh, yeah. Of course. Sorry. Bad debt, we've got about a 60 basis point bogey. For, the midpoint of guidance for the year. To put that in contrast or compare it to 2025. We had about 30 basis points of bad debt in 2025 for the same property pool. We are expecting a normalization. We're not seeing anything. That would cause us to expect year over year uptick, but it feels just a prudent base case for now, and we'll update that, obviously, as the course over the course of the year. Ronald Kamdem: Helpful. That's it for me. Thank you. David Lukes: You're welcome. Operator: Your next question comes from the line of Floris Van Dijkum from Ladenburg Thalmann. Your line is open. Floris Van Dijkum: Hey. Morning, guys. My question is maybe if you can talk a little bit about know, the operations. Your portfolio is big enough now where, you know, you've got some scale. Are you guys seeing any operating synergies by having multiple properties in single markets? I know you're big in Atlanta and Miami, for example. Maybe you can talk a little bit about how you know, if there's any additional synergies that you can squeeze out of having more assets in single markets? David Lukes: Thanks for the question. I would say that the synergies, I would put them in two buckets. One is G&A. And, the expense to run a property, and the second is the more you have in a certain market, the more it allows you to have a little bit of a tighter cam pool. In both of those cases, there is some truth that, you know, scaling in certain markets does give you a little bit of leverage on both of those costs. But I will say that the recovery rate on this asset class is so high that it doesn't really flow through to same store NOI or total property performance as much. So I would say that the synergies are a nice to have, but they're not a must to have with how this property type operates. Floris Van Dijkum: Yeah. Of course. It feels like the synergies are much more corporate-focused in the sense that you know, you're leveraging public company costs. And you're seeing that already as you look at just, you know, G&A as a percentage of GAV or G&A as a percentage of revenue. Maybe my follow-up in terms of capital allocation. Have you considered going I guess maybe there hasn't been a need to, but going into more value-add assets with higher vacancies or are you, you know, sticking to your knitting? Because you know, frankly, the market is telling you, go ahead and keep acquiring. David Lukes: It's a great question, Floris. I'll probably back up by saying that it is interesting to see in the entire unanchored strip category that there are different strategies that are emerging. You know, some folks focus on value-add. Other folks focus on secondary markets. Some people like short wealth, no credit. I think you see that in other property types like, you know, student housing as a part of multifamily. You know, there are lots of examples you can point to. For us, if you think about where we are in the real estate cycle right now for retail, leasing demand is high. Occupancy is high, and rents are growing. And so when we look at our strategy of scaling convenience, I think the three risks that we really don't want to take are execution risk, credit risk, and capital risk. And if you add those three together, it just tells you that the returns we can get on an unlevered IRR basis for buying high-quality real estate that's very well leased with high credit tenants. It doesn't feel worth the risk to take in order to generate slightly higher IRRs. And so that strategy for us is allowing us to be very specific about which pieces of real estate we buy. And said differently, if you're buying high-quality real estate, it's most likely to outperform in a recession that's probably a strategy that I think investors would want to see us pursue. Operator: Thanks, David. Your next question comes from the line of Craig Mailman from Citigroup. Line is open. Craig Mailman: Hey, good morning, guys. I guess just the first one, On the $1.3 million lease term fees, could you just talk about that? And just in general, kind of how much we should think about these term fees in a given year just given you that that's kind of smaller spaces and you know, good credit at this point. Conor Fennerty: It's really hard to hear you. Can you try that one more time? Craig Mailman: Oh, sorry. Can you hear me now? Conor Fennerty: Much marginally better. I think it was about term fees, Craig, and stop me in if you wouldn't mind repeating the question, though. Craig Mailman: Yeah. Just on proceeds, could you just tell us what drove the $1.3 million in the quarter? And how we should think about kind of your Easter fees on a recurring basis? Just give us a little bit of a smaller portfolio and just in general, I said that you guys have better credit. Like, was this driven by you guys, or is this a tenant driven? Conor Fennerty: Craig, okay. I'll take a stab in. Just let me know if I answered the questions. If you look at the last two years, we had just over $2 million in 2025 and just over $4 million in 2024. It does feel like and, again, if you look back in 2023 from our SEC filings pre-spin-off, that there have been some quarters where we've had chunky term fees. Some of those have been one tenant driving the entirety of the fee. Other times, they've been more fragmented. It does feel like it's a pretty I want to say recurring part of the business because of how chunky they are. But it does ex we do expect there to be kind of a normal level of term fees over the course of any particular year. I would expect that number to grow as the portfolio grows. To what's driving those, it could be a function of a number of different things. One, a tenant just deciding a space or a market doesn't work for them. Others where they go dark and paying and we come to agreement. The best thing about it, though, is to David's point, just given the economics of our business, more often than not, we wouldn't consider a term fee until it pays for the CapEx, the downtime, and most of more often than not, we're actually making money when we get those spaces back. And then the only thing I'd add is unlike a larger format or purpose of building where we gotta tear that down or spend a year repurposing that space, we generally can get a tenant back in between three and nine months. So for us, we think of it as almost like gravy. But, again, it's there's generally just a pretty wide range of reasons that drive them. It doesn't feel like it's one specific reason one specific tenant that drives the boat. Let me know if I answered your question. Would say, again, it's challenging to hear you. Craig Mailman: Yeah. That is all. Is this better? I switched microphones. Conor Fennerty: Yes. Craig Mailman: Okay. Perfect. Sorry about that. But you did answer my question. I guess on the second question, just on kind of sources of capital, you guys are sitting on a good amount of cushion here. And, you know, net debt to EBITDA even without the forward is around one times. Could you just talk about going forward the thought process on incremental equity issuance versus kind of building out your ladder, becoming a more seasoned issuer, or potentially setting yourself up to become a more seasoned issuer to lower your cost of debt here. And just the decision to use the forward, I guess, versus spot. You know, that's a it's always good in hindsight, but the stock is, you know, close to eight, 9% higher than where you guys issued the forward. Earlier this quarter. So just talk in general on that. I know you guys are issuing at least above my NAV, so it's hard to complain. But it feels like speculating on this document, you left a little bit on the table. Conor Fennerty: Sure, Craig. Well, a lot there to unpack. So I would just say starting with liquidity on hand. Have about $580 million of cash unsettled equity versus our target of $700 million investment. So to my comments from the transcript or from the opening remarks, excuse me, we only have about a $100 million funding gap for the remainder of the year. Which is pretty insignificant. We think about the enterprise value and the fact that we've got an undrawn line of credit behind that. So the question is, how do we think about sources and uses to kind of fill that gap? To your point, we now are a seasoned private placement issuer. We've got access to the bank market. We have a 0% secured debt ratio. We now have access on the ATM. It's a pretty wide range or a pretty broad menu we now have of options, as we think through. And I would just tell you the way we think about it is consistent with the way we thought about it at site centers and the way we thought about it last year plus where if equity at one point in time was accretive to the business plan, we would consider it. But we also like to your point to start to build up a market and build up a nice ladder on the private placement market, which we're already seeing compression in spreads as we continue to tap that market. So I would just tell you, it's a really wide range of menus of options, which is a fantastic spot to be. And over the course of the year, we'll decide what's the best path. But we just have I would just say, dramatic optionality just given where we are from a leverage perspective. Which is fantastic. Craig Mailman: Great. Thank you. Conor Fennerty: You're welcome. Thanks, Craig. Operator: Next question comes from the line of Todd Thomas from KeyBanc Capital Markets. Your line is open. Todd Thomas: Hi. Thanks. Good morning. I wanted to go back to acquisitions and some of the comments that you made about having visibility on around half of the $700 million factored into guidance. Are these all single you know, single off deals? Or are you seeing any portfolios included in the pipeline? And then is there a limit on the amount of volume that you can do in any given year? Are there any constraints either around your appetite or the amount that you might be able to achieve in terms of acquisitions? David Lukes: Good morning, Todd. It's David. I would say that the first part of your question is that to date, our pipeline is almost exclusively actually, it is exclusively single asset acquisitions. So I would say this is the one at a time baseline. And I think, as you know, when we went public, we did have a question mark as how much of our deal flow was gonna be portfolios versus individual assets. I think what we found is the more of our G&A that we've allocated towards the transaction side of the business and the more people we've been able to move into the field and build relationships, the more deal flow has come to us. And I would say every quarter that goes by, we're starting to see more inventory that fits our criteria as opposed to simply sifting through all of the inventory that's on the market. It is a very, very large asset class. And the addressable market for us, even if you look at the top quartile, is still a significant amount of deal volume. So I would say our confidence that we can achieve a baseline of our budget simply doing one-off deals is pretty high. If portfolios do come up, I think it's great. I would say that, so far, portfolios have been episodic as opposed to kind of a normal quarterly run rate. And given the fact that there's so much inventory on the one-off, that fit all of our filters in terms of quality, I think we're less aggressive with having to stretch for portfolios that might have assets in them that we don't want. So I think that probably answers your question, but our confidence is really high that the individual brokerage community and the sellers are starting to approach us with deals that we really find attractive. Todd Thomas: Okay. That's helpful. And then, wanted to just ask, it looked like there was perhaps a disposition in the quarter or perhaps something small. Just curious if you can discuss that. And it seems like there would not be really much in the way of dispositions just given your sort of designing and constructing the portfolio from scratch in some sense, but any sort of dispositions or, you know, kind of asset management you know, sort of associated activity that you're know, sort of anticipating in '26? David Lukes: Yeah. Todd, it's David again. As we've said prior, you know, one of the benefits of building a portfolio one at a time is that you don't really have the need to recycle. We don't have in our budget any dispositions planned. Our business plan is not about recycling. We're purely based on buying things that we want to own over the long term. Every now and then from an asset management perspective, something might come up where it simply is better to sell it. In particular, the asset this last quarter, which was very small, happened to be adjacent to a property that site centers owned. They offered us a price to buy that asset that we thought was attractive because the cost to change out a tenant and do some work on it was such that we felt it was better to exit and sell to site centers. Site centers, on the other hand, felt like they got more liquidity from owning an adjacent parcel with the property that they're trying to sell. Again, it was quite small. It went to both boards for approval, which are separate boards as you know, but I don't expect this to be a recurring issue. Conor Fennerty: Todd, just to expand that. It was a vacant piece of land. So today, this point is sub $2 million. And there's no nothing into the 2026 budget for further dispositions. Todd Thomas: Okay. Great. Thank you. David Lukes: Thanks, Todd. Operator: Your next question comes from the line of Hong Zhang from JPMorgan. Your line is open. Hong Zhang: Yeah. Hey. I guess I was wondering if you could talk a little bit about your expectations for the cadence of lease commencements this year. Conor Fennerty: Sure, Hong. I guess I would respond by kind of giving the framework of same property NOI because they should go hand in hand. We do expect acceleration in the first quarter from the fourth quarter on same property. And then a modest deceleration in the second quarter, which is a comp on uncollectible revenue and just on some CapEx recovery items. Then to my response, I think it was to Floris earlier. Do expect a pretty big pickup in the back half of the year. From commencements of the spaces recapturing the fourth quarter. So I would expect that gap to compress in the same property to accelerate in the third and the fourth quarter. Hong Zhang: Got it. Thank you. Conor Fennerty: You're welcome. Operator: Your next question comes from the line of Alexander Goldfarb from Piper Sandler. Your line is open. Alexander Goldfarb: Hey. Good morning. So just following up on the capital questions. David, you've been speaking for some time about growth profile, the double-digit growth profile over a number of years. Your acquisition pace has been tremendous. And as Conor pointed out, there's no slowdown in deal flow. Does your, like, trajectory as you think about debt normalization, has that accelerated, meaning that instead previously, if you thought thinking maybe you had five years of runway before you get to debt normalization, maybe that's sooner, in which case that double-digit growth profile that you guys outlined may actually truncate? Or the way you see it, you still are fine for the next I think you talked about five years, where you can grow sort of in this double-digit way without, you know, capital events slowing that down? David Lukes: Morning, Alex. It's David. I can turn it over to Conor for the long-term business plan, but I think the short story is accurate and that when we went public, we had a five-year business plan, and we had $500 million a year guidance what we thought we could do in the first year, and we obviously exceeded that last year. And I think our budget for this year is certainly higher as well. So I think by definition, that five-year business plan has compressed. On the other hand, I feel like the addressable market has also revealed itself to be surprisingly strong, and I think our reliance on portfolio deals has certainly gone down in our own minds. So the confidence that that cadence will continue is equally as high, but there's no question the business plan has been pulled forward a little bit. Conor Fennerty: Yeah. Alex is expanding on that. I would say the two other significant variances would be one, we've outperformed dramatically on operations versus our initial expectations. Obviously has driven a higher level of EBITDA, more retained cash flow, which extends the timeline. To David's point, we've bought more quickly. Compresses it. And then the second thing is we've already issued some equity. And just given how small our denominator is, that equity issuance expands the pipeline. So whether the five-year business plan is now four and a half or, you know, four and a quarter, you know, I'm not sure, but there are other factors that have limited our near-term needs for equity. And, again, we just have so much optionality with the balance sheet that that runway is still pretty long today. Alexander Goldfarb: Okay. And then the second question is, Conor. It seems like site is, you know, could well end up, you know, coming to an end, I guess, this year. Just that's our math. I don't want to put words in their company's face, or name. But, your 26 guidance does that contemplate sort of a complete wind down separation payment whatever resolution from site, or if something happens there, there would be some update to your guidance. Conor Fennerty: Yeah. That's a good question, Alex. So we have assumed the status quo and guidance with no changes shared service agreement in 2026. Now as you know, though, if it's terminated by site on the two-year anniversary, would 10/01/2026, there'd be a pretty significant fee paid by site to curb which would more than offset, in our view, any expenses associated with the transition. So it would be a good guy of sorts if it did occur in 2026. Given that, to your point, it's a decision by independent board of site, and curb to terminate it, didn't feel it's appropriate to put in our budget, but it would be a good guy in any scenario. Alexander Goldfarb: Okay. And just if I could just follow-up that. I know you're not giving '27 guidance but as we think about our '27, is there something that you would tell us to think about as we model '27, or you would just say, hey. Leave everything status quo right now and you know, we'll deal with that a year from now on the February call. Conor Fennerty: It would be the latter in my opinion. Alexander Goldfarb: Okay. Thank you. David Lukes: You're welcome. Thanks, Alex. Operator: Your next question comes from the line of Floris Van Dijkum from Ladenburg Thalmann. Your line is open. Floris Van Dijkum: Hey, guys. It's a quick follow-up question that if you don't mind. I was just the site prompted something about your G&A. Maybe if you can talk a little bit about where what you think your G&A is gonna be on a going forward basis once, you know, the agreement is settled down and what needs to happen internally to make sure you're properly aligned? Conor Fennerty: Sure, Floris. It's Conor. So, we mentioned prior to spin-off that we felt that Curb could be as, if not more efficient, than SITE as it relates to G&A as a percentage of GAV, which is how we look at expenses. That was about 1.1% or 1% of GAV. To Alex's question from a moment ago, what are some factors or things that have changed I would just tell you, one is operational performance. Two, we realized we could run this business more efficiently. And so as I mentioned in my prepared remarks, we're paying about $1 million per quarter to site. Effectively, what we've said to folks is that fee would essentially just be replaced by the cost that would come over from site once that agreement is terminated. So it's a long, inelegant way of saying feel like we've got great visibility. We spent an inordinate amount of time on the expense structure of CURB. I would just tell you, if we look back to versus two years ago, it is extremely it's more efficient. Our expectations will be more efficient today. It was pre-spin-off. Other than that, to Alex's point, once we have clarity on the exact timing of the resolution and termination of the SSA, provide the specifics, but I would just tell you we expect to run really efficiently pro forma for the termination. Floris Van Dijkum: So but but one to one and a half percent of GAV is sort of a good benchmark? Conor Fennerty: No. What I said was one to 1.1% of GAV. And what we're saying is, Curb, we expect to be more efficient than that. Floris Van Dijkum: Got it. Got it. That was just after we deployed the $2.5 billion initial business plan. Once you get through that, then you really start to scale the expense. Coming back to your first question from the start of the call, then you really start to scale the corporate expenses. And that's where you start to generate pretty significant EBITDA growth. Conor Fennerty: Thanks, Floris. Operator: And we have reached the end of our question and answer session. I will now turn the call back over to David Lukes for closing remarks. David Lukes: Thank you all very much for joining our call, and we look forward to speaking with you next quarter. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Kyndryl Holdings, Inc. Fiscal Third Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. Please press 11 on your telephone. To withdraw your question, please press 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Lori C. Chaitman, Global Head of Investor Relations. Please go ahead. Good morning, everyone. And welcome to Kyndryl Holdings, Inc.'s Earnings Call for the Third Fiscal Quarter Ended December 31, 2025. Lori C. Chaitman: Before we begin, I'd like to remind you that our remarks today include forward-looking statements. These statements do not guarantee future performance and speak only as of today. The company assumes no obligation to update its forward-looking statements except as required by law. Actual outcomes or results may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties. For more information on some of these risks and uncertainties, please see the risk factors section of our annual report on Form 10-K for the year ended March 31, 2025, as such factors may be updated from time to time in the company's subsequent filings with the SEC. Also, in today's remarks, we refer to certain non-GAAP financial metrics. Definitions and additional information about our calculation of non-GAAP financial metrics as well as a reconciliation of non-GAAP metrics to GAAP metrics historical periods are provided in the presentation materials for today's event, which are available on our website at investors.kyndryl.com. Following our prepared remarks, we will hold a Q&A session. I'd now like to turn the call over to Kyndryl Holdings, Inc.'s Chairman and Chief Executive Officer, Martin J. Schroeter. Martin? Martin J. Schroeter: Thank you, Lori, and thanks to each of you for joining us. Today, we announced a few leadership changes and important for this call, Harsh Chug has been appointed interim Chief Financial Officer. He's joining us on today's call and will walk through the quarter in more detail. Harsh is a seasoned leader with extensive experience in our business, finance, and the technology industry. We are fortunate to have his leadership to guide our finance organization as we continue to execute our priorities. With that, let's turn to the third quarter. We delivered margin expansion, higher earnings, and positive free cash flow. Our 3% top-line growth was unchanged in constant currency. We've been investing to support future growth opportunities, and the base we're building is strengthening our profitability as our mix of post-spin signings convert over time. With $3.9 billion of signings in the quarter, including 11 signed contracts exceeding $50 million each, and $15.4 billion over the last year, our trailing twelve-month revenue book-to-bill ratio remains above 1.0. And we're pleased that disciplined execution has ensured that signed contracts come with solid projected margins. While we made progress in the third quarter, I want to share some thoughts on what is different from the start of our fiscal year that drove our second-half outlook to be below what we were targeting. For some context, we're in a services business operating mission-critical systems that require multiyear customer commitments. With the accelerating pace of new AI capabilities being introduced, and regulatory uncertainties specifically on data sovereignty, long-term agreements have become more complex and therefore, sales cycles are taking longer. Additionally, the timelines for large enterprise ERP transitions to cloud solutions have extended, which has also contributed to longer sales cycles. These dynamics were particularly noticeable in Kyndryl Consult's third-quarter performance, which remained strong and delivered double-digit revenue growth but came in below our expectations. Second, the way we collaborate with IBM, one of our key alliance partners, is continuing to evolve. I'll speak more about that in a minute. Before I do, I want to discuss our earnings variance in the quarter. We've made investments to support our growth in Consult. These investments have taken longer than expected to contribute to the top line, due to the lengthening in the sales cycle that I just described. Coupled with an unanticipated decline in overall employee attrition, our labor costs are higher in the near term given the levels of turnover we've assumed. As we've demonstrated over the last four years, we will address our labor efficiencies. Importantly, we've had positive momentum in key aspects of our business, including Consult and alliances. And we have a strong foothold in the areas where market disruption is occurring, which gives us a running start as more customers are ready to scale AI and implement sovereign solutions. Therefore, we're driving towards our key fiscal 2028 targets and we remain confident in our growth strategy. As I mentioned a moment ago, it's important to put a bit more context to the evolution of our partnership with IBM. At the time of the spin-off, as we've covered many times, the commercial agreement that we inherited essentially put 40% of our revenue in a low to no margin position. We called this our focused accounts initiative. Over the last four years, we've addressed most of these focus accounts and you can see that reflected in our revenue performance and our significant profitability improvements. As we entered this fiscal year, we believed that by and large our customers who consumed IBM's innovation through our services contracts would continue to do so in a similar manner. What we are seeing is that our customers' consumption models for IBM's innovation are changing. While it doesn't change the scope of our services, or our ability to grow our services content, it does have an impact on the size of our signings and the revenue we receive over time. And as we said, this has a limited impact on our earnings. So this chart shows our revenue performance in constant currency, and you can clearly see the revenue declines through our focus accounts initiative. And these declines have continued as the evolving IBM content had a 3.5% adverse effect on revenue growth. To give you a sense of the magnitude of this, when we were spun off, the annualized run rate of our spend with IBM was nearly $4 billion. And now it is approximately $2 billion, so it's essentially cut in half. This matters because our customers will decide how to best consume our high-value services and IBM's own innovation. We continue to evolve the joint Kyndryl and IBM value proposition as the pace of modernization and mission-critical environments accelerates. The goal of the work we do together is to create greater value for our customers, and we believe it is important to understand both views of revenue growth. Now let's shift to our primary growth factors and the actions underway to execute against a clear set of priorities. Let me start with our hyperscaler alliances. At the start of the fiscal year, we expected we would deliver $1.8 billion in hyperscaler-related revenue. And after strong execution in the first half, we expected to exceed our initial target. And we are now on track to realize nearly $2 billion in revenue by the end of 2026. To step back for a second, the transformation that this business has undergone starting with nearly $4 billion in IBM spend, is now approximately $2 billion while at the same time going from essentially zero in hyper-related revenue to nearly $2 billion and growing is profound. And it demonstrates how we've transformed Kyndryl's underlying capabilities and positioned us to grow profitably and be part of our customers' future with all of our partners. We've also invested heavily in Kyndryl Consult and will continue to do so as it is a key growth driver for us. As I said before, while Consult has performed extremely well, Consult's performance in the third quarter was below our expectations. Additionally, to address the factors that have impacted our revenue and our earnings, we're leveraging our Kyndryl Bridge operating platform and building even more agentic AI into how we deliver services to our customers to drive quality enhancements and enterprise efficiency. We're consistently expanding our capabilities with a focus on AI, and our AgenTeq AI framework is resonating powerfully with our customers. We'll continue investing in AI innovation labs and in related capabilities and skills to deliver emerging technologies to customers at increasing scale. We're further expanding our presence in private cloud where we're seeing renewed demand driven by AI, data sovereignty, and security requirements. And we'll work with our alliance partners to align with those opportunities. And at the same time, we will get our cost base back in line. We're operating with a clear strategic mindset, providing innovative and world-class services that are fully aligned with our longer-term goals. We are confident in our strategic direction. We're in a business with trusted customer relationships and long-term contracts that evolve all the time to meet changing market dynamics. The operational adjustments we're making position us well as we move ahead, and as we head into a new fiscal year and drive our business toward our multiyear objectives with the strategy and actions we've just outlined, it's important to recognize the progress we're aiming to deliver and focus on delivering our fiscal 2028 targets. In fiscal 2025 and with our outlook for fiscal 2026 over this two-year period, we estimate that we will deliver approximately $1.1 billion in adjusted PTI. And less expected cash taxes of $300 million over the same period, our target is to generate $800 million in fiscal 2025 and 2026 combined free cash flow. So today, we have a strong conversion of earnings to free cash flow at the rate we've been targeting. As we continue to recognize more and more revenue from our higher margin post-spin signings, we're confident in our ability to drive toward more than $1.2 billion in adjusted pretax income in fiscal 2028. And we believe we're well positioned to convert that level of earnings into more than $1 billion in adjusted free cash flow and we still see mid-single-digit growth as we exit fiscal 2028. With that, I'd like to pass the call over to Harsh. Harsh? Harsh Chug: Thanks, Martin, and hello, everyone. Today, I would like to discuss our third-quarter results and outlook for fiscal 2026. In the quarter, revenue totaled $3.9 billion, up 3% from the prior year quarter on a reported basis and unchanged in constant currency. This represented three points of revenue growth sequentially, but behind what we were expecting. The variances versus our expectations were concentrated in our strategic markets and UK operations, which we are taking actions to address. And despite our efforts to get deals over the finish line, we have continued to experience longer sales cycles. With that said, we continue to deliver strong growth in Kyndryl Consult, which grew 20% year over year in constant currency. Kyndryl Consult now represents 25% of our total revenue in the quarter. This underscores how we are expanding our role with higher value services. While our Q3 signings decreased 3% year over year, our last twelve months' signings totaled $15.4 billion. As a result, our book-to-bill ratio was above one over the last twelve months. We continue to see strong demand for our modernization services. In fact, we recently announced a five-year contract extension with Hertz to modernize its IT infrastructure. Our adjusted EBITDA decreased 1% year over year, to $696 million. As depreciation and amortization were a larger percent of our cost in last year's third quarter. Adjusted pretax income grew 5% year over year to $168 million, which reflects incremental benefits from our three A's initiative partially offset by the incremental investments we are making primarily in Kyndryl Consult to drive further growth. Our three A's initiatives continue to be an important source of margin expansion and value creation for us. Through our alliances, we generated $500 million in hyperscaler-related revenue in the third quarter, a 58% increase year over year. This puts us on track to exceed the 50% growth in hyperscaler-related revenue that we were expecting at the beginning of the year. Through advanced delivery, powered by Kyndryl Bridge, we continue to drive automation through our delivery operations. Kyndryl Bridge incorporates more technology into our offerings, reducing our costs and increasing our already strong service levels. This is worth roughly a cumulative $950 million of savings a year to us. Our accounts initiative continues to remediate elements of contracts we inherited with substandard margins. In the third quarter, the cumulative annualized profit savings from our focus accounts was $975 million. A key takeaway point from this update on the three A's is that we have successfully implemented these initiatives and they have become a core part of our operational discipline. Turning to our cash flow, balance sheet, and share repurchases. We generated free cash flow of $217 million in the third quarter. Our net CapEx was $210 million, which is above our typical quarterly run rate, but is consistent with our expectation for the quarter. Working capital was a source of cash in the quarter. We have provided a bridge from our adjusted pretax incomes to our free cash flow. In the appendix, we include a bridge from our adjusted EBITDA to our free cash flow. And more information on the free cash flow metric calculation. Under the share repurchase authorization, we announced in late 2024, we bought back 3.7 million shares of our common stock in the quarter, which represents 1.6% of our outstanding shares at a cost of $100 million. Since the inception of the program, we have repurchased 5% of our outstanding shares. We have approximately $350 million capacity available under our authorized program. Our financial position remains strong. Our cash balance at December 31 was $1.35 billion, and we are rated investment grade by Moody's, Fitch, and S&P. Our debt maturities are well laddered from late 2026 to 2041. We plan to refinance or use cash on hand to fund a near-term debt maturity of $700 million later this calendar year. And we recently drew $1 billion under a revolving credit facility. We have increased flexibility ahead of our seasonally higher cash outflow in our fiscal first quarter as well as for other general corporate purposes, including tuck-in acquisitions. Our target has been to keep net leverage below one times adjusted EBITDA and we ended the quarter well within our target range at 0.7 times. On capital allocation, our top priorities are to maintain strong liquidity, remain investment grade, and reinvest in our business, including tuck-in acquisitions, and share buybacks. We have remained focused on winning business with healthy margins. And December was a continuation of this trend. Throughout fiscal 2023, '24, and '25, and now into the first nine months of fiscal 2026, we have signed contracts with projected gross margins in the mid-twenties and projected pretax margins in the high single digits. As our business mix increasingly shifts towards more post-spin contracts, you'll continue to see significant margin expansion in our reported results. We have again included a gross profit book-to-bill chart that illustrates how we have been creating and capturing value in our business. With an average projected gross margin of 26%, on $15.4 billion of signings over the last twelve months, we have added nearly $4 billion of projected gross profit to our backlog. Over the same period of time, we have reported gross profit of $3.3 billion. This means we have been adding more gross profit to our backlog than our contracted book of business has been producing in our P&L. Having a gross profit book-to-bill ratio above one at 1.2 over the last twelve months demonstrates how we are growing what matters most. The expected future profit from committed contracts. It also highlights the quality of our post-spin signings. And our gross profit book-to-bill ratio having been consistently above one means that we have been consistently growing our gross profit backlog over the last four years. As we have said previously, our core financial goals are to grow our revenues, expand our margins, increase our earnings, and generate free cash flow. In light of our third-quarter results, our outlook for adjusted pretax income this year is now in the range of $575 million to $600 million. We estimate that adjusted EBITDA margin in fiscal 2026 will be approximately 17.5%. We also continue to see opportunities to drive efficiency in our operations, both through advanced delivery and in SG&A functions. On the topic of cash flow, with the expected cash tax of roughly $160 million and a net use of cash for working capital, this implies free cash flow in the range of $325 million to $375 million for fiscal 2026. As Martin mentioned, the principal reasons for our revised fiscal 2026 outlook are the longer sales cycle, the expected revenue headwinds from our evolving partnership with IBM, the investments we have made to support future Consult growth, and the fact that it takes time to adjust our hiring to respond to lower attrition. With that, Martin, I'll turn the call back to you. Martin J. Schroeter: Thanks, Harsh. I want to note that today we disclosed that the filing of our quarterly report will be delayed as described by our filing with the SEC. As we disclosed, following the receipt of a voluntary document request from the SEC, the company, the audit committee of our board of directors, is reviewing our cash management practices, related disclosures, the effectiveness of internal control over financial reporting, and certain other matters. We are cooperating with the SEC. We do not expect a restatement or other impact on our financials. Due to the ongoing nature of these matters, we will not be able to comment further at this time. Before I open the call up to your questions, I want to thank the tens of thousands around the world who are providing world-class services to our customers every day. Operator, let's move to questions. Operator: As a reminder, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question will be coming from Tien-Tsin Huang of JPMorgan. Your line is open. Tien-Tsin Huang: Hi. Thanks. Good morning here, Martin and Harsh. I want to ask on the outlook and the revision. I understand you can't speak to the filing here. But on the revision, given how confident you were last quarter and the revision, I'm trying to think about attribution and what really changed. I heard the sales cycles being delayed and, of course, the evolution of the IBM piece. So maybe can you just discuss what surprised you and how broad-based some of these issues were for the company? Harsh Chug: Hey, Tien-Tsin. Nice to hear your voice again. If you remember during the last quarter as we were guiding, we talked about three factors that we got confidence from. One was the acceleration in the Consult. We were expecting two points of additional growth from that and hyperscaler another additional growth of two points, and then rapid acceleration in the conversion of our sales pipeline. Those were about six points, and I think we fell short on all of them. Not that we didn't have the growth in Consult, but it was 20% on constant currency. It was not what we were hoping for. And, again, the sales cycle extension had the impact not only on the Consult but also on hyperscaler as well as the acceleration we were expecting. So that adds to about six points and the continued headwind about IBM was another factor. So those are the primary drivers, along with some of the other things, we talked about ERP conversion onto the cloud platform, and those are market dynamics that we have to deal with. And I think, Martin, you would like to add? Martin J. Schroeter: No. Look, I'd say first, thanks, Tien-Tsin. I would add as you heard, we got revenue back to flat. And as we start to share the difference between the evolving IBM relationship, you can see that without that headwind, we're actually growing the core part that matters so much to us. So the shape of that curve is kind of what we expected. As Harsh said, we were hoping and expecting to accelerate. We got good performance, but we didn't accelerate the way we had expected, and the world is getting more complex. AI is making customers rethink how their infrastructure should run. The sovereignty discussions around the world are top of mind for everybody. So we just didn't accelerate as we expected we would. Tien-Tsin Huang: Got it. No. Thank you both for that. And just my quick follow-up, just on the I think you mentioned strategic markets in the UK specifically. What are some of the changes that you might be putting in? What kind of cost might there be to do it or benefit? Just trying to understand how quickly that can be addressed. Thank you. Martin J. Schroeter: Yeah. Thanks, Tien-Tsin. So a couple of things. You know, we did as we mentioned in our prepared remarks, we did see a pretty dramatic slowdown in attrition. And then on top of all of that, or in addition to that, we have particularly strategic markets and in the UK, we were investing, a lot of that investment is local. It's domestic, which tends to be much more expensive than the center-based hiring that we're doing. So we are addressing those. It doesn't happen immediately, but we will absolutely get the wiring diagram right. We have been very successful over the last four years in freeing up people through automation and then reskilling those people to put them into roles where somebody has left the firm. And so we know the diagram, the wiring diagram works. And importantly, we also know that to the extent we make progress on this, we get to keep this. It shows up in our profit. So I feel like it's going to take us a quarter to get ourselves back on track here. Harsh, you want to take it? Harsh Chug: Yeah. I think strategic markets, if we kind of piece that part, like, I think the trend is not the same, meaning LA has done well. I think Martin mentioned data sovereignty is a bigger discussion that is happening in Europe and that is a big component of strategic markets. And that was one of the major factors in our discussions with customers there. So I would say evolution of regulation and data sovereignty has been a big factor. That certainly impacted a lot in Europe within strategic markets. Lori C. Chaitman: Operator, next question, please. Operator: Our next question will be coming from James Faucette of Morgan Stanley. Your line is open. James Faucette: Thank you. I wanted to delve a little bit deeper there on some of those factors. But first, recognizing you can't really say much about what is happening from a review perspective, but I am wondering can you talk about how much some of that review may have impacted, if at all, your forward commentary? Can we start there? Martin J. Schroeter: Sure. Let me look. As you know, you're an experienced analyst who's, I'm sure, dealt with companies that have been in these kinds of examinations. And the fact is we just can't comment until the examination is complete. So the teams are working expeditiously so we can share more. The teams are working expeditiously so we can share remediation. Having said all of that, I think the key message here is that we are not changing our fiscal 2028 goal. So we still see fiscal 2028 coming together in the time frames we talked about. And as we also said in the disclosures, we don't expect to have a restatement here. So I would say that until the work is finished, we can't comment more, but our fiscal 2028 goals are something we remain confident in, and we don't expect a restatement. So do you want to dive into some of your other deeper questions? James Faucette: Sure. No. Yeah. I appreciate that. So I guess following up on Tien-Tsin's questions, you know, and you mentioned appreciate the breakdown of the different pieces. When you look at, like, the extending sales cycles, etcetera, can you just talk about is this across all the different pieces themselves? And is there something that you can, I guess, encapsulate the types of incremental work or changes in work scope that your customers may be looking for that you hope to address as they go through these lengthened evaluation and sales cycles for you? Harsh Chug: I think it's more promising for us in terms of the types of conversations we are having. And it's largely driven by a lot of industry dynamics. And I will start with AI because it's causing a bit of industry disruption, many industries, and regular customers that we deal with, because they're getting threatened by what I call nontraditional players. So that's kind of one that starts from the business process to the application led to the infrastructure layer, so kind of that type of dynamic. And then data sovereignty and AI, which means is data going to be closer to AI or AI going to be closer to data? I think that kind of causing it because we are in long-term infrastructure modernization conversation, it becomes more complex for the decision-makers to think about the evolution of the industry, how it impacts. And I think our consult teams are deeply engaged from those modernization discussions. And I think our evolution, as Martin mentioned, not only being relevant from a partnership with IBM, as you mentioned, but relevance with a hyperscaler where we are growing and now our intent to grow deeper in private cloud, it kind of makes us a bit more relevant across. So I feel very confident that the types of dialogue we are having is much more balanced in terms of what we can bring than what could have been done at the time of spin. So it's the slowing, but the relevance of the types of discussion will make us more relevant to where customers are going than where we would have been previously. Lori C. Chaitman: Operator, next question, please. Operator: Our next question will be coming from Ian Zaffino of Oppenheimer and Company. Your line is open. Ian Zaffino: Thanks. Question will be on the buyback. Since you're doing the buyback here, what's kind of the message you're sending out here? You know, is it, and I guess, the question would be on visibility is, you know, it's been very murky. And so given the murkiness of your visibility over the past, you know, three quarters or so, you know, what gives you confidence in visibility going forward? Thanks. Harsh Chug: Yeah. I think this is Harsh. Again, the principles around how we think about capital allocation, we have to be nimble. Like, we look at every opportunity that stays in front of us. Like, first, as we mentioned, we need to have a strong balance sheet. Good financial flexibility. We do like to do tuck-in acquisitions. We have debt which is maturing, so we cannot think about how we're going to deploy. And, again, Revolver was a part of it. So we think about capital allocation more holistically. And we have to be ready for whatever opportunity presents. But at the end of the day, we want to grow this business. So investing in the business will continue to be important, whether it's investment in Kyndryl Bridge, building our own internal capabilities, hiring more resources for Consult, and tuck-in acquisitions. So I think it's going to be a balanced discussion, Martin, for you. Martin J. Schroeter: And I did want to add one more thing. You know, we've said now for a number of years that over time, the ability for us to convert profit into free cash flow would basically be the difference would basically be cash taxes. And that's what we've delivered, that's what we've been, that's what we've put on the chart in the prepared remarks. You'll see that over the last two years, our combined profit less the last two years of cash taxes is essentially where we're guiding cash flow to this year. So I think the clarity that we have and this business's ability to generate cash is exactly what we said it would be, and we see that continuing in the future as well. Lori C. Chaitman: Operator, next question, please. Operator: Our next question will be coming from James Eric Friedman of Susquehanna. Your line is open. James Eric Friedman: Hi. I just wanted to ask about the free cash flow and your comments, Harsh. You called out the working capital at $102 million. That looks good. The $217 million in free cash flow seemed fine. So when you look at the difference in your prior free cash flow, which was $550 million versus the $325 million to $375 million. I mean, it doesn't seem like it's the change in operating current assets or working capital. Is it all just the pretax income revision? Harsh Chug: Yeah. I think there are two components. One is the PTI that has a direct linkage, so it's roughly about $150 million from where we were. And working capital, while it was a benefit in the third quarter, it's going to be a bit behind for us. That's kind of the biggest driver from where I see the fourth quarter land. So I think that's kind of the balancing point, but largely driven because of the PTI change. James Eric Friedman: Got it. Lori, if I could just sneak in one more. So and you did call that out, Harsh, in your prepared remarks about the fourth quarter. I don't remember. Did you quantify where we should be thinking about working capital for the fourth quarter? Harsh Chug: We have not quantified, but that's largely the difference between the PTI and what the working capital uses. So I think you're thinking right. Cash tax, we know, and then the remaining is driven by working capital use. James Eric Friedman: Got it. Thank you. I'll drop back in the queue. Lori C. Chaitman: Operator, next question, please. Operator: And our next question will be coming from Jonathan Lee of Guggenheim Partners. Your line is open, Jonathan. Jonathan Lee: The shortfall in fiscal '26, can you talk about the building blocks in the business that give you confidence in achieving your fiscal 2028 targets? Martin J. Schroeter: Sure, sure. It's a great question. So I'd say a couple of things, and obviously, I'll ask Harsh if he has anything to add. You know, our fiscal 2028 targets when we set them out a bit over a year, almost a year and a half ago now, were really built on a few elements. One was the fact that our cash flows, which had been heavily burdened by the early cash taxes we were paying. We saw our cash flows growing faster than profit because our cash tax position now was going to be relatively stable while we improved profitability dramatically. So that's what allowed cash to grow faster, quite frankly, that phenomenon still exists. On the profit side, the primary driver is, I should say two things. One, as we've shared every quarter, every reporting opportunity, what is going into the backlog has consistently been in that high single-digit kind of 9% PTI range. And so for us, the driver of that profitability is not a trend or a building block as much as it is that over the time frames that we're talking about, the substantial majority, more than 90% of our P&L will be determined by those high 9% PTI backlog elements as opposed to the backlog we inherited. And over a year and a half ago, that year. And when we set that guide out when only half of our P&L was determined by what we put in. So the cash flow growth comes from both the profit growth and from the better cash tax position we're in that remains today. The profitability comes from the shift over time to what we've put in the backlog versus what we inherited. And that continues as well. So and then I should add the revenue component as you saw the outside of the more, outside of the harder to predict IBM content, our revenue is growing and we've taken the IBM content from $4 billion down to $2 billion. And so its impact in the future should likely diminish from the 3.5 points it has been, while at the same time our hyperscaler business is already up to nearly $2 billion, our consult business continues to grow. So the growth metrics, the growth drivers that we've had would just continue to punch bigger and bigger and bigger in the overall mix. Harsh, you want to add? Harsh Chug: Yeah. I think, two things. One is you heard on the gross profit book-to-bill, like, that continues to add. We had $4 billion added in the last twelve months versus what you saw is $3.3 billion that was used. And that's kind of one dimension. Like, what we are signing, and more and more of these signings are post-spin. So that kind of gives us the confidence. Number two, the level and relevance of our consulting in having a broader discussion about our engagement, which is across the overall ecosystem that didn't exist, like, two years or three years ago. So that kind of gives us confidence in the types of conversation because these are customers who we have had for decades. Right? So they trust us. So this is kind of becoming more relevant across the broader ecosystem. So I think those are elements. And the third point I would say is that, like, I think we're likely to be in a better opening position at the start of next year than where we started last year. So that also gives us a better starting point. Jonathan Lee: Thanks for that. If I could quickly add a follow-up. You know, when you think about some of the bookings softness or rather the elongation of sales cycles, is there any sort of time frame as to when you think you could actually close some of these deals? Would it be within the fiscal year where we seeing push outs until next fiscal? Thanks. Harsh Chug: Alright. Meaning, there is a timeline to many of these deals. Like, many of these deals are linked with renewals of our customers. Now many of these discussions start a year, two years in advance, and that's kind of the discussion. So there is a timely nature of customers, and the urgency for them to sign. So I don't think it's elongation that it's going to be multiyear elongation. This is we're talking about a couple of quarters now that can still roll into other renewals that might be coming in the future. So I think it comes to what I call more stability in terms of the shift that happens. But at the same time, as the industry gets disrupted, as AI conversation happens, it's more and more content that we start to have discussions. So I'd rather there is a slip in a deal, I'd rather have more content in my future deal than signing something which is not future-proof. I see it as an opportunity rather than something backwards. Lori C. Chaitman: Thanks, Harsh. Martin, that was our last question. Would you like to close the call? Martin J. Schroeter: So look, everybody, thank you for joining us. As we look ahead and work toward our multiyear goals, it is, I think, important to recognize all of the progress we've made to date, how that progress has translated into a much higher value services business, how it positions us to drive profitable growth, deliver higher earnings, and as we said, convert that into free cash flow. We're focused on expanding Kyndryl Bridge and its footprint and its capabilities and continuing to integrate more and more of our AgenTeq AI capabilities into our services as well as into our own operations in the way we run. We will continue to leverage the momentum that we have in Consult and the hyperscaler-related services as well as our other partners. We will further expand into the private cloud space where there is a pretty substantial, renewed demand due to all the things that are happening in the industry, AI, data sovereignty, security, etcetera. And at the same time, as we said, we will address our cost base. And as fast as we can, and we'll make sure we get that right. So thank you again for joining. We appreciate your time. Operator: And this concludes today's program. Thank you for participating. You may now disconnect.
Operator: Good morning, ladies and gentlemen. I am your conference facilitator today, Kevin. And I would like to welcome everyone to Cleveland-Cliffs Fourth Quarter and Full Year 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. The company reminds you that certain comments made on today's call will include predictive statements that are intended to be made as forward-looking within the safe harbor protections of the Private Securities Litigation Reform Act of 1995. Although the company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that could cause results to differ materially are set forth in reports on Form 10-Ks and 10-Q and news releases filed with the SEC, which are available on the company's website. Today's conference call is also available and being broadcast on clevelandcliffs.com. At the conclusion of the call, it will be archived on the website and available for replay. The company will also discuss results excluding certain special items. Reconciliation for Regulation G purposes can be found in the earnings release, which was published this morning. At this time, I'd like to introduce Lourenco Goncalves, Chairman, President, and Chief Executive Officer. Lourenco Goncalves: Thank you, Kevin, and good morning, everyone. After several years of no real actions taken to reverse the systematic destruction of the American industrial base, we finally saw in 2025 a federal administration that values the importance of preserving and growing American manufacturing. That said, in 2025, throughout the entire year, we were still exposed to a lot of steel imports, poisoning our domestic market and creating a demand gap that negatively impacted our steel shipments and asset utilization. In response to these challenging conditions, we made difficult decisions on shutting down assets that are dragging us down. Also in 2025, we terminated our index-based slab supply contract with ArcelorMittal. The contract became very onerous in its final year when the Brazilian Slab Price Index unnaturally separated from the U.S. finished steel prices. The factors that weighed on our performance in 2025 were well known and addressable. As we entered 2026, these problems have either been resolved or are clearly improving. We have already secured more business from our automotive clients, and that will show throughout 2026 as the OEMs reshore production back to the United States. Also very important, at the end of 2025, the Canadian government has finally made a move to restrict imported steel into Canada, and that has created positive momentum in 2026 for our Canadian subsidiary Stelco. Our robust order book is the best confirmation that the business environment has already started to improve. Section 232 tariffs at 50% are, of course, a leading driver of this impact. We are seeing the benefit of melted and poured requirements in driving demand for domestically produced steel. A lot of the new galvanizing capacity in the U.S. has come online and taken share from imports, reducing the amount of hot rolled availability in the marketplace. We have been able to use the melting capacity previously allocated to orders of low-margin slabs to fulfill orders of higher-margin flat rolled products. That said, due to melted import requirements, we anticipate continued demand for our domestically produced slabs. We remain open to being a domestic slab supplier to those in need of domestic slabs, as long as we can agree on a pricing construct that makes sense. With all this positive influence, the spot steel price is sitting at a two-year high. Layering the recent cold weather stretch across the Midwest, scrap prices and electricity prices have continued to grind higher, which has increased the cost structure of the mini mills to a greater level than our own. This has given us a cost advantage as we generate a lot of our own power and use much less scrap. Even with our sizable fixed-price automotive footprint, because of our vertically integrated nature and the also significant size of our non-automotive customer base, profitability is more impacted by spot steel prices than any other company in our industry. Said another way, when hot rolled coil prices rally, we, Cleveland-Cliffs, benefit. Automotive is still our core end market, and when domestic production levels of cars, trucks, and SUVs remain weak for an extended period, the impact on us is unavoidable. Vehicle production in the United States was down in 2025 for the third consecutive year. But with this new era of policy-driven reshoring, the return to pre-COVID levels of vehicle production in the United States is inevitable. Throughout 2025, we geared up for this inevitability by signing multi-year fixed-price contracts with all major OEM customers. These agreements increased our market share and secured high-margin business that will flow through in 2026. We have the installed capacity available right now. Cliffs does not need to build new plants. Unfortunately, the transition to Cliffs Steel from the previous suppliers is not instantaneous. It takes some time before we see the full impact of these changeovers, but we will see it in 2026. The expected combination of these market share gains with an increased domestic production of vehicles will be a massive gain for our throughput efficiency, costs, and ultimately profits. One more time, differently from our competitors currently building new steel plants or announcing plans to build steel plants, Cleveland-Cliffs has production capacity available right now. Again, Cliffs does not need to build plants to be ready in 2028, 2029, or 2030. The incremental volume demanded by the automotive industry can and will be absorbed by our existing footprint. That volume carries attractive incremental margins, and thanks to our multi-year fixed-price contracts with all major automotive OEMs, there will be no pressure on the price of cars to consumers in the U.S. that could even remotely be attributed to the price of Cliffs Steel. Another example of the progress we continue to demonstrate in automotive is our successful replacement of aluminum with steel using aluminum forming equipment. Our Cliffs Steel is now stamped into exposed automotive components using existing forming equipment on a production scale basis. This Cleveland-Cliffs development demonstrates that the changeover from aluminum to steel can be easily done without requiring new tooling or capital investment from the customer. That significantly lowers the barrier to adoption and expands the addressable market for our Cliffs Steel products, particularly as the aluminum supply chain has suffered severe disruption with a succession of fire events, clearly exposing its weakness. More than ever before, Cleveland-Cliffs is seeing a clear path to replace aluminum with made-in-USA steel in major applications. We operate in a market that companies from around the world are spending billions of dollars to enter. We are already here. We already have the assets. We already have the workforce. As manufacturing activity in the United States continues to recover, Cleveland-Cliffs is the best positioned to benefit without requiring massive capital investments. I want to drill down on another factor that impacted our 2025 performance, and that was the change in dynamics in the Canadian steel market. For the last several years, even under the previous tariff regime, pricing in the Canadian market moved in tandem with the U.S. market. We acquired Stelco on November 1, 2024, four days before President Trump's election, and immediately took Stelco out of the U.S. market, redirecting Stelco's output 100% to the Canadian market. This was not driven by policy change, but rather our conviction on what's in the best interest for our shareholders and our employees on both sides of the border. Even the all-surprising change in Canada relations with the U.S. should not have affected this strategy at all. But that's not how it played out. All of a sudden, Canada became a dumping ground for producers trying to avoid U.S. tariffs, and downstream Canadian manufacturing was negatively impacted as well. Canadian pricing decoupled from U.S. pricing. Until recently, the Canadian government insisted on doing nothing about this unsustainable situation, preferring to watch its steel industry flounder for the sake of globalism. After raising the alarm louder and louder, we finally saw the Canadian government come around late in 2025. While still insufficient and limited in scope, the restrictions implemented were at least able to stop the bleeding. As a result, we have seen Canadian pricing and shipments improve in the last month. Prior to our acquisition, Stelco was a low-price exporter into the U.S. and a highly disruptive one, by the way. When you look at the big picture, what our acquisition has done to transform and improve the U.S. marketplace more than justifies and supports our return on our $2.5 billion purchase price of Stelco. In the fourth quarter, we revealed that our memorandum of understanding partner was POSCO, Korea's largest steelmaker and the world's third-largest steelmaker outside of China. The partnership with Cliffs will allow POSCO to support and grow its established U.S. customer base while ensuring that its products meet U.S. country of origin melted import requirements. Our collaboration represents a model of how allies can deepen industrial cooperation under fair and transparent trade principles. And it aligns with U.S. policy goals to strengthen domestic industry and attract foreign investment. POSCO continues to conduct due diligence as part of our recently announced strategic partnership. Both parties are focused on structuring a transaction that's highly accretive and strategically compelling for each company. The duration of these negotiations reflects the seriousness and potential scale of the opportunity. We are targeting signing a definitive agreement in 2026. This remains the number one strategic priority for both Cleveland-Cliffs and POSCO. And engagement between the teams is active and ongoing. Our MOU is non-binding, and we will only move forward on ratifying our partnership if the collaboration is accretive to Cliffs' shareholders. I would like to conclude my remarks by congratulating our employees for our remarkable safety record. In 2025, we achieved the lowest total recordable incident rate since Cleveland-Cliffs became a steel producer six years ago. Our TRIR, including contractors, which is unusual in our industry, we include contractors, was 0.8 per 200,000 hours worked. That represents a 43% improvement compared with 2021, which was our first full year operating as an integrated steelmaker. This is a direct outcome of how we manage and operate in contrast with how the predecessors used to do, with the same people and the same plants. Safety performance at this level requires discipline, consistency, and leadership at every site. We have room for improvement, but the amount of progress we have seen in safety results since forming this new iteration of Cliffs six years ago is truly remarkable. I will now turn it over to our CFO, Celso Goncalves, for his remarks. Celso Goncalves: Hey, good morning. Total shipments in Q4 were 3.8 million tons, which was slightly lower than Q3 due to heavier than usual seasonal impacts. Looking forward, Q1 shipment levels should improve back to the 4 million ton level again, driven by improved demand and less maintenance time at our mills. My expectation for full year 2026 shipment level is in the 16.5 million to 17 million ton range, an improvement from 2025 as we run our mills at higher utilizations. Q4 price realization of $993 per net ton fell by around $40 per net ton as the lagging indices on spot prices declined. Automotive volume fell, and slab prices became even more disconnected. Since these factors are largely behind us, I expect a substantial improvement in realized prices starting in 2026, an increase of approximately $60 per ton from 2025. As pricing continues to grind higher, and assuming this trend continues, we will likely see even further increases in this price as the year progresses. On the operations side, 2025 represented our third straight year of unit cost reductions, with another $40 per ton reduced last year. The much-needed rationalization of our footprint and reduction of around 3,300 employees last year was a big part of that. We have further momentum heading into 2026 as we locked in coal contracts that generate over $100 million of savings year over year and an expectation of much higher utilizations, both in melt and in our finishing operations. Combining this with some partial offsets in utilities and labor costs, we expect unit costs to decline again for a fourth straight year, down another $10 per ton in 2026. On an apples-to-apples basis with 2025, the reduction is even greater as we are also selling a richer mix this year without slabs, making the year-over-year reduction even more impressive. With that said, for 2026, the recent spike in utilities costs and change in mix will likely push costs up temporarily before normalizing into Q2. As a reminder, we generally hedge 50% of our natural gas exposure looking forward one year. On CapEx, we had a record low year in 2025 in capital expenditures as a steel company, with only $561 million spent. 2026 total CapEx is projected to be around $700 million, reflecting more normalized maintenance capital as well as some pre-work and a coke plant upgrade ahead of the Burns Harbor furnace C reline plan for 2027. Annual pension and OPEB cash obligations continue to decline. With the HRC curve where it is, automotive volumes ultimately returning, I expect to return back to healthy cash flow generation in 2026, all of which will be used to pay down debt. Asset sale processes continue, and they should bring us more cash proceeds throughout the year. We have already closed the sale of FPT Florida, and we are under contract to sell several idled properties, with agreements in principle for the majority of the rest. My expectation of the $425 million in total proceeds from these sales remains intact. Some of the larger asset sale processes remain in a holding pattern while the POSCO talks remain ongoing, but we have several options out there that we're evaluating. One major success we had in 2025 was balance sheet management, particularly in the fourth quarter. From a pure dollar perspective, our leverage remains too elevated for my liking, but the shape and format of our debt structure gives us incredible runway and flexibility. After the refinancings that we completed in 2025, our nearest bond maturity is now in 2029, and all of our outstanding bonds are unsecured. Our ABL draw is the lowest it has been since the Stelco acquisition, and our total liquidity to end 2025 was $3.3 billion. The focus this year is on generating EBITDA and cash flow. I feel much better about where we are today versus where we were twelve months ago. Looking ahead, our order book is solid, demand is improving, lead times are going out, prices are rising, costs are still coming down, tariffs are in place, the slab contract is gone, manufacturing is coming back, unemployment is low, rate cuts are here, tax refunds are coming, Stelco's contributing, autos are looking to replace aluminum with steel, POSCO is collaborating, our employees are incentivized, and our operations and commercial teams are working together towards the same goal: to maximize profitability in 2026. With that, I'll turn the call back over to Lourenco for his closing remarks. Lourenco Goncalves: Thank you, Celso. 2025 was about fixing what needed to be fixed, making tough but necessary decisions, and positioning Cleveland-Cliffs for sustainable performance in a fundamentally improved market. Those actions are now largely behind us. As we move through 2026, we are operating with a leaner footprint, a stronger order book, improving price realization, declining unit costs, and a clear line of sight to higher utilization and cash generation. With that, I'll turn it over to Kevin for the Q&A. Operator: Thank you. We'll now be conducting a question and answer session. First question today is coming from Carlos De Alba from Morgan Stanley. Your line is now live. Carlos De Alba: Yes, morning, Lourenco and Celso. Thank you. My first question is on the benefit that you expect on the cancellation of the slab contract this year. Given the running prices that we have seen, can you maybe update us as to how much EBITDA, more or less, or any other form of benefit that you expect to see from this contract expiring? And then maybe we can just on CapEx beyond 2026. Given the relining that you expect in 2027, you know, how much should we pencil in, give or take, for CapEx in 2027? Lourenco Goncalves: Yes, Carlos, I will answer the question on the slabs, and I will let Celso talk about the CapEx one. As far as the slabs, when we acquired ArcelorMittal USA from ArcelorMittal, we had that slab contract as the last item that we had to negotiate. It was more about duration than pricing formula because the pricing formula was based on the international price of slabs and referencing the Brazilian slab price just because Brazil was by far the largest exporter of slabs at the time. So, and for four of the five years, the contract worked. And then on the fifth year, magically, the separation between the price of slabs and the price of hot band turned that contract into a disaster. And we tried to negotiate the contract, but we were unsuccessful because short-term gains for them were more important than the long-term relationship. I'm fine with that. So I ate, I took like a big boy, and now they don't have their hours left anymore. So good luck on running their business here in the United States without having melted and poured slabs made in Cleveland-Cliffs. Not made somewhere else. Somewhere else does not know what they're doing. We know what we are doing. So they don't have these slabs anymore. If I can put a number on the gain, the EBITDA number by itself is to the order of $500 million just by replacing these slabs with higher margin. That's a very high-level number and should be even more than that. But $500 million is a good number to start thinking about the gain of not having. And that's just a benefit on us, not the fact that competition for automotive business became automatically weaker when you don't make our slabs available to a competitor. I'll let Celso answer the other one on CapEx. Carlos De Alba: And sorry, maybe before we move to Celso, please. Question on when should we expect to see the beginning of this around $500 million improvement in EBITDA already in Q1 or it's more Q2? Lourenco Goncalves: Yeah. Look. We are already selling the material in Q1, yes. But of course, you know how these things work. The cost flows through inventory, and you're going to see more impact in Q2 than in Q1 and then more impact in Q3 than in Q2. But that's our projection for the year. Celso Goncalves: Yeah. Carlos, if you think about it, right, HRC prices $970 or so, and the slab price was like $485. So it's a pretty immediate improvement. You know, in terms of revenue at the current price, it's like a $700 million improvement in revenue at current market prices. And then you consider, call it, $150 million increase in conversion cost to roll the slabs. That's the way to think about it on a full-year basis for 2026. Carlos De Alba: Great. Thank you. Lourenco Goncalves: Yeah. Celso Goncalves: And then as it relates to CapEx, as I mentioned, 2025 was a record low at $561 million. We had dramatically reduced spend at Stelco. We had CapEx avoidance related to idled facilities and asset optimization and things like that. 2026 will be more normalized, that $700 million, call it more normalized maintenance spend and some pre-work and pre-spend related to the Burns Harbor reline in 2027. And then beyond '27, you know, it goes to, call it, $900 million in '27 and then back down to $700 million in 2028. And the only reason that '27 goes to $900 million is largely because of that blast furnace reline at Burns Harbor. Carlos De Alba: Perfect. Thank you very much. Celso Goncalves: Thank you. Operator: Thank you. Next question is coming from Nick Giles from B. Riley Securities. Your line is now live. Nick Giles: Operator, good morning, Lourenco and Celso. So, Lourenco, you outlined the capacity you have today in attractive incremental margins on what I heard is uncontracted volumes. So you've layered in some multiyear agreements, but I was wondering if you could give us a sense for how much open capacity that is, what could still be contracted, and similar to Carlos's questions, just any sensitivity from an EBITDA perspective? Lourenco Goncalves: Yeah. Look, we have downstream capacity in pretty much every single location that we operate. Just to give you an idea, let me take a simple example. Single line galvanizing line we have in Columbus, Ohio. That was one of the first assets that were caught in the attention for POSCO. We run that line at less than 300,000 tons a year. That line has a capacity of 450,000 tons a year. We can produce all kinds of exposed parts over there. But we don't run at full capacity because the OEMs don't produce cars in the United States as much as they should. They produce in Mexico, they import from Korea, they import from other places, and that's what kind of kills our automotive business. And it has been abundantly clear since day one of the Trump administration, the directive is to produce cars in the United States. Not importing cars from Korea and putting a stamp of an American OEM on top of that is still a Korean car. It's not an American car, it's not generating American jobs. So, that's what kills our capacity utilization. We need this made-in-USA automotive production in order to utilize our capacity. What I just explained to you with numbers, for Columbus, Ohio, I can do the same thing for Rockport, Indiana, for other downstream facilities like what we call New Carlisle, Indiana, that used to be called Tech and Cult under previous ownership. We have a lot of capacity to deploy, and it's a matter of just moving from commodity type, which by the way now is extremely profitable, to a more specialized type of steel. That is typical Cleveland-Cliffs type of capability or forte in terms of the technology. By the way, we have the technology. We are a well-known and well-recognized supplier of automotive steel on an international scale. And we knew that all along. Now we have the agreement of POSCO on that. So there's nothing that we need to learn from POSCO on how to do stuff. We know how to do stuff. We just don't have the orders. But now we're going to have it. Nick Giles: I really appreciate all that detail. My second question was really just around the outlook, particularly here in Q1. HRC has obviously risen dramatically. So can you just help us set expectations around ASP and costs and maybe just volumes as well? Thanks. Lourenco Goncalves: I'll have Celso handle that for you, Nick. Celso Goncalves: Yeah. Hey, Nick. Let me give you guys some general guidance for Q1 and the rest of 2026. So for Q1, we should return back to that 4 million ton mark. And that's largely driven by improved demand in the U.S. and Canada. Q1 auto shipments are expected to improve back to the, call it, '25 levels or better. As I mentioned, ASP is expected to be up $60 a ton in Q1. All that pricing that negatively impacted Q4 is now positive for Q1. The monthly lag, the quarter lags, and spot pricing are all up. Canadian pricing is also improving. We talked about the end of the slab contract, and the automotive volumes increasing is also a benefit. The way that we calculate that, ASP has changed slightly. So let me give you guys the new kind of guidelines for that. Given the expiration of the slab contract and the increased automotive volume, the way to think about it going forward is around 35% to 40% is on a fixed full-year price with resets throughout the year, obviously. And then 25% of the volumes are on a CRU month lag, 10% is on a CRU quarter lag, and then the balance, call it, 25% to 30% is the spot and other, including the Stelco volume. So that's the way to think about ASP going forward. Costs in Q1 will likely be up around $20 a ton, normalizing into Q2. But as I mentioned earlier, on a full-year basis, the cost from 2025 to 2026 on a full-year basis is expected to decline $10 per ton, with further adjustments for a richer mix and the expiration of the slab contract. So on an apples-to-apples basis, the cost would be down even more, but should be down around $10 per ton with the current construct. I think with that, you should have everything you need to get a sense for Q1 and the full year 2026. Nick Giles: Guys, I appreciate the detail as always, and continue the best of luck. Celso Goncalves: Thank you. Operator: Thank you. Next question is coming from Lawson Winder from Bank of America. Your line is now live. Lawson Winder: Yes, thank you very much, operator, and good morning, Lourenco and Celso. Nice to hear from you, and thank you for the update. If I could ask on POSCO, like, I think there's no question that it is serious and potentially transformational for Cliffs. I was just curious, you made the remark that POSCO is still continuing their due diligence. Has Cleveland-Cliffs completed its due diligence on POSCO? Lourenco Goncalves: Look, yes. That's correct, number one. Number two, keep in mind, Lawson, they came to us. We did not look for them. So, that's a very important point to consider. So, that shows that we feel like they need us probably much more than we need them. That's my view. That said, we are proud of our negotiation and our conversation and our potential partnership. One thing to keep in mind, our Cleveland-Cliffs Board of Directors will not approve any deal that's not accretive to our shareholders. So that's what we're working on. Forming a partnership with POSCO is our number one strategic priority at this point. And based on what they said to us, that's the same thing for POSCO. We believe that we would be able to provide to POSCO the ability to meet U.S. trade and origin requirements, particularly melted import into the United States, in a short term what they need, absolutely need. They will not be able to sell here without complying with that requirement. That thing is not going to change. It's clear at this point. And this is a market that everybody wants to be in. And we are the only possibility for any company that's outside of the border of the United States to be inside the border of the United States. So, POSCO is in the pole position in a very comfortable position to have a partnership with us. We absolutely love working with them. And they seem to like working with us. Now it's a matter of finalizing an agreement that's accretive to both Cliffs and POSCO, which should not be difficult to accomplish. Lawson Winder: Thank you, Lourenco. That was very helpful. If I could ask one following question. Just on the aluminum opportunity, I mean, I think it's really intriguing. Could you maybe frame that up for us in terms of the size of the opportunity to take share from aluminum in terms of tonnages? And then what would be the timeline to achieve those tonnages? Lourenco Goncalves: Yes. Look, this was the type of thing that we have been asking for an opportunity to prove ourselves through our clients. And for some reason, they were committed to keep the status quo in place until they are no longer. Because it's not just the ones that use massive amounts of aluminum. That's obvious. That's absolutely obvious. We can't rely on a supply chain of aluminum that is very weak in the United States, and they proved that by having a succession of fires in the same plant in a space of forty days or forty-five days. And also truly dependent on aluminum produced abroad. Knowing that Canada is another country. Like they like to say, we're not a fifty-first state, yes, we agree with that. It's outside of the border of the United States. It's another country. Yes, so that's why they are subject to Section 232. And will continue to be because they are another country. So aluminum from Canada is not a strategic solution for the supply chain. And then we proved our point that stamping aluminum or stamping steel for the type of steel that we, Cleveland-Cliffs, produce is the same thing. And we proved that at this point with three different OEMs, and they know what they need to do, and we are ready for them. Timing is under their control, not my control. We are ready. We proved that. We are getting orders at a production scale basis. And this should only be growing. And the potential is the potential of the size of our aluminum utilized. The best-selling vehicle in the United States has a lot of aluminum on the outside. We are starting to produce parts for that vehicle. That's why I can tell you without triggering any problems with my clients. Lawson Winder: That's very helpful. Thank you very much. Lourenco Goncalves: Thank you. Thank you. Next question today is coming from Alex Hacking from Citi. Your line is now live. Alex Hacking: Yes, thanks. Good morning. Can you maybe quantify how big of a drag on earnings Stelco has been for the past few quarters? And therefore, kind of by proxy, how much potential upside there is if Canadian markets turn around? Just for context, you know, we're looking at a Canadian publicly traded peer that's guiding to losing, you know, over $250 a ton of EBITDA in Q4. I assume Stelco's doing better than that, but anything you could do to help quantify that? Thank you. Celso Goncalves: Yeah. Hey, Alex, it's Celso. We don't break down EBITDA by mill, but obviously, Stelco was disappointing in 2025, as you can imagine. But the good news is that they're a contributor now. We've seen a lot of improvement recently that will lead to a significant EBITDA increase in 2026. If you think of the big picture, on a net basis, even though they haven't been contributing to the bottom line, it has kind of changed the dynamics of the market. And has helped our U.S. business. And that's only gonna be amplified here as HRC pricing in the U.S. has found some footing at a higher level. So you can't really think of Stelco as a standalone. We're happy with the asset. We're happy with the people. We have great people that work for us at Stelco. But you have to think of the business as a whole. And going forward, they're gonna be a much bigger contributor to the big picture. Lourenco Goncalves: Yes. Alex, Lourenco here. Let me add a little bit more on the Stelco comparison with the competitor. The competitor had the same business model as Stelco, selling to the United States. And we bought Stelco to do one thing that the competitor is never willing to do: changing their business model to sell into Canada. And we did. Like I said in my prepared remarks, a few days before Trump was elected. Let alone Trump was in office and let alone President Trump implementing Section 232 tariffs in April. We did that in November. So we were way ahead of the game in terms of how to reposition Stelco. Another thing that we took from Stelco that we did not have before is made-in-Canada coke in our coke battery over there, which is USMCA compliant feedstock. So, there was a benefit for us. And that benefit will continue to be in place. The other thing is that if we had not had all the imports from the United States being redirected to Canada and had the Canadian government accepting that as normal course of business, we would have had a completely different 2025. It took us almost one entire year to convince the Canadian government that that was a completely unsustainable situation. And we finally, they finally made a move. A move that was a lot smaller than the move that we would like them to make. But there was enough for us to see a completely different dynamics in the domestic market in Canada. So the comparison between Stelco and the competitor is not a good comparison. Got to be Stelco for Cliffs and Stelco for Cliffs going forward. And Stelco for Cliffs in 2025 was not as good as we envisioned, basically because domestic Canadian prices went down due to the avalanche of imports into Canada. That has been put on hold. That has changed. And we will have a completely different 2026 because of that. Alex Hacking: Thanks for the color. I guess just following up, how much better can 2026 look? Like, on the price side, you know, where do you think Canadian prices should be with the new tariff policy versus where they are today? Don't know if you can comment on that at all. Thank you. Lourenco Goncalves: Yes. Like Celso said, we don't break down Stelco results into our results, so we do not disclose that, but it's easy to see that based on how bad 2025 was and use the competitors as the reference for that specific point. You'll see that there will be ninety-day, so they will be a contributor, and it will be a significant contributor to Cliffs' results. Alex Hacking: Thank you. Lourenco Goncalves: You're welcome. Operator: Thank you. Next question today is coming from Albert Realini from Jefferies. Your line is now live. Albert Realini: Hey, good morning. Lourenco, Celso, thank you for taking my question. So just Celso, I think you kind of alluded to it a bit, but the $425 million in total proceeds that are potentially under contract closure and agreement. I think you had said that doesn't include some of the larger scale assets. And I think you had mentioned that those would be on hold until anything with POSCO to be finalized. So I guess what I'm asking is, that total amount of proceeds from the asset sales could be a lot higher, and then timing would be until anything with POSCO would be finalized. Is that my understanding correct? Celso Goncalves: Yeah. So hey, Albert. So the $425 million, that's the totality of all of kind of our idle plants that we're marketing. And there's interest across the board for all of them. We've received $60 million so far. But we're in discussions to sell the rest, and that would add up to the $425 million. Beyond that, you know, we have the larger assets that we could sell that there's been some interest around. You know, specifically Toledo HBI and now we put these larger FPT assets. So that would be in addition to the $425 million. Asset sales on hold, given POSCO's interest in our business. They're looking across our entire footprint. So we don't want to jeopardize the POSCO opportunity, which is much bigger. But, you know, if, for whatever reason, if the POSCO opportunity were to not materialize, we could pick up where we left off on the larger asset sales. And we've had some meaningful interest in those as well. So that would be in addition to the $425 million. You're correct. Albert Realini: Understood. Thank you. Lourenco Goncalves: Albert, just a slight correction. I also said on the discussions, some of the discussions are already signed the contract. So we are beyond a little beyond just discussions. We have contracts in place, and it's a matter of going between binding contract and a sale agreement at closing. These transactions are real. It's a matter of time for closing. So like we have done so far, we do want that already closed. Albert Realini: Got it. Thank you for the clarity. Lourenco Goncalves: Thank you. Operator: Thank you. We reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments. Lourenco Goncalves: Thank you very much, and you guys have enjoyed 2026 as much as Cleveland-Cliffs will. I appreciate your interest in our company. Thanks a lot. Operator: Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. Thank you for your participation today.
Operator: Thank you for standing by. My name is Jeannie, and I will be your conference operator today. At this time, I would like to welcome everyone to The Hain Celestial Group, Inc. Fiscal Second Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. We do ask for today's call, you limit yourself to one question and one follow-up. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, Thank you. I would now like to turn the call over to Alexis Tessier, Head of Investor Relations. You may begin. Alexis Tessier: Good morning, and thank you for joining us for a review of our fiscal second quarter 2026 results. I am joined this morning by Alison Lewis, our President and Chief Executive Officer, and Lee Boyce, our Chief Financial Officer. Slide two shows our forward-looking statements disclaimer. As you are aware, during the course of this call, we may make forward-looking statements within the meanings of federal security. These include expectations and assumptions regarding the company's future operations and financial performance. These statements are based on our current expectations and involve risks and uncertainties that could cause actual results to differ materially from our expectations. Please refer to our annual report on Form 10-K, quarterly reports on Form 10-Q, and other reports filed from time to time with the SEC, as well as the press release issued this morning for a detailed discussion of the risks. We have also prepared a presentation inclusive of additional supplemental financial information, which is posted on our website at hain.com under the Investors heading. We discuss our results today, unless noted as reported, our remarks will focus on non-GAAP or adjusted financial measures. Reconciliations of non-GAAP financial measures to GAAP results are available in the earnings release and the slide presentation accompanying this call. This call is being webcast, and an archive will be made available on the website. And now I'd like to turn the call over to Alison. Alison Lewis: Good morning, everyone, and thank you for joining the call and for your continued support of The Hain Celestial Group, Inc. Today, we will discuss the actions we are taking to advance our turnaround strategy and the results for our second quarter. First, let me start with an update on our strategic review. As previously communicated, we have been conducting a comprehensive strategic review with the goal of simplifying our portfolio, enhancing our financial flexibility, reducing our leverage profile, and maximizing shareholder value. The assessment phase involves a thorough review of our assets, operations, and market opportunities. As a result, we are executing our first decisive step to sharpen our focus on categories and brands in key markets where we can leverage our organizational strength. On February 2, we announced that we reached a definitive agreement to sell our North American snacks business to Snackrupters, a family-owned manufacturer of food and baked goods in Canada, for $115 million in cash. Proceeds from the transaction will be used to reduce debt, thereby strengthening our company's financial position and leverage profile. I am confident that in Snackrupters, we have found the right home for our beloved snack brands and the employees who support them. I want to express my gratitude to the many talented employees who have built our North American snack brands over the years. Their commitment has been instrumental to reaching this milestone. This divestiture marks a pivotal moment for Hain as we focus to grow. The simplified portfolio that emerges in North America following the divestiture is stronger financially with a more robust margin and cash flow profile to drive growth. The Hain Celestial Group, Inc.'s North America snacks represented 22% of the company's net sales in fiscal 2025 and 38% of the North America segment's net sales, with negligible EBITDA contribution over the last twelve months. The financial profile of the remaining portfolio in North America is meaningfully stronger and expected to deliver EBITDA margin in the low double digits, underpinned by gross margins above 30%. Our North America business will be healthier financially and more focused as we concentrate on three flagship categories: tea, yogurt, and baby and kids, while we continue to develop our meal prep platform. This portfolio remains diverse across life stages, is aligned with better-for-you trends, and is quite GLP-1 resistant, meeting evolving consumer needs. This recently announced divestiture is the first visible step in the execution phase of the strategic review we initiated with Goldman Sachs. This transaction is a clear example of how we intend to use the value embedded in our portfolio to meaningfully reduce debt, strengthen our balance sheet, and sharpen our strategic focus. In parallel, we are actively advancing the next phase of this review to further simplify our portfolio with a clear priority on continued deleveraging. We expect the resulting financial flexibility will allow increasing investment over time, enabling us to drive sustainable, profitable growth and create long-term shareholder value. I'd like to discuss the concrete operational progress we've made to advance our turnaround strategy and the positive changes we're driving across the organization. We are beginning to see measurable results from the steps we've taken to reshape our cost structure, enhance our operating model, and execute our five actions to win. As a reminder, our turnaround strategy is centered on five key actions to win: streamlining our portfolio, accelerating brand renovation and innovation, implementing strategic revenue growth management and pricing, driving productivity and working capital efficiency, and strengthening our digital capabilities. Underpinning our turnaround strategy is enhanced operating discipline. Early signals across forecast accuracy, inventory management, service levels, and productivity reinforce our confidence that we are enhancing operating discipline, tightening production processes, improving cash efficiency, and establishing a strong foundation for long-term growth. For example, forecast accuracy in the US rose by four points quarter over quarter, and in December, reached the highest level in the last several years. This contributed to a four-day improvement in days' inventory outstanding in North America, while international improved by nine days, driving improved cash flow. In terms of service level increases, North America was over 96% in the quarter, our best service level in recent history, enhancing our ability to meet demand and support sustainable growth. Further, we drove 13% improvement in SG&A year over year, or 120 basis points as a percent of sales, and productivity remains on track to hit our targets for the fiscal year, supporting our ability to reinvest in the business. On this improved operational foundation, we are driving Hain forward with a focused portfolio, more brand renovation and innovation, rigorous pricing and promotion execution, and enhanced digital marketing and e-commerce capabilities that position us to accelerate growth and improve profitability. Turning now to quarterly results. Our second quarter results reflect both the meaningful progress we are driving and the near-term pressure we continue to navigate, particularly from volume-driven deleverage in select parts of the portfolio. Even with these headwinds, we delivered important wins: strong cash flow, a reduction in net debt, and a clear sequential improvement in both top and bottom line trends in our international business. The core of our business is stable with continued growth in North America tea, yogurt, and in baby kids. Finger foods across both regions. Organic net sales in Q2 were flat year over year when excluding the known hotspots of North America snacks and Ella's Kitchen wet baby food, as well as Earth's Best baby formula, which is impacted by lapping supply recovery last year. SG&A performance was a standout with disciplined execution driving meaningful improvement. Adjusted EBITDA of $24 million reflected volume mix impact and cost inflation. Importantly, the actions we are taking across innovation, pricing, and brand investment should position us for a stronger second half. We remain fully committed to delivering improved top and bottom line performance in the back half of the year as these initiatives take hold, executing with discipline to strengthen our cost structure and position the business for growth. We are advancing our turnaround strategy with urgency and this quarter demonstrated meaningful strategic and operational progress. We are sharpening our portfolio and strengthening our balance sheet through the divestiture, giving us greater financial flexibility alongside an improved margin and cash flow profile. Our core categories are stable, our operational execution is improving, and the actions underway across simplification, pricing, innovation, productivity, and digital provide a clear path to sequential improvement in the back half of the year. I'll now turn the call over to Lee to review our second quarter results in more detail, along with our outlook. Lee Boyce: Thank you, Alison, and good morning, everyone. For the second quarter, we saw an organic net sales decline of 7% year over year, driven by lower sales in both the North America and international segments. The decline in organic net sales growth reflects a nine-point decrease in volume mix and a two-point increase in price. As Alison mentioned, organic net sales trends in the second quarter were flat year over year and in line with Q1 when excluding North American snacks, and Ella's Kitchen wet baby food, along with Earth's Best baby formula, which was cycling a significant return to market pipeline. Adjusted gross margin was 19.5% in the second quarter, a decrease of approximately 340 basis points year over year. The decrease was driven by cost inflation, lower volume mix, and unfavorable fixed cost absorption, partially offset by productivity and pricing. Actions already underway, including SKU simplification, revenue growth management, targeted pricing, and productivity initiatives along with efforts across key manufacturing sites to improve plant absorption, and reduce discards, position us well for margin improvement in the back half. SG&A decreased 13% year over year to $61 million in the second quarter, driven by a reduction in employee-related expenses and non-people cost discipline. As we implemented overhead reduction actions, SG&A represented 15.9% of net sales for the quarter, as compared to 17% in the year-ago period. We are nearly finished with our restructuring program to date having taken a $103 million in charges associated with the transformation program. Excluding inventory write-downs, the total charges are now expected to be $115 to $125 million reflecting a $15 million increase related to actions anticipated in connection with the sale of the North American snacks business. We remain on track to deliver the targeted $130 million to $150 million in benefits through fiscal 2027. Interest rose 22% year over year to $16 million in the quarter, primarily driven by higher spread as well as increased amortization of deferred financing fees as a result of the amendment of our credit agreement. We have hedged our rate exposure on more than 50% of our loan facility with fixed rates of 7.1%. We continue to prioritize reducing debt over time. Adjusted net loss, which excludes the effects of restructuring charges, amongst other items, was $3 million in the quarter, or 3¢ per diluted share as compared to an adjusted net income of $8 million or $0.08 per diluted share in the prior year period. We delivered adjusted EBITDA of $24 million in the second quarter, compared to $38 million a year ago. The decrease was driven primarily by lower gross margins partially offset by a reduction in SG&A. Adjusted EBITDA margin was 6.3%. Turning now to our individual segments. In North America, organic net sales declined 10% year over year. The decrease was primarily driven by lower volume in Snacks and by baby formula, partially offset by growth in beverages. Excluding snacks, organic net sales in the quarter would have declined by 3%. The core is relatively healthy with growth in tea, yogurt, and Earth's Best finger food and cereal. Second quarter adjusted gross margin in North America was 20.8%, a 440 basis point decrease versus the prior year period. The decrease was driven primarily by lower volume, cost inflation, and unfavorable fixed cost absorption, partially offset by productivity savings and pricing. Excluding snacks and eaves, which we previously announced we were exiting, gross margin would have been 28.6% in the quarter. Adjusted EBITDA in North America was $11 million, or 5.5% of net sales, reflecting a decrease of 57% from the year-ago period. The decrease resulted primarily from lower gross margins, partially offset by a reduction in SG&A expenses. Excluding snacks and eaves, EBITDA margin on a comparable basis would have been 12.8% in the quarter. In our international business, organic net sales declined 3% in the quarter, primarily driven by lower sales in baby and kids. This represents an improvement from the 4% decline in organic net sales in the first quarter, driven primarily by a moderation in declines in baby and kids. International adjusted gross margin was 18.1%, a 200 basis point decrease versus the prior year period. The decrease was driven primarily by cost inflation, unfavorable fixed cost absorption, and lower volume mix, partially offset by productivity savings and pricing. Adjusted EBITDA was $19 million or 10.2% of net sales, reflecting a decrease of 16% compared to the prior year period. The decrease resulted primarily from lower gross margins. Now turning to category performance. Alison Lewis: Organic net sales in snacks was down 20% year over year, driven by club distribution losses and velocity challenges in North America. Importantly, we are seeing velocity improvements with our recent avocado innovation and multipack optimization. And our seasonal innovation performed particularly well, with ghosts and bats for Halloween, and more recently, holiday trees. In baby and kids, organic net sales growth was down 14% year over year, driven primarily by industry-wide softness in wet baby food in The UK, as well as formula in North America, driven by lapping the return to market pipeline. We have continued to see strength in best finger foods and cereal in North America, each showing dollar sales growth of low double digits percent year over year. Ella's Kitchen Finger Food also saw organic net sales growth up high teens year over year. And while still in decline, are seeing signs of stabilization in the wet baby food category in The UK. In the beverages category, organic net sales growth was 3% year over year, driven by tea in North America, and demonstrating an acceleration from the 2% growth year over year Q1, Celestial Seasoning Bad Tea grew dollar sales in the quarter, in part due to the recent launch of wellness innovation. In meal prep, organic net sales growth was down 1% year over year. A softness in spreads and drizzles in The UK was partially offset by strength in yogurt in North America. Greek gods grew dollar and unit sales in the quarter, by high teens percent and gain share. Shifting to cash flow and the balance sheet. As Alison mentioned, we had strong cash delivery in the quarter, Free cash flow in the second quarter was $30 million, an increase of 22% compared to $25 million in the year-ago period. The improvement was primarily driven by inventory delivery, higher cash earnings, and improved payables, partially offset by lower recovery of accounts receivable. We are pleased with the progress we're making on inventory, driven by improved operating discipline. Inventory continues to be an area of focus for fiscal 2026. Days inventory outstanding improved to seventy-five days in the quarter compared to eighty-three days in Q1 2026, and seventy-seven days in the prior year period. Each day of inventory is worth approximately $3.5 million. We also made progress in our days payable outstanding, with days payable outstanding of fifty-seven days in the quarter, in line with Q1, and an improvement from fifty-six days in the year-ago period. CapEx was $7 million in the quarter, was up slightly from $6 million in the prior year period. We now expect capital expenditures to be in the low $20 million for fiscal 2026. Strong cash flow generation in the quarter for cash on hand to $68 million and net debt to $637 million, a reduction of $32 million. We also have a $144 million of available liquidity under our revolver and remain in compliance with all credit agreement covenants. Our credit facility matures in December 2026. Accordingly, have classified all of the associated borrowings as a current liability in our 10-Q. We have a disciplined approach to capital management and continue to prioritize debt reduction as the primary use of cash as we continue to act proactively to manage the upcoming maturity. Over the last ten quarters, we have reduced net debt by $140 million. We expect to generate additional operating cash flow during the balance of fiscal 2026, including the collection in January of $26 million of insurance proceeds, and ongoing working capital improvement meaningfully reducing debt obligations in the ordinary course of business. Our strategic review has yielded a multistage plan aimed at materially improving liquidity and leverage. The sale of the North American snacks business is an important first step, with net proceeds dedicated to debt repayment. Pro forma for the transaction, leverage would fall from 4.9 times at quarter end to approximately four times. As we execute the next phase of this plan, we are advancing additional actions to enhance financial flexibility, improve performance, and address the upcoming credit agreement maturity, including further asset sales and operational improvements. We believe that aligning the maturity solution timing with the execution of the multistage plan will enable us to achieve the strongest long-term outcome for the company and shareholders. We remain actively engaged with our lenders and are assessing opportunities to refinance our debt or extend maturities, while evaluating potential capital raising or strategic transactions. We believe that the successful execution of these plans will enable us to refinance, extend, or repay our debt prior to maturity from a position of strength. Turning now to our outlook. As previously communicated, we are not providing numeric guidance on fiscal 2026 operating results at this time, given the uncertainty around the outcome and timing of the completion of our strategic review. We intend to provide pro forma financials upon closure of the North American Snacks divestiture, expected in February. Looking ahead, we expect the divestiture of North American Snacks to be gross margin and EBITDA accretive, and the profile of the go-forward North American portfolio to have gross margin above 30% and EBITDA margin in the low double digits. As for fiscal 2026, we continue to expect strong cost management and productivity along with execution against our five actions to win in the marketplace, to drive stronger top and bottom line performance in the second half of the year as compared to the first half. And for the full year, we continue to expect positive free cash flow. Before I turn back to Alison, I want to underscore the actions we are taking to strengthen our financial position. We are enhancing our flexibility and improving performance through initiatives to stabilize sales, improve profitability, optimize cash, and reduce debt. The strategic review and agreement to sell our North American snacks business are important steps, and we continue to advance additional actions. With solid liquidity, strong cash delivery in the quarter, and positive free cash flow expected in fiscal 2026, we remain confident in our ability to drive improved performance in the second half and beyond. Now I'll turn the call back to Alison for some closing remarks. Alison Lewis: Thanks, Lee. In summary, I want to reaffirm our confidence in the direction we have set for the company. This quarter marks a pivotal moment in our journey. We have taken a significant first step to sharpen our focus and strengthen our financial position. We are engaging in ruthless focus, fewer categories, fewer brands, and fewer SKUs, enabling concentration on areas that better align with our strengths and core capabilities. We are making tangible progress in improving our operational health and enhancing cash delivery. The actions we have taken will drive a structural reset of our margins. And we continue to identify and remove costs from the business, freeing up fuel to invest. Q2 results demonstrate strong cash delivery, reduction in net debt, and a stable core business. We are attacking our challenges head-on and nurturing growth through our five actions to win. We are encouraged by the progress we are making as we focus on executing our strategy and building momentum quarter by quarter. While we continue to navigate pockets of pressure, we are executing with resolve, and we remain confident that the steps we are taking today position Hain to deliver sustainable, profitable growth and long-term value for our shareholders. That concludes our prepared remarks, and we are now happy to take your questions. Operator, please open the line. Operator: At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. And your first question comes from the line of Jim Salera with Stephens Inc. Please go ahead. Jim Salera: Hey, Alison and Lee. Good morning. Thanks for taking our question. Wanted to start off with maybe some more details around the decision to divest the Snacks portfolio. If we go back to the Investor Day in 2023, you guys called out a couple of different categories, you know, to focus on as you grow. Snacks was one. The baby and kids, and then beverages. I think there's six brands, three of which were snacks. And then over the preceding years, there's been a lot of focus on innovation in the Snacks portfolio, you know, getting better placement and away from home, things like that. And so clearly, something's changed. You guys think that there's more value in focusing on other areas of the portfolio. So we just love you could kind of help us bridge, you know, what changed in your thinking or what you've seen in the market from, you know, that 2023 until now to result in divesting the snacks. Alison Lewis: Sure. I'll jump in first. So good morning. Look. You know that our first action to win is all about simplifying our portfolio. We needed to take some action in North America that would allow us to really focus to grow. As we assess the various businesses, stepping back and looking at sort of rights to win and what it takes to win in a category like snacks, the reality is that there are a lot of capabilities given that this is an impulse category that I would argue are more difficult for us to develop. So if you think about impulse categories that are fundamentally demand creation categories, you need to have, you know, really heavy and intense innovation. You need to have strong marketing investment consistently. You need to have DSD-like merchandising to drive again, kind of that impulse purchase. If you look at sort of the rest of our portfolio, it tends to be more center of store in North America and center of store categories are fundamentally demand fulfillment. Demand's already there, and it's not quite as competitively intense. So that is, you know, one of the key reasons when we looked at, you know, our portfolio where was sort of the biggest opportunity for simplification. I'll also add, and you saw that, you know, snacks over the years had become somewhat financially challenged for us as a company. We had become over-reliant on the club channel. That club channel is really great when you have that business, really challenging when you don't have that business. And so again, we had to look at how do we build a portfolio that financially is structured to grow. And we firmly believe that as we divest the Snacks business, having a portfolio in North America that has gross margins 30 plus percent and has EBITDA margins in the low single digits, it's going to put us in a position where we truly can invest and truly can focus to grow. Jim Salera: Yeah. I would agree. I guess just building on that to what Alison said, I mean, the operating model, talent profile, capital allocation priorities are very different. You know? And what we called out is you kind of look forward is, Snacks, and we also said Eaves as well because that's another piece of business we previously disclosed that we've gotten out of. The gross margin profile of those businesses is 28.6. You know, the ongoing margin profile, the gross margin profile of the remainder of the North American business, we anticipate being greater than 30%. So, you know, and again, we don't like to do kind of x but if you take out a couple of things specifically around snacks, and then some, you know, some category softness that we've had in kids. You know, we were actually flat. So that speaks to kind of the rest of the portfolio. So we think we are better positioned as we move forward with a higher profitability portfolio. Jim Salera: The estimate reallocating some of the innovations? I imagine if you're not having the Snacks portfolio anymore, that frees up some internal capabilities. To then pivot to innovation in the remaining categories. Can you talk through maybe some of the stranded overhead, what those costs are? And if we could expect to see more innovation in, you know, the remaining categories whether it's in the back half of this year or maybe that's a 2027 event? Lee Boyce: Yeah. We did call out the stranded cost. I don't think, you know, we can probably didn't verbally speak to it, but it was on one of the slides. So the stranded cost impact is about $20 million to $25 million. So those are costs that are allocated to Snacks right now. We have really concrete plans to execute to mitigate the majority of those costs within the six to twelve month, time frame. And, again, you know, it will free up, you know, resources some of that would obviously would drop through, but also just free up resources as we support those innovations, as we make sure that we have kind of adequate market expenditure against the rest of the portfolio. Alison Lewis: Yeah. I'll just I do think your point is right that we will be able to put more investment and more time and energy against the innovation for the balance of the portfolio and we really are seeing, I think I've talked to you before about how we're doubling down on innovation both in our North America and our international segments. We're seeing that those innovations that we're putting in the market, whether it's single-serve yogurt and with the Greek gods, you know, or wellness tea or Earth's Best snacks, we're seeing that those innovations are driving incrementality. They're driving share growth. So innovation is absolutely critical in this segment or in the Better for You categories to bring new consumers in and ultimately get to growth and driving volume-based growth. So, yes, absolutely, we will continue to double down on innovation. Jim Salera: Great. I appreciate the time. I'll pass it on. Operator: Your next question comes from the line of Kaumil Gajrawala with Jefferies. Please go ahead. Kaumil Gajrawala: I guess a question on the divestiture in the context of cash. Obviously, you have some sort of cash coming in, but, were those businesses cash burn businesses where run rate perspective or whatever capital that was required? Like, how does that sort of bend the curve on your ability to generate cash? Lee Boyce: Yeah. I mean, the Snacks is not a significant cash-generating business. I mean, we talked about the lower margin profile within it. You know, so it's a it I'd say from an ongoing kind of cash generation perspective, we're in a very, very good position. You know, one thing we did emphasize is, you know, as you look at Q2, we did have a really strong cash delivery. We will continue to be very focused on inventory reductions, continue to make progress on payables. The second thing, especially as we go into the second half, I think we also mentioned we do have $26 million that we got on January 2. On insurance proceeds as well from a previous M&A activity. So I think we're in a good position moving forward. But to your question, I mean, the Snacks business was not a significant cash generation business for us. Kaumil Gajrawala: Okay. Got it. And you provided some, I guess, thoughts on the upcoming maturity. You know, how much flexibility do you have? Is it leaning one direction versus the other? You know, refinance versus equity versus strategic? So there's feels like there's many moving parts. Just curious how should we be thinking about what you what your options are and how much flexibility there is as the date gets closer. Lee Boyce: Yeah. So I'd say a few different things. I mean, we have a path. We're mindful of the upcoming maturities, and, you know, we're in frequent and constructive dialogue with our bank group. So, you know, what we did feel was that aligning the maturity solution with the execution of the strategic review will put us in a stronger long-term position. The key thing, obviously, with the execution of this divestiture, you did see on a pro forma basis our leverage decreased significantly, so going from 4.9 to four times. So again, we are also continuing under that strategic review to look at other options. So again, we're mindful of it. We're working through good discussion with our bank group. And we're continuing to just do a, you know, thorough evaluation of our strategy in our portfolio. So again, the four times is versus the covenant we have. That takes us all the way through to the twenty-second December, which is 5.5 times. So have significant headroom under the current. But again, we're in ongoing dialogue to make sure that we come up with the right optimal long-term capital strategy. Kaumil Gajrawala: Okay. Got it. Thank you. Operator: Your next question comes from the line of John Baumgartner with Mizuho. Please go ahead. John Baumgartner: Good morning. Thanks for the question. Like to ask, Alison, I'd like to ask a follow-up to Jim's question and the characteristics for categories that you like and you wanna pursue. The profit improvement from the snack sale is clear. You know, as you progress in the second phase of review and presumably divest more assets, how do you envision Hain as a true growth business in the end? You know, I get the resource allocation. You have some bright spots with the Finger Foods and Kids. You know, there's pockets in meals that haven't really grown over time. In babies and kids, the fertility rates are declining across your market. So how do you think about driving sustainable volume in that backdrop? Does it require larger price cuts to bring your products more within reach of, you know, sort of mainstream middle-income households and expand penetration that way? Alison Lewis: You know, as I look at again, I'll sort of focus it, I guess, on North America given that we're focused there with the divestiture. As you look at the remaining portfolio in North America, as I mentioned, first of all, the demand fulfillment aspect of it is an area where I think we had strength and we've demonstrated, you know, consistent delivery over time. As you think about growth in the remaining portfolio, we talk about some of our flagship categories being our tea business, our yogurt business, and our Earth's Best baby and kid business. What you see is in those businesses, we have strength. So if you look at, you know, we're a top three player in tea. We've shown that we can drive growth when we innovate. So our wellness innovations that we launched in June are a great example of that. They're driving share growth for us, share growth in the overall wellness category. When you look at our yogurt business, I mean that's a standout business for us with double-digit growth. Again, in a very specific area where we have strength. So whole milk, which is a growing area of, you know, interest in the overall dairy category where whole fat are something that consumers are moving more and more towards. So again, a niche area within a broader player, but an area where we can build from a place of strength. And then the same with baby and kids. When I look at our snacks business and our cereal business, where, again, you know, we're number one in each of those categories. So we have strengths. We're seeing innovations that we're launching there are delivering results, double-digit growth in fact. So, again, the idea is play to your strengths. Find those sort of spots within those categories where you already are in a top three position and keep driving that. When it comes to meal prep, there's also areas within meal prep that I would argue are underpenetrated. A great example, you know, we're number one in coconut oil in spec oils. Right? An area where less competition, we're number one. We're launching into liquid coconut for the first time in the second half of the year. 25% of households only use coconut oil, so it's an untapped opportunity for continued growth. So when you talk about sort of where does that growth sit, it's really finding those growth pockets and being close to the consumer and unlocking that with innovation, and renovation. When it comes to price cuts, here's what I'd say. I mean, price is relative to the value that you deliver. And what we've consistently seen, and I think you see this broadly across all categories, is that price relative to value. So when we're bringing innovation or we're bringing and we're seeing that added value come into the product, we're seeing an ability to, you know, sustain price or even price up. So again, the key is not so much about, you know, decreasing prices, increasing prices, it's really about what's the value that we're bringing and what's the consumer willing to pay for that value. John Baumgartner: Okay. Thanks for that. And then, for Lee, in terms of the potential or, I guess, likelihood of additional asset sales from here, are there a cost basis or tax considerations or any other factors that might limit your degree of flexibility in divesting certain businesses? Lee Boyce: There are no concerning tax considerations at this point. John Baumgartner: Okay. Thank you. Operator: Your next question comes from the line of Andrew Lazar with Barclays. Please go ahead. Andrew Lazar: Great. Thanks so much. Good morning. Alison Lewis: Hey, Andrew. Andrew Lazar: You mentioned sequential improvement. Expectation in the fiscal second half. And obviously, you also announced the divestiture of Snacks, which is expected to close fairly soon. Much of the weakness in fiscal first half was, of course, related to Snacks, so I'm curious if you also expect sequential improvement in the fiscal second half sort of on a pro forma basis. And then any thoughts or help on how we should think about the potential magnitude of such improvement? Alison Lewis: Yeah. So I think we talked in the first part of the call a little bit about sequential improvement in our international segment. We saw that from first quarter to second quarter and we expect that to continue in the international segment not only driven by the innovation that we're putting into the market it is significant. We also cycle the Ella's challenges with the broader sort of industry and category in May of 2026. So that's going to definitely, definitely help. In North America, we also expect sequential improvement as we look to from first half to second half. We saw that actually in our tea business. If you look at Q1 to Q2, we see that pick up with the rest of our businesses as we launch innovation. So when you think about our yogurt business, the doing very well. We continue to expand our single-serve Greek gods yogurt, which is driving a lot of incrementality, about percent incremental to the business and almost 100% or the category and almost 100% incremental to our business. When you look at our Earth's Best business, we are launching seven SKUs in the big kids snacks area. That's an area we have not been in the past. So we're launching bites, we're launching Waze, we're launching Sticks. All of those things have added protein, have added fiber, and so they really play into where the market is moving. So again, the sequential improvement comes from that innovation, we also see the full realization of the pricing actions we've taken. As you know, pricing actions have been rolling in across baby, across tea, across meal prep. As we executed the first half, in the second half, we see the full benefit of that, along with we'll continue to tighten up sort of our promo efficiency and effectiveness. So definitely, we are looking to drive sequential improvement first half to second half overall, and we have a lot of activities. I guess our five actions to win help drive that. Lee Boyce: Yeah. And I just building on that a little bit, you know, we expect our margins in the second half to improve. The reasons Alison mentioned. I mean, RGM, you know, we did have some impact and we talked about it in the second quarter on manufacturing on absorption. We expect to get improvements in our manufacturing footprint continue to drive productivity reducing some of our waste as well. So we expect to see that as we move through. So we expect to see an improving margin profile as well. Andrew Lazar: Okay. Great. And then just regarding stranded costs, call out the $20 to $25 million on an annual basis. Obviously, you're gonna do what you can to mitigate that as soon as you can. But, I guess, in the near term, I mean, should we think about EBITDA being impacted for a period of time when the deal closes because of the stranded costs? And does the four times pro forma leverage include or exclude the stranded costs? Lee Boyce: Thank you. Yes. So we do I mean, the pro forma leverage did include some of the stranded cost and then some of the other benefits as we've taken out. Moving forward, I mean, will be some short-term pressure with the stranded cost, but we do have a very detailed plan to get those out in a short period of time. We said the six to twelve month period. So, it is something again, there's a number of elements. It's primarily in the SG&A side, a little bit in our distribution and warehousing network. But we have action plans to get those out. So you got I'd say you would see some pressure in the first quarter, but that would dissipate as we execute those actions. Very, very quickly. Thank you. Operator: Again, if you would like to ask a question, press 1. And your next question comes from the line of Anthony Vendetti with Maxim Group. Please go ahead. Anthony Vendetti: Thank you. Yeah. So just to know you gave us the percentages of the snack business relative to overall into North America. If we had a look at the last either the last twelve months or fiscal year 2025, what was the actual revenue contribution from the Snack business? Lee Boyce: We gave it as was it 38% of the total of the total North America number. Anthony Vendetti: Okay. Did the is that was that business I know you said that there was I think the gross margin on that business was twenty-eight point six. Not that far off from what you're look No. No. No. Sorry. Lee Boyce: Sorry. Just one correction there. That gross margin was ex the Snacks business. So the Snacks business was extremely dilutive to that. So that's why we wanted to give you x the snacks business. Anthony Vendetti: Got it. Okay. Good. That's helpful. And then if you know, in terms of I know the first question was you know, what drove you to this. Was this was this sale you know, pressured by the debt by your bank group? Did the bank group sign off on it? You know? And if there if the bank group wasn't involved you think you would have spent more time trying to turn it around? Or maybe just give us a little bit color on what drove the sale right now. Lee Boyce: Yeah. It definitely pressured by the bank, it was done. I mean, we talked about I think it was made. We kicked it off. We had a strategic review process, and where we've strategically in a position with the right to win within that category and how did it fit within the rest of our portfolio. So that's really what drove the decision. You know, it felt like with the acquirer, they've got a better position to drive that moving forward. So not pressured by the bank group, no. Alison Lewis: Yeah. And I would say, Anthony, I mean, you know, look, obviously, this is public now with the team. We couldn't talk to, you know, the team in North America much about what we were doing. As the team looks at sort of the potential of the business with the three flagship categories I noted plus, you know, selective opportunities in meal prep, they're excited. They're excited because the financial profile is such that they can put a lot more focus against these. They know there's growth in these businesses. They're gonna be given an opportunity to unlock that growth. So, again, simplification is our first action to win. We have to engage in ruthless complexity reduction across our business and that was a very smart way to do that given the capabilities that are required to win in Snacks, which I would argue are not capabilities that are at the heart of The Hain Celestial Group, Inc.'s strength. Given it's an impulse category and fundamentally a demand creation category. Anthony Vendetti: Okay. Great. And then one last follow-up on the meal prep business because that is one of the fastest growing categories within grocery stores. Maybe give us a little bit more color on the plan there. Is it gonna be more frozen, refrigerated? And just an idea of how you're gonna build that out? Thank you. Alison Lewis: Yeah. You're right. Meal prep is actually an exciting area, and as we've sort of we're looking at how do we put some additional focus against that business without the snacks business in North America. We're looking at out our pipeline related to Maranatha. You heard me talk about liquid coconut oil on Spectrum. 25% of households only using coconut oil, and we're number one right now. But we don't have a liquid product. That's another great example. So we will absolutely look at ways we can unleash the opportunity within meal prep as we go forward because we know it's a growth category. And when 38% of your business is in snacks and it requires impulse category like capabilities. You find that a disproportionate amount of human resources are spent there. We now have time to spend it against some of the other great opportunities that exist in our portfolio. Anthony Vendetti: Okay. And I would just like to conclude with congratulations on the permanent appointment as CEO, Alison. Alison Lewis: Thank you very much. Continue to be energized by it. Operator: Your next question comes from the line of Jon Andersen with William Blair. Please go ahead. Jon Andersen: Morning. Thanks for the question. I was wondering if you could help us just with kind of the cadence in the baby and kids business, there are, I guess, a couple of other transitory events that are affecting organic growth in that business. You've cited the first one as being pipeline associated with the Earth Balance relaunch last year. And then just kind of the industry-wide challenges in Wet Baby in The UK, can you remind us UK. You know, the timing of those? When will those be cycled or kind of out in the base, if you will, and do you do you kind of expect post that that the baby and kid business is in a position in aggregate to grow? Thanks. Alison Lewis: Yeah. So I'll talk about The UK first and Ella's. So the BBC Panorama documentary came out in early May of last year. And so we do start to cycle that drag that has hit the category come Q4 of this year. So you will see, you know, that business return to a much better position and return to growth. We are, as you know, on that business we've been doubling down on marketing. I think I talked in our last call about sort of a new marketing campaign that's getting very good response that we are also doubling down on our innovation. So in the back half, in Ella's, we have 10 new snacks SKUs going in. We have new meal stage four, so older kids sort of meals going in. And then we have the nutty blend, which is a combination of nuts and fruits and vegetables. So, again, lots of innovation to continue to drive that category, and Ella's does remain the number one in the category overall. And is the pioneer in sets the standard for organic baby in the category. So again, once we cycle that, we have confidence that again, that business, you'll see a return to growth. As it relates to the North America business, I think we've talked quite a bit that we're in a tale of two cities where we've got good growth double-digit growth, strong double-digit growth in our Earth's Best snack, in business, and we'll continue to drive that with the innovation we have coming in, in the back half of the year. On our cereal business, the same thing. Mid single-digit growth, strong business. Again, looking at innovation to continue to drive that. When it comes to our formula business, this is the last big cycle this quarter with the last big cycle that we see, so we should get to a more normalized place. Although I will tell you that formula is an incredibly competitive category. You have a lot of new players in, and Earth's Best has been working hard to really rebuild sort of the trust credentials that it always had as well as engage in very targeted recruitment-based marketing through things like Earth's Besties, as well as some of the registry programs with our retailers. So again, we have more work to do on our formula business, but the cycles we get over. As it relates to our pouch business, sort of our other challenged area, I mean that's another example where hypercompetitive in the pouch business a lot of the pouch business moving to refrigerated. And so you're seeing sort of a sea change and a shift in that category overall. We will still be cycling some exits of that business as we look to we talked to you, I think, our last earnings call about the 30% SKU reduction in North America. We continue to drive that. A chunk of that SKU reduction does actually hit our pouch business as we look to really again build a focused power core of sort of hero SKUs in our wet baby food business. So again, we've got great strength in a couple of segments, and we'll continue to drive those hard. And we're working to stabilize the other two segments with some cycles that we get through as we move through the remainder of the year. Jon Andersen: That's thanks for the color. That's helpful. Makes sense to focus on the area where you have the strongest differentiation. One follow-up to Andrew's question just on stranded overhead. I just want to make sure, when you talk about North America gross margins, being in the thirties post on a pro forma basis and EBITDA margin double digit or double digit. Is that after the work down of the stranded overhead costs, or is it, you know, kinda right out of the gates? Lee Boyce: Oh, no. That's a good question. It is after the work down of the stranded overhead impact. So again, that's why we've emphasized and we have action plans to do take those out on the kind of a short-term basis, moving very aggressively. But it is up to that work down. That's right. So just again, for modeling purposes, it would be I guess, prudent might be the word to assume, you know, there's gonna be kind of a $5 to $6 million overhead stranded overhead headwind per quarter until those are worked down. Jon Andersen: That's the way it would work. Yes. It would be about, yeah, $5.05 $5 million, you know, a quarter, 5 to 6. But, again, we would be taking actions, you know, to quickly kind of work that down as fast as possible. Jon Andersen: Understood. Okay. Thank you so much. Operator: That concludes our question and answer session. I will now turn the call back over to Alison Lewis, CEO, for closing remarks. Alison Lewis: Great. Well, thank you, everyone, for joining today. I'll just reaffirm our confidence in the direction that we're taking. This quarter represented a really pivotal step for us as we began to execute our strategic review with the Director of Snacks. We're focusing our portfolio for growth. We're improving sort of our overall financial profile as we go forward. And strengthening our operational health while they continue to drive out costs and enhance our overall cash delivery. And I would say, you know, we're attacking the challenges head-on. Certainly, business is in transformation, and turnaround, but we see bright spots and, we'll continue to drive those bright spots as we action our five actions to win. So thanks for joining us today. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning, everyone, and welcome to the Sally Beauty Holdings, Inc. conference call to discuss the company's first quarter fiscal 2026 results. All participants have been placed in a listen-only mode. After management's prepared remarks, there will be a question and answer session. Additional instructions will be given at that time. Now I would like to turn the call over to Jeff Harkins, Vice President of Investor Relations and Treasurer for Sally Beauty Holdings, Inc. Jeff Harkins: Thank you. Good morning, everyone. Thank you for joining us. With me on the call today are Denise Paulonis, President and Chief Executive Officer, and Marlo Cormier, Chief Financial Officer. Before we begin, I'd like to remind everyone that management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors, including those discussed in the Risk Factors section of our most recent annual report on Form 10-K and other filings with the SEC. Any forward-looking statements made in this call represent our views only as of today, and we undertake no obligations to update them. The company has provided a detailed explanation and reconciliations of its items and non-GAAP financial measures in its earnings press release and on its website. I'd like to turn the call over to Denise to begin the formal remarks. Denise Paulonis: Thank you, Jeff, and good morning, everyone. Our first quarter financial performance marks a strong start to fiscal year 2026. We achieved top-line results and adjusted operating income at the high end of our expectations and adjusted diluted earnings per share above our guidance range. Through focused execution in the service of our customers, we delivered total sales of $943 million, with comparable sales flat to last year. Reflecting our ability to navigate and rebound from the macro volatility we saw during the quarter, most notably from the government shutdown. Strong gross margins of 51%, careful cost control, and benefits from our Fuel for Growth program resulted in outperformance on the bottom line, with adjusted diluted earnings per share increasing 12% to $0.48. We also generated strong cash flow from operations of $93 million, which we deployed towards investing for growth, further strengthening our balance sheet with $20 million of debt pay down, and returning value to shareholders through $21 million of share repurchases. In our Sally segment, while our customers remained choiceful, they demonstrated overall resilience in a challenging macro environment. We are pleased to see performance strengthen in December as the government reopened, and in turn, our Sally US and Canada business delivered positive comparable sales growth of 1.3% for the quarter. Of note, in the quarter, we did exit substantially all of our lower margin full-service operations in Europe. This represents a positive strategic shift for our business as it simplifies our operations and allows us to concentrate on driving growth within our core store and omnichannel businesses. While this exit will result in a modest sales headwind, approximately $10 million, to full year 2026, it is not expected to have a material impact on operating profit. Underscoring the benefits of focusing our resources on areas with greater long-term potential. Our core color category was a standout performer at Sally, with year-over-year growth of 8%. For Sally US and Canada, color was also up 8%, and we saw a meaningful increase in color customer count, which increased 3% fueled by our performance marketing and personalization initiatives, as well as ongoing momentum in our licensed Colors on Demand platform. Additionally, our entry into the fast-growing fragrance category was met with a positive response. In November, we introduced fragrance in our top 1,000 Sally US stores, and strong demand drove out-of-stocks in the latter weeks of the quarter. On the digital side, our ecommerce sales grew 20% in the quarter. This performance was powered by marketplaces, as well as positive trends across key categories, including color, hair, and styling tools, and reflects robust performance throughout the Black Friday, Cyber Monday weekend. Turning to our BSG segment, top-line results were roughly flat, with both net sales and comp sales down 20 basis points to last year as stylists continued to buy closer to need and seek value. Spending trends softened in tandem with the government shutdown but rebounded nicely in December. While stylists' appointment books were relatively busy, their customers were more cautious in their spending with some pullback in add-on services. We are pleased to have delivered healthy gains in key categories and brands, highlighting the innovation and value we bring to our stylists. As our teams continue to execute against our four key growth drivers, we remain focused on delivering consistent performance with a business that is resilient and positioned for long-term growth. Now I'll provide an update on our strategies and discuss our near-term initiatives. Our first strategy, understanding and activating the customer, is focused on acquisition, retention, and share of wallet. At Sally, our Save While You Skip the Salon campaign that we launched in Q1 is resonating with customers. Additionally, as we continue to drive new customer acquisition, we're continuing to run that in Q2. From our performance marketing, CRM, and personalization initiatives, we are pleased to see expanding customer counts among the millennial and Gen Z cohorts. We believe there is a meaningful opportunity to grow our brand with these important customer cohorts that embrace color trends, hair health, and DIY. Our brand marketing strategy also includes licensed Colors on Demand, which continues to drive strong economics and serve as a powerful customer acquisition tool. Of note, customers acquired through LCOD spend two times more than customers acquired through other means over their first year with us. And our existing customers that engage through LCOD show a lift of over 25% in their annualized spend. With that level of impact, we are pleased to see that in Q1, the number of new and reactivated customers continued to grow, and we averaged approximately 5,000 weekly consultations. Moreover, we recently launched a new care consultation strategy, which is gaining traction quickly in the New Year and is expected to help drive long-term improvement in care category performance. Looking now at BSG, we are implementing new personalization and journey optimization strategies to deepen engagement with our stylists. While BSG is in the early innings relative to Sally in this area, we are already seeing our efforts make a difference in two places. First, we use targeted offers to drive strong reactivations of customers that had previously lapsed, and we have plans to expand our targeted offers as we move through the next few quarters. Second, we are partnering with our brands to drive more effective and direct communication with our stylists, and we saw several key brands drive significant growth in customer counts in the quarter, like Schwarzkopf, Color Wow, and Major Jones. Moving now to our second strategy, unlocking and harvesting digital value. Ecommerce sales were up 20% in the Sally segment and up 4% in the BSG segment in the quarter. With strong ecommerce sales momentum in both business segments, our teams are focused on leveraging our existing capabilities and strengthening our digital foundation to drive increased engagement and conversion. In fiscal Q1, we saw broad-based ecommerce gains across categories at Sally, fueled in part by our marketplaces strategy. The upgrade of our Sally app is underway and will continue to roll out in the coming quarters, which will improve the user experience and reduce friction. Notable enhancements include coupon clarity and loyalty transparency, so value is more visible, easier to interpret, and actionable at the right moments, as well as a more efficient search engine for easier product discovery. At BSG, during the quarter, we launched Apple Pay to reduce friction at checkout, introduced inventory near me functionality, and created a favorites category for our stylists, enabling quicker discovery of frequently purchased items. In addition, we're on track to roll out substantial updates to the BSG app in the coming months. The updates are designed to deliver an improved user experience, faster payment checkout, and enhanced capabilities around education, AI, and personalization. The changes will begin to roll out to our stylists this spring. Turning to our third strategy, differentiating with product assortment and innovation. In the Sally segment, we are quite pleased to see that our customers have given us permission to participate in the fragrance category. In our second quarter, we're expanding to another 1,000 Sally locations and expect to end the quarter with fragrance in 2,000 stores. On the own brands front, the Q1 relaunch of Texture ID is bringing customers back to the brand and building momentum. Looking ahead, we have more brand refreshes and innovation coming throughout the year. At BSG, we have some exciting launches planned for fiscal 2026. Earlier this month, we introduced Milkshake and Keratin Complex, brands that are well-loved by stylists and bring exciting innovation to BSG. We brought Milkshake to 225 US stores and ecommerce with products across both color and care. And Keratin Complex launched in 525 of our US stores, full service and ecommerce, deepening our participation in the glossing and straightening trend. We're also excited about upcoming expansion in key brands where we already have strong momentum, including Moroccan Oil, Danger Jones, and K18. Now to discuss our fourth strategy, accelerating new growth pathways. I'll start with our Sally Ignited initiative, which encompasses both physical and digital refreshes, category and brand expansion, and immersive experiences focused on discovery and community. During fiscal Q1, we completed eight store refreshes, bringing us to 38 locations and putting us on track to have approximately 80 Sally Ignited stores in the market by the end of 2026. We're pleased to see positive KPIs in our Ignited stores, reinforcing that we are on the right path. Let me share a few details. First, from a customer perspective, we are seeing a mid to high single-digit increase in new and reactivated customers. Second, on the sales front, UPT and ATV continue to trend above the rest of the fleet, with customers spending more time in-store and cross-shopping categories at an increased rate. Notably, this stronger performance is especially evident in our larger format stores, where expanded skincare and cosmetics assortments have contributed to even stronger basket growth. We'll continue to use fiscal 2026 to refine the program as we look towards scaling the rollout in fiscal 2027. In the BSG segment, we are advancing our initiatives to enter the skin and spa category with testing underway. Currently, we have two brands in 250 stores, and we activated marketing in the first quarter as well. We are focused on building awareness within the skincare community and will continue to roll out campaigns targeting estheticians in the coming quarters to drive consideration and conversion. Turning now to an update on Happy Beauty. Our recent merchandising and marketing initiatives are proving successful and contributed to strong holiday season results. Our mall locations outperformed, with indie brands leading the way across key categories, including cosmetics, skincare, and fragrance. Building on the traction we saw in our mall locations, we are actively at work on our Happy Beauty ecommerce site that will launch later this fiscal year, and we continue to evaluate the optimal path forward for brick and mortar. More to come in the quarters ahead. While continuing to fuel the top line through these four growth drivers, our teams are also remaining laser-focused on driving profitability unlocks via our Fuel for Growth program and ongoing financial discipline. We're in year three of the program, which is expected to be an important contributor to gross margin profitability in fiscal 2026. We're tracking to capture approximately $45 million of benefits this year, putting us at total cumulative run rate savings of $120 million by the end of fiscal 2026. We are grateful to our talented teams and remain confident in our path forward. We are committed to driving durable growth and building long-term shareholder value in the quarters and years ahead. Now I'll turn the call to Marlo to discuss the financials. Marlo Cormier: Thank you, Denise, and good morning, everyone. Our first quarter results reflect the benefits of our strategic initiatives and disciplined execution. We are pleased to deliver net sales and adjusted operating income at the high end of our expectations and adjusted diluted earnings per share above our guidance. Q1 consolidated net sales totaled $943 million, up 0.6%, and included 90 basis points of favorable impact from foreign currency translation while operating 38 fewer stores compared to the prior year. Consolidated comparable sales were flat, which is in line with our expectations and reflects positive comps of plus 1% at Sally US and Canada, partially offset by the full-service exit in Europe that Denise previously mentioned, as well as a 20 basis point comp decline at BSG. Global ecommerce sales increased 11% to $111 million and represented 12% of total net sales. We delivered healthy gross profit in the quarter, with adjusted gross margin expanding 50 basis points to 51.3%. The year-over-year improvement is primarily attributable to higher product margin in both business segments, driven by the benefits of our Fuel for Growth program. Turning to expenses, Q1 adjusted SG&A totaled $404 million, reflecting a modest increase of $6 million to last year. Higher costs across labor and other compensation-related expenses, rent, and advertising were partially offset by $4.5 million in Fuel for Growth benefits in the period. During Q1, we captured $14 million of pretax Fuel for Growth benefits to both gross margin and SG&A, and remain on track to capture full-year fiscal 2026 benefits of approximately $45 million. Our teams are continuing to act with rigor and discipline, putting us on track to deliver cumulative run rate savings of about $120 million by fiscal year-end. Moving down the P&L, the combination of healthy gross margins and careful cost control enabled us to deliver strong bottom-line results. Adjusted operating income of $80 million is at the high end of our expectations. Adjusted diluted earnings per share of $0.48, which increased 12% last year, came in above our guidance range. Turning now to segment results, Sally Beauty net sales increased 1.2% to $532 million, which included 160 basis points of favorable impact from foreign currency translation while operating 33 fewer stores versus a year ago. Comparable sales were essentially flat, up 10 basis points to last year. Comparable transactions were down 1%, and average ticket was up 1%. For the global Sally Beauty segment, color increased 8% while care declined 6% versus prior year. Sally ecommerce sales grew 20% to $50 million and represented 9% of segment net sales for the quarter. In addition, ecommerce sales for Sally US and Canada grew by 28%. Gross margin in our Sally segment increased 20 basis points to 59.8%, driven primarily by higher product margin from benefits of our Fuel for Growth program. Segment operating margin came in at 14.7%. Looking at the BSG segment, net sales totaled $412 million, a decrease of 20 basis points. Comparable sales were also essentially flat, coming in down 20 basis points. Comparable transactions were down 1% while average ticket was flat. From a category perspective, color increased 4%, and care was flat. BSG ecommerce sales increased 4% to $60 million, representing 15% of segment net sales for the quarter. Gross margin at BSG expanded 90 basis points to 40.2%, primarily reflecting higher product margins from the benefits of our Fuel for Growth program. Segment operating margin was strong, coming in at 13.1%, up 90 basis points to last year. Turning to the balance sheet and cash flow, we ended the quarter in strong financial condition with $157 million in cash and cash equivalents and no outstanding borrowings under our asset-based revolving line of credit. Inventory levels totaled $979 million, down 3% versus last year. First quarter cash flow from operations totaled $93 million, and free cash flow came in at $57 million. During the quarter, we utilized excess cash to repay $20 million of term loan debt, bringing our net debt leverage ratio to 1.5 times. We also deployed $21 million of cash to repurchase 1.4 million shares of stock under our existing share repurchase program. Turning to our fiscal 2026 outlook, on a full-year basis, we are raising the low end of our EPS guidance as we flow through our Q1 beat. We are reiterating the rest of our full-year guidance, which now includes the following: consolidated net sales in the range of $3.71 to $3.77 billion, which includes approximately 50 basis points of favorable impact from foreign currency rates; comparable sales flat to up 1%; adjusted operating earnings of $328 to $342 million; adjusted diluted earnings in the range of $2.02 to $2.10 per share, up from a prior range of $2 to $2.10, and assumes that 50% of free cash flow goes towards share repurchases. Capital expenditures are expected to be approximately $100 million, and free cash flow is expected to be $200 million. In addition, we expect our store count to be approximately flat, including about 40 new stores, 40 store closures, and about 50 relocations. For Q2 2026, we expect the following: consolidated net sales in the range of $895 to $905 million, which includes approximately 100 basis points of favorable impact from foreign currency rates; comparable sales up 0.5% to 1.5%. Given the soft comparison to Q2 of last year, we expect this to be our strongest comp sales quarter of fiscal 2026. Adjusted operating earnings of $68 million to $71 million. In our Q2 guidance, we are returning to a more normal quarterly pattern for SG&A, with overall SG&A dollars expected to remain relatively consistent from Q1 2026 to Q2 2026. It's worth noting that Q2 last year benefited from unusually favorable foreign currency impacts that have since reversed, as well as timing shifts in incentive compensation, advertising, and IT as we managed through last year's sales headwind. Looking over a two-year period, we expect SG&A growth in Q1 and Q2 to be similar, reflecting stable underlying expense trends. Adjusted diluted earnings in the range of $0.39 to $0.42 per share. We appreciate your time this morning. Now I'll ask the operator to open the call for Q&A. Thank you. Our first question comes from the line of Oliver Chen with TD Cowen. Your line is now open. Oliver Chen: Hi, Denise and Marlo. On the BSG customer relative to the Sally customer, it sounds like the BSG customer is somewhat value-focused. Would love your take on comparing and contrasting what trends are happening there and the health of your consumer. Also, you have a lot of really exciting initiatives ahead, including fragrance and Sally Ignited. What are your thoughts on fragrance and other categories as a percentage of sales over time as a big nice opportunity, and we're seeing such a compelling structural growth there? And on Sally Ignited, the KPIs look really robust. What's holding you back from the timing of rolling those out? Thank you. Denise Paulonis: Morning, Oliver. Let me start with unpacking a little bit about what's going on with the customer. So on the Sally side of the house, the Sally customer was resilient. They really responded well to initiatives like LCOD, marketing marketplaces, innovation, and with color comps up 8%, we felt really good about where that business was. Of course, there was a minor disruption there through the government shutdown, which did hinder results a bit. But even with that, Sally US and Canada posted a 1.3% growth in the quarter. Where we are seeing that customer be a bit more choiceful is in discretionary categories like styling tools, still looking for value, and really being disciplined in where they shop in places like the care category. On the BSG side of the house, I think two trends. One, similar to Sally, where we did see slower business around the government shutdown but saw that recover nicely in December. We did also see our stylists tell us that while they were busy, their customers were being a little bit more choiceful with add-on services. So, all in all, we think the customer in general is healthy. We're navigating through pluses and minuses that happen out there, but feeling good overall about where we are with them. On the initiatives front, you specifically called out new categories. Really pleased with fragrance in Sally. So we were in a thousand stores as we went through the holiday period. We'll be in another thousand stores for a total of 2,000 stores in pretty short order. The customer's loving, kind of a high-end value offering is what I would say. So a bit of a dupe-focused strategy, but one that is resonating well. How high is high? I don't think we know yet. We're certainly navigating and testing our way through that. And then as I mentioned in particular with the ignited remarks, as we're pushing further into cosmetics and skincare, we're pleased to see that our customer is really giving us permission to play in a targeted way in those categories, often something that maybe they won't find in maybe some other mainstream beauty stores. So, once again, haven't sized it yet, more to come as we continue to test and learn there, but feeling really good about where we're headed. And finally, absolutely, very excited about Sally Ignited. What we saw as we've had these stores now open a bit longer in terms of both new customer and reactivated customer accounts as well as ATV and cross-shopping in the categories is certainly giving us momentum behind our plans. We think it's important this year to stay pretty disciplined to get these test stores, the next 50 stores up and running and really hone the model. But we're certainly prepared to accelerate into FY 2027 assuming that everything that we're seeing now continues to bear fruit. Oliver Chen: Okay. And a follow-up. On the comp guidance, how do you see that manifesting between traffic and ticket? You had some nonrecurring, hopefully nonrecurring headwinds this quarter. Just would love your thoughts on risk factors on the comp guidance and why it can even be better than what you're forecasting? Denise Paulonis: Yes. I think when you think about Q2, we guided 0.5% to 1.5% comp for the quarter. When we look at that, we are lapping a softer quarter last year when there were so many transitory impacts. When we think about what's leaning towards the positive, I think the underlying momentum in the Sally initiatives, whether that is LCOD, marketplaces, innovation, performance marketing, personalization, and then on the BSG side, continued strength in color as we also see in Sally, but also innovation with Keratin Complex and Milkshake coming online. And we think we're really well positioned for the quarter. We hope that there could be a little help from tax refunds, but until we see how that manifests itself across income groups and how people used to spend money, that could be a little bit of upside. And then these new categories that we're playing in, whether that be skin and spa on the BSG side or fragrance in the early steps into skincare and cosmetics, could be a little bit of upside on the business as well. Thank you. Best regards. Thank you. Our next question comes from the line of Susan Anderson with Canaccord Genuity. Your line is now open. Alec Legg: Hi. Good morning. Alec Legg on for Susan. Thanks for taking our question. I'm just curious, how was the promotional environment over the holiday versus maybe initial expectations? And how should we think about promotions heading into Q2 and for the rest of the year? Denise Paulonis: Yes. So value continues to be important on both our Sally and our BSG sides of the house, no doubt about that. Promotional levels were up slightly year over year in both segments. With that, we maintained a very strong gross margin over 51%. So kind of all factored into our plans and activities. But we do see those customers leaning in when there's an offer that is resonating with them, and we saw that within the competitive set on both sides of our business as well. What we're also monitoring is how we think about flexing to what the consumer wants. So beyond just leaning in on promotion, I think we're very focused on the right messaging about value, and I spoke a little bit about Save While You Skip The Salon and that campaign resonating very well on the Sally side of the house as another element of communicating value. When we go into Q2 here, I don't think there's any real material changes in trends. We don't expect it to be a highly promotional period. Certainly haven't seen that yet. Alec Legg: Thanks. And then just a quick follow-up on fragrance. I guess what type of customers are shopping fragrance at Sally? Are they existing customers just adding it to their basket while shopping online or in-store? Or maybe is it helping bring in a new customer base? Denise Paulonis: Early days. I'd say right now because of the way that it came to market in-store, it's going to be more customers that would already have been shopping with us. We have not done a heavy marketing push through performance marketing or things like that to a new customer base. So far so good with the customers that are coming in, and we'll continue to expand that communication to a broader set of potential customers as we expand to 2,000 stores here very shortly. Alec Legg: Thank you. Denise Paulonis: Our next question comes from the line of Olivia Tong with Raymond James. Your line is now open. Olivia Tong: Great. Thanks. Good morning. I apologize I was on a little bit late. But so I hope my questions haven't been answered. But first, just short term looking at the Q2 outlook, last year, you had a lot of illness hitting results. You had mentioned in the past that stylists and customers had to postpone appointments. So could you just put that in context to the Q2 outlook that you just provided, which would suggest that at least on top line a little bit better than on a year-over-year basis against an arguably weak comp and an EPS sort of plus or minus flattish. Just trying to understand how much of this is timing, anything that looked to be hitting harder this quarter versus a year ago, just to put some context around the Q2 outlook. Thanks. Denise Paulonis: Sure. So I'll start on the sales front. When you think about the top line, we are lapping our softest quarter of last year. So clearly, there is a bit of a tailwind from that. But overall, we think the business is performing well on both sides of the house. We're excited about where we are with the Sally consumer and engagement with the Sally US Canada business up 1.3% comps in Q1. We expect momentum to be strong and continue. And BSG with the strength of color behind it also anticipates good news there. We, of course, have just rolled through a pretty recent weather event, which is also always factored into our guidance as we know it. So that is in our numbers as well. And then I think when you turn further down the P&L, we still expect very positive gross margins in the business coming through. And then we articulated in the prepared remarks a bit of color about SG&A, where we really do have a bit of a timing shift there. SG&A last year really benefited from two sets of factors. First, foreign exchange was very favorable, which has since reversed. And then we had timing shifts last year on expense items like incentive comp, advertising, and IT as we really managed some pretty tough sales headwinds last year. So we're getting back to a normalized SG&A cadence where we expect dollars to be relatively flat from Q1 2026 to Q2 2026. And on a two-year basis, relative very modest SG&A growth consistent Q1 to Q2. So we really feel good about the trajectory for the full year. Flowing through that first quarter EPS beat, taking up the low end of the guidance. Excited to see how the rest of the year continues to unfold. Olivia Tong: Great. Thanks. And then just wanted to dig a little bit deeper into some of the ignited stores and understand the trends there relative to the base and whether you're seeing anything different or what you're seeing different in traffic and ticket in those post-Ignite stores? Thanks. Denise Paulonis: Yeah. I mentioned it a bit earlier, but I'd reiterate. I think what we're really pleased about is the economics that we're seeing overall with the Ignited stores. We think that we are seeing more new and reactivated customers coming into those stores, which is a great win for what we're exactly trying to do in terms of bringing more customers into the box. And then in terms of building value with our existing customers, seeing overall ATV up, UPT up, AUR up compared to the rest of the fleet. So customers are coming in. They're spending more time in the store, they are cross-shopping more inclusive of fragrance and cosmetics and skincare. So really good track. We like what we see and are excited to keep underway here. Olivia Tong: Great. Thank you. Best of luck. Denise Paulonis: Thank you. Our next question comes from the line of Sydney Wagner with Jefferies. Your line is now open. Sydney Wagner: Hi. Thanks for taking my question. We've seen some beauty companies report last week who adjusted down their expectations for category growth. Can you just talk about yours? Maybe have there been any changes since we last chatted? And then just kind of on a more, I guess, high-level trend piece, in thinking about the salon consumer, you know, and kind of the maybe longer frequency, longer time between visits. Is that a trend? Is that more macro-driven? Do you see any trends on the horizon maybe towards higher maintenance cuts, colors that could maybe accelerate that pacing of visits? Thank you. Denise Paulonis: Morning, Sydney. You want to think about the category growth, I wouldn't say that we've materially changed any of our expectations. Where we are seeing really nice strength is in color. In color that is expanding through regular color, vivid, blonding, just great activity in that space, and we're excited to see that continue. The care front care has been a tougher category. We had that factored in coming into the year, so probably not a change in our expectations. But it's subcategories like serums and treatments that are performing well and more traditional shampoo conditioner that feels a little bit more softness. Where we have real opportunity is real entrance into new categories. Skin and Spa on the BSG side, Fragrances on the Sally side, where it's less about our expectations on the category and more new opportunity and new business for us given that we have not materially played there before. So very excited about the trends we're seeing. And then your second question was around salon customers. What we're seeing for the folks who are sitting down in the chair. What we saw was just a little bit of pullback in the first quarter, particularly just add-on services. And then this disruption that came from the government shutdown, right? It just distracted consumers a bit, and so we saw them behave a little bit differently than they had before. But nobody really neglects their hair long term, so I think those stylist chairs are gonna stay busy over time and get to a good spot. In terms of trends, I'd say the most interesting trend right now is really around the glass and super straight look. So, you know, any product that is aimed at helping that straightening and very clean line look is what customers are looking for for both at-home use as well as in the salon. Sydney Wagner: Thank you. Denise Paulonis: Our next question comes from the line of Simeon Gutman with Morgan Stanley. Your line is now open. Laureen Ng: Hi, this is Laureen Ng on for Simeon. Thanks for taking our question. So first, I just wanted to touch on the comp guide for Q2 and the implied second half. Also, assumes trends for the full year remain stable in the first half versus the second half. Can you walk us through this maybe as you're expanding into other categories and sound a little bit more positive on your initiatives? I guess why shouldn't we assume trends can materially improve into the second half of '26? Thank you. Denise Paulonis: Yeah. When we think about the comp guide for the full year, we laid out a flat to up one with where we guided the second quarter, we'll be kind of at the mid of that coming out of the first quarter. And that did reflect a little bit easier comps in the second quarter that will be lapping from last year. When we look to the second half, we're very optimistic. So once again, we think that there's plenty of opportunity for us to continue to grow with our customer base with these new categories and with the full suite of initiatives that we have around LCOD, personalization, performance marketing, our digital and marketplaces, and then innovation. So all in all trending in the right way, I think we're being appropriate and guarded in our guidance as we see some of the bumps in the road with macro is still out there. But expect the second half of the year to be continuing the momentum that we've seen in the business to date. Laureen Ng: Great. And then just a question on Sally Ignited. That also sounds encouraging with your KPIs positive. Curious if you could help us understand maybe where the comp run rate could get to based on your current remodels? Denise Paulonis: So we haven't provided all of that information yet. You know, we're evaluating the pace at which we could roll out in the future, you know, likely. These are not small remodels. These are pretty big pieces of work. So we're evaluating ranges from anywhere from 100 to 200 stores a year to be able to go and touch. And so as we do that, we would anticipate that there's a favorable tailwind as we work that program over a multi-year horizon. But I'd say more to come as I said, pretty wide range right now in terms of how we're thinking about the rollout. As we continue to evaluate performance and plans to go ahead. Laureen Ng: Okay. Great. Thank you. Denise Paulonis: Thank you. And I'm currently showing no further questions at this time. I'd now like to turn the call back over to Denise Paulonis for closing remarks. Denise Paulonis: Well, thank you for joining us all today. As always, I'm very thankful for all of our team members around the world serving our customers. We appreciate all you do through busy quarters up and down, no matter what it is. The great work you do in serving our customers is always appreciated. And we look forward to updating our shareholders on next quarter's performance in about ninety days. Operator: This concludes today's conference. Thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to Apollo Global Management's Fourth Quarter 2025 Earnings Conference Call. During today's discussion, all callers will be placed in listen-only mode. Following management's prepared remarks, the conference call will be opened for questions. This conference call is being recorded. This call may include forward-looking statements and projections, which do not guarantee future events or performance. Please refer to Apollo's most recent SEC filings for risk factors related to these statements. Apollo will be discussing certain non-GAAP measures on this call. Management believes these are relevant in assessing the financial performance of the business. These non-GAAP measures are reconciled to GAAP figures in Apollo's earnings presentation, which is available on the company's website. Also note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Apollo fund. I would now like to turn the call over to Noah Gunn, Head of Investor Relations. Noah Gunn: Thanks, operator, and welcome again, everyone, to our call. Joining me to discuss our results and the momentum we're seeing across the business are Marc Rowan, CEO, James Zelter, President, and Martin Kelly, CFO. Earlier this morning, we published our earnings release and financial supplement on the Investor Relations portion of our website. Our apologies for the later earnings date this quarter; this was principally due to our Partner Summit, which was a fantastic event that we held in Tokyo last week. As you can see, our results reflect the broad-based strength across the business and our team's exceptional execution throughout the year. For the full year, we generated record combined fee-related earnings and spread-related earnings of $5.9 billion, which drove adjusted net income of $5.2 billion, up 14% year over year, or $8.38 per share. Given the strength of these results, I've asked the guys to keep our remarks on the tighter side this quarter, but of course, we make no promises. With that, I'll hand it over to Marc. Marc Rowan: Thanks, Noah. I will do my best. I have doubts about James and Martin. Again, an exceptional quarter capping off an exceptional year. FRE for the year was $2.5 billion, up 23% year over year. SRE was $3.4 billion, normalized plus 9% year over year. The business is firing on all cylinders. Origination record volume crossed the $300 billion mark. More importantly, robust consistent spread of 350 basis points over treasuries with an average rating of BBB. Capital formation record inflows of $228 billion, both Athene and Asset Management ACS, marked the third straight record year. Most important to us, this is all done with strong investment performance without reaching. To give you a sense of just how strong, all buckets of credit were up 8% to 12%, hybrid value up 16% for the year, Fund X, our most recent vintage Fund XIII, 22% net IRR, strong DPI versus an industry DPI that rounds closer to zero. Looking forward, all of the drivers that powered us in 2025 are going to power us in 2026. In fact, I would say that they're more mature. And if you think about what's happening in our business, we are going from serving one market, institutional false portfolios, to serving six markets. We now serve individuals, we serve insurance, we serve the debt and equity buckets of our institutional clients, we serve traditional asset managers, and we hope to serve more robustly the 401(k) market. Each of these markets has the ability to be roughly the same size as our original market, which powered the entire industry. Understanding that these markets require different products, different product structures, different access points, different investments in technology to serve, and you will see these markets mature more and more over time. As we look forward, we think the trends that are showing up in 2025 will show up even more in 2026 and again in 2027. To give you a brief sense of progress, the individual market saw more than $18 billion of inflows, now nine strategies in excess of $500 million of annual fundraising. Insurance saw more than $15 billion of third-party insurance with a very active pipeline increasing growth in our fixed income replacement business. What we see is a number of the leading investors in the world moving to this notion of a total portfolio approach. Total portfolio approach essentially opens up the debt and equity buckets of these institutions to private assets in competition for what has historically been 100% market share for public assets. Traditional asset managers, you saw the announcement with Schroders this morning, which I expect to grow into a multibillion-dollar partnership. And PRIV, our ETF with State Street, now approaches $700 million in size, and more importantly, it's among the top performers of investment-grade ETFs everywhere. Again, proving that private can be both liquid and illiquid. In this case, private investment grade being fully liquid. We're also seeing progress in our DC and 401(k) products in motion with State Street, with Empower, with One Digital, and with one very large RIA. Everything we're talking about ultimately comes down to the promise of private markets, which is excess return per unit of risk, and our ability to generate assets or originate assets with excess spread at scale is becoming more and more important, and our historical investment in origination has given us a bit of a competitive moat that others are trying to catch up to. Outlook in 2026 for Asset Management, which will not be a flagship fund year, continues to be 20% plus FRE growth. In Retirement Services, the demand for retirement income has never been higher. The global retirement crisis is coming much more into view. We as a world and we as societies are starting to deal with the consequences of this. You saw more than $80 billion of inflows in 2025. You should expect approximately $85 billion of inflows in 2026. More than $5 billion of this will be from a market that we were not in eighteen months ago, and then I believe will turn out to be a very large share of our business. Our November teach-in set a very clear path. The SRE growth remains durable. We expect 10% SRE growth in 2026, and we reaffirm the 10% growth on average through '29, assuming we do what we're supposed to do in the alternatives. We step back and we think about macro. All of this comes down to a focus on risk and reward. Each of us has our own way of expressing what it is we're doing. The way I like to express it is to talk about markets that essentially exist on a playing field. For most of my career, 95% of the outcomes have been on that field, and very little has been outside that. In fact, it was such a small percentage chance that we never really thought about it that much and didn't really hedge. Sometimes we liked what was in front of us in terms of valuation, in terms of liquidity, in terms of economic outlook, and sometimes not. But we knew how to navigate those cycles. What we're watching now is just an increased percentage or increased probability of outcomes outside of established lanes or an established playing field. One needs to take those factors into account as you invest, as you think, as you think about risk and reward. What's becoming clear in our industry is the notion of having a principal's mindset versus an agent's mindset. A principal's mindset approaches every asset and every asset class as if they're going to own it for the long term because they do. An agent's mindset responds to the hot dot in the marketplace and asks more fundamentally, can the asset be sold? Is the asset popular? I believe a principal mindset will serve us very well. Jim will give you some notion of software, and I will steal only a little bit of his thunder. But in our PE business, our software exposure rounds to zero. In our Athene balance sheet, our software exposure rounds closer to zero than to one. In ADS, half the exposure of our large peers. Software is an amazing business. The market's overreaction to software is extreme. But clearly, factors have changed, and we have good software companies and bad software and good valuations and bad valuations. If you were aggressive at a point in time when valuations were very high, and not a lot of diligence was being done, and people were expecting growth forever, you're playing defense now. I assure you, we are on offense. Software will be a very attractive sector, albeit not at the valuation levels and with the kind of underwriting that has been done previously. To give you a sense of how this principal mindset plays out, take our largest private markets direct lending vehicle, ADS, now more than $25 billion. For the quarter and for the year, approximately 8% return. Lowest leverage, top of the capital structure, large company, no pick. I assure you, ADS is on offense. In hybrid, our largest vehicle there is AAA, which now exceeds some $25 billion. AAA, 12% inception to date return, very low volatility, 43 of 44 positive quarters, including 23 consecutive positive quarters. This is the perfect strategy for institutions who are thinking about a total portfolio approach in that on a risk-reward basis, it has outperformed almost everything else in their book. In our equity business, the 39 gross and 24 net return for our PE flagship funds over the last three and a half decades just can't be matched. At Athene, while others have reached for spread, we have been positioned defensively. We've built a $24 billion position of cash, treasuries, and agencies. While this is a short-term drag, we are always willing to sacrifice short-term profitability for doing the right thing, and it gives us significant firepower to redeploy. Athene maintains plenty of flexibility, and some of the levers that we've seen even industry leaders undertake, whether it's the move to Cayman or asset risk-taking, we have simply not had to do. Nor will we do. When you come to work each day with a principal's mindset, you just approach your business very differently. Athene is a very tough competitor with numerous advantages. Let me just wrap up by saying last week we had a chance to spend time in Tokyo with our 200 partners, an unbelievable cultural moment. Theme of playing to win, tremendous excitement, not just about what's happening, but what is in the kitchen, that we're working on, which we expect to roll out over the next six months. We'll focus on what makes Apollo Apollo and responding to the cultural moment and not simply growing our business for the sake of growing our business, but growing our business at scale with quality and with intentionality. Jim, over to you. James Zelter: Thanks, Marc. Over the past several years, we've talked about Apollo's individual capabilities. Our credit platform, our equity franchise, and balance sheet, each strong on its own. But I want to take focus for a moment today on how those pieces work together in an integrated system. The connection between origination and capital formation and why that matters more than ever today. At scale, investing does not get simpler. It gets more complex. What differentiates Apollo is that we built a system designed to absorb that complexity and convert it into consistent high-quality outcomes for our clients. That is our long-term moat. Origination today is no longer a standalone function. It's bespoke investing. The flywheel that powers our business is now origination, product, and investing teams working in sync across the firm. And capital formation is not something that happens at the end of the process. In many ways, it shapes what we originate upstream. Understanding this connection between origination and capital formation allows us to deliver the right cost of capital to the right opportunity quickly and at scale while maintaining discipline and alignment. At the end of the day, our job is to make money for our clients. And that's precisely what we did in 2025. With our scaled connected platform generating over $60 billion of value to our investors. We've been running our business with the same patient purchase price matters discipline that has driven our investing success through various cycles over the last thirty-five plus years. That discipline is particularly evident in areas like software. We estimate it represented approximately 40% of all sponsor-backed private credit and 30% of all PE deployment for more than a decade. As Marc mentioned, our positioning is amongst the lowest in the industry, and it's really a situation of selectivity versus exposure. Today it represents less than 2% of our total AUM. In private equity, zero exposure to growth software. On Athene's balance sheet, we have de minimis exposure of 0.5%, which is virtually all IG rated with hyperscalers such as Microsoft and Oracle. I'd further add that software investments within our credit business, excluding Athene, represent less than 4% of AUM, and within ADS's relative proportion is amongst the lowest, as Marc mentioned, amongst our peers. We have managed ADS, our flagship credit vehicle, in a prudent manner with lower than market leverage, low pick, and all first lien exposure. In summary, we see parallels between software and prior cycles. Where an influx of capital fuels over-allocation, dispersion follows, and patience is rewarded. We believe we're well-positioned for this moment. Turning to origination in 2025, the strength and breadth of our capabilities were on full display. As Marc noted, we originated over $305 billion of assets, up nearly 40% from the prior year. Incredibly, that was really the first year of our five-year plan that we presented at Investor Day just eighteen months ago. Across that activity, $282 billion was debt, comprised of approximately 80% IG with an average rating of single A and 20% sub-investment grade rating with a rating of single B. Within core credit, volumes were led by large-cap direct lending, commercial mortgage lending, residential mortgage lending, and fund finance. A large growth area. Across our platforms, where volumes increased over 30%, the activity was led by our three Atlas, MidCap, and Reading Rich. The scaling that we've seen has been facilitated by a broadening of our offering, expanding our capabilities, and redefining our opportunity set. Our success within the sponsor ecosystem is a clear example. We identified sponsors as an opportunity several years ago, and in 2022, it generated $20 billion in volume across mid-cap and large-cap direct lending. Through the broadening and deepening of our sponsor toolbox, which now allows us to offer comprehensive full-service solutions, origination volumes in this area totaled nearly $80 billion in 2025, quadrupling in four years. Numerous noted transactions could be put forth, but I'll mention three quickly. In December, we led a $3.5 billion capital solution to support Baylor's $5.4 billion acquisition and lease of data center infrastructure to a subsidiary of XAI. This franchise transaction for the firm in the AI space underscores our role as a leading provider of flexible, asset-based capital for the next generation assets. In January, we led a $3 billion convertible preferred financing for QXO, a building products distributor led by Brad Jacobs, a proven allocator with a phenomenal track record, and we were tapped to bring together a blue-chip investor group to provide flexible capital to support the company's long-term strategy of growth. Lastly, our hybrid and credit franchise delivered a $1.2 billion strategic financing for Russell Investments, providing long-term capital and enhanced balance sheet flexibility to support their continued expansion. Double-clicking and providing context on the origination spreads for the year, our investment-grade origination generated an excess spread of 290 basis points over treasuries or approximately 220 basis points over rated corporates in the index. On our sub-IG origination, we generated an excess spread of 490 basis points over treasuries or approximately 200 basis points over comparably rated high-yield rated corporates. Again, and importantly, we observed stable spreads quarter over quarter over the course of the year, noteworthy in a market environment where public spreads remain near decade tights. Generating excess spread at broad scale while maintaining quality is a clear testament to the breadth and depth of our solutions offered by our origination systems. Simply put, 2025 was an outstanding year where we focused on scale, but also maintaining quality. Turning to capital formation, our fourth-quarter results punctuated a record year across the firm. We generated $42 billion of inflows in the quarter and $228 billion for the full year. Asset Management delivered $100 billion of organic inflows and $45 billion of inorganic inflows, while Athene added $83 billion. Across the firm, we generated record organic inflows during the year totaling $182 billion, approximately two-thirds were attributable to third parties of focused growth over the last several years. Similar to origination, the definition of success within capital formation has expanded with the addition of new capabilities and new sources of demand. The scaling that we have seen in capital formation has been driven by moving from a sole source of demand, as Marc mentioned, the alts buckets with institutions, to six pockets of demand with new sources including fixed income replacement, wealth, third-party insurance, traditional asset managers, and 401(k)s. Of the $100 billion of organic inflows into asset management during the year, approximately 75% went to credit-oriented strategies and 25% to equity-oriented strategies, supported by strong demand across multiple client types and geographies. Our institutional business had a phenomenal year, posting the strongest year of fundraising on record outside of a flagship year. Within institutional, third-party insurance was a particular highlight with $15 billion of new mandates, and when combined with $16 billion of growth in our third-party sidecars during the year, this brings our third-party insurance platform to more than $135 billion across 30 strategic and SMA mandates. We continue to see growing engagement from insurance who value our origination capabilities and the complete alignment that comes with our balance sheet. This is translating into a robust expanding pipeline around the globe, but with particular focus in Europe and Asia. Our global wealth business had an excellent year with fundraising totaling $18 billion, up nearly 50% year over year. As Marc mentioned, to illustrate the increased diversification of the activities, nine strategies raised more than $500 million, and three raised more than $1 billion. ABC followed last year's record quarter with another $400 million in raise. We believe sustained investor interest reflects the confidence in our origination advantage in the asset-based finance. As investors look to diversify away from corporate credit, our global wealth offering is resonating, and partners are increasingly engaging Apollo as a full-service solution provider rather than just for individual strategies. At Athene, full-year inflows were a record $83 billion, driven by robust retail inflows of $34 billion, record funding agreement issuance of $35 billion, and strong reinsurance of $12 billion, and a modest contribution from the pension group annuities, as well as a variety of new channels. The global retiree wave continues to build, and Athene remains uniquely positioned to meet the growing demand for long-term security. We did not get here by accident. Years of hard work have established us as the industry leader with multiple competitive advantages, allowing us to serve retirees at increasing scale. Overall, the road ahead for capital formation is full of opportunity, is global, and the momentum we're seeing gives us confidence we'll see meaningful more organic inflows across Asset Management and Athene in every channel in 2026. With that, I'll turn it over to Martin. Martin Kelly: Thanks, Jim, and good morning, everyone. So our fourth-quarter results cap a very strong year of performance and demonstrate sustained execution against our long-term strategy. Particularly evident this year is the earnings flywheel benefit of origination, driving inflows to create management and performance fees, syndication volume to create capital solutions fees, and spread assets to create spread-related earnings. In asset management, we generated increases in AUM and fee-generating AUM of 25% year over year to $938 billion and $79 billion, respectively. This helps drive record fee-related earnings of $2.5 billion in 2025, up 23% year over year. I would note that this level of FRE growth was among the best in the sector for 2025. In the year, we delivered 22% growth in management fees with underlying strength driven by increasing contribution from third-party asset management inflows into both credit and equity strategies, as well as strong capital deployment and robust growth at Athene. Capital solutions fees of $226 million reached a new high in the fourth quarter and drove the full-year result to exceed $800 million. The underlying activity driving 125 transactions in the fourth quarter and approximately 430 transactions during the full year. With full-year transaction activity approximately 60% credit-driven. This is a strong validation of how our proprietary origination capabilities are continuing to broaden and deepen, resulting in greater fee generation opportunities for ACS. Fee-related performance fees grew by 28% year over year, reflecting continued scaling of diversified wealth products and perpetual capital vehicles led by ADS and with additional contributions from Reading Ridge, MidCap, and other platforms. In the fourth quarter, growth in fee-related expenses was driven by several factors, including the full quarter impact of Bridge, continued investment in our team with key senior hires, including our new Heads of Strategy and Asia, as well as infrastructure investment, particularly on next-generation technology platforms, data and AI initiatives, and further normal course fourth-quarter seasonality and some non-recurring non-comp costs. For the full year, our FRE margin was approximately 57%, stable year over year and consistent with our previously communicated target. In the first four months post-acquisition, Bridge contributed approximately $105 million of fee-related revenue and $60 million of fee-related expenses to our 2025 results. And quarterizing that contribution is a reasonable way to estimate the run rate contribution over the near term. Excluding the impact of Bridge, our full-year FRE margin grew by about 50 basis points inclusive of the cost of significant investments in our platform. Moving to retirement services, Athene's net invested assets grew by 18% year over year to $292 billion. We generated $865 million of SRE for the quarter with an additional $28 million at our long-term 11% return expectation on the alternatives portfolio. The alts return for the quarter came in slightly higher than our pre-estimate due to favorable late-quarter pricing adjustments. The blended net spread ex-notables was 120 basis points in the fourth quarter versus 121 basis points in the prior quarter, primarily reflecting asset prepayments and mostly offset by new business growth and higher return on the alts portfolio. When considering our 11% return expectation on the alternative portfolio, the net spread in the fourth quarter would have been four basis points higher. Both the fourth quarter and the full-year SRE landed slightly above our previously communicated expectations. We continue to originate new business that meets our long-term ROE targets and that is in line with historical averages, supported by our origination capabilities and highly efficient cost structure. The recently announced transaction with Apollo Commercial Real Estate Finance (ARI) is one such example where Athene will acquire, subject to ARI stockholder approval, $9 billion of commercial mortgage assets with attractive yields and conservative LTVs. These assets offer approximately 50 to 75 basis points of additional spread versus new issue CMLs today. Importantly, Athene already knows the portfolio well, given nearly 50% ownership overlap with the underlying loans. Turning to principal investing, realized performance fees of $588 million in the fourth quarter were driven by carry from several strategies. Fund ten appreciated above its escrow ratio for the first time, allowing us to receive a catch-up of carry previously accrued. Accord Plus completed a full portfolio monetization following the one-year anniversary after its investment period, and our credit hedge fund credit strategies recognized its annual crystallization upon generating very strong performance. Our operating tax rate in the fourth quarter benefited from large deductions related to employee stock compensation due to a higher stock price on delivery. We continue to expect our multi-year tax rate to be approximately 20%, subject to quarterly variability. On capital allocation, we've returned approximately $1.5 billion to shareholders via dividends and repurchases during the year, while also allocating capital to strategically invest in future growth. With respect to dividends, we intend to increase the annual per share amount by 10% from $2.04 to $2.25, commencing with 2026. This continues our commitment to returning capital through dividends, which we intend to grow approximately 10% annually or roughly half the growth rate of FRE, as well as share repurchases to immunize equity-based compensation. As we enter 2026, we do so with significant embedded momentum across the platform and a clear line of sight to continued earnings growth. We previously communicated, we expect FRE to grow by 20% plus, with 75% of the revenue contribution coming from well-established core businesses such as asset-backed finance, direct lending, multi-credit, and hybrid, as well as the annualization of growth already in the ground. The remaining 25% of top-line growth we expect to come from newer initiatives such as Apollo Sports Capital and Athora's pending acquisition of Pick. Specific to FRE expenses, we expect low double-digit growth in non-comp costs inclusive of a full year of Bridge. Compensation cost growth will reflect investments in the build-out to support the six markets, and further senior hires in specific areas, as well as a full year of comp costs associated with Bridge, in some growing at a high teens growth rate. For SRE, we anticipate 10% growth and assuming an 11% alts return, or approximately $3.85 billion in 2026. This outlook is consistent with our detailed retirement services business update from last November. Since the merger with Athene, which closed at the end of 2022, we have generated compound annual growth in adjusted net income of 17%, more than double that of S&P 500 companies over the same period. As we enter 2026, we are extremely well-positioned to continue delivering durable performance and compounding value for our shareholders. With that, I'll hand the call back to the operator. We appreciate your time and we welcome your questions. Operator: Thank you. The floor is now open for questions. Our first question is coming from Mike Brown of UBS. Please go ahead. Mike Brown: Great. Good morning, everyone. Morning. Morning, Mike. I wanted to start on Martin, you commented on the ARI transaction. I actually wanted to start there. Can you just unpack a little bit of the implications to SRE here? Just looking at the loans, they have a nice high yield of about 7.7%. So just thinking through that, how can that help with the spread? Can that drive spread higher? Or is it something that kind of just helps drive growth for Athene? Then what are some of the offsets that we need to consider when we think about how that could play through for us? Marc Rowan: Sorry. So it's Marc to start and then we'll get to the specifics of your question. Think about what's going on. Institutions are looking really hard for durable spread. Safe yield, if you will. Individuals or at least retail investors and stocks trade these vehicles at a discount. The notion of us continuing to invest into vehicles that don't create value to shareholders didn't make a lot of sense to us. And so for us, the best outcome was to transfer the portfolio at fair market value from the public company, which is trading at a discount to NAV, to primarily Athene, will ultimately be other third-party buyers for loans that they already know that offer them spreads in excess of what's available in the current market. This is just for us just common sense. Again, just to focus and we see this across our business. The structure of some of these vehicles, particularly closed-end vehicles, just historically have traded at discounts. At a point in time when the assets themselves are very scarce. As we transfer those assets to Athene, it will not be a full net benefit of, for instance, $9 billion with excess spread. Because we maintain a diversified portfolio, it will displace other forms of SRE lending. And Martin's comments and our confidence in the 10% SRE for the year embeds the notion of this portfolio as opposed to it being additive. I don't know if either Jim or Marc do you want to add? James Zelter: Yeah. I think listen. Marc has captured the philosophy of getting the right cost of capital and the right investor capital on certain assets. And, again, this is just a basic philosophy about how we approach all of these vehicles. And so the idea of having a pool of assets that are institutionally in high demand in a vehicle trading at a historic discount does not make philosophical sense for it. So it goes into what principal mindset and alignment. At the core of what we do. And I'll let Martin talk about the philosophy and or this the specifics. Excuse me. Martin Kelly: Sure. So it's I think it's clear, Mike, that our objective here is to deliver 10% SRE growth. And so this transaction, while not contemplated in the prior guidance we gave, certainly sort of helps de-risk the year. And so that's I would I would view it as a part of a steps delivering 10% of necessary growth, but don't assume it's more than that. We're focused on 10% annual growth over time. Operator: Thank you. The next question is coming from Alex Blostein of Goldman Sachs. Please go ahead. Alex Blostein: Hey, good morning, everybody. Thank you for taking the question as well. Hoping we could spend a minute on dynamics in the non-traded BDC space and ADS and your comments there, specifically. So obviously, it's been a little bit more turbulent with redemptions picking up and sales have generally slowed down, and that's really even before all the software headlines from the last week or so. To your point, ADS, I think, is in mid-teens exposure to software. Talked obviously about other features that make the product, perhaps less risky than what's out there. Is that resonating with advisers in the channels? How do you think the competitive position of ADS will look over the next sort of six to twelve months? From a net flow perspective when it comes to this part of the market. James Zelter: Yeah. Alex, it's Jim. Yeah. So there's no doubt that what's happening today we have been consistent for the last twenty-four months. If not longer, about the philosophy in terms of portfolio construction with regards to ADS 100% senior secured, first lien, no pick, no ARR and all of those themes have resonated historically but certainly resonating currently as well. We had a net even though with a small below the line redemption in the fourth quarter, net new assets were up every quarter last year. Over $5 billion of net inflows. And yes, it's resounding to many of the distribution channels that it's the alignment and philosophy but it's return without reaching. So yes, we expect the numbers as you as you mentioned, we're a little bit over double digit in terms of aggregate software exposure when you really take again, it's really more about selectivity than it is real exposure. And when you look at our software pick exposure negligible when you look at our software ARR exposure negligible, when you look at our pre 'twenty-one, 'twenty-two, software exposure negligible. And so those folks who really are students of the product are able to really differentiate, and we expect to be picking up share in that product. But also, we've been clear in the last twenty-four months that investors should diversify away from their corporate exposure in terms of a broader portfolio approach and that's why we're so excited about ABC really the flagship vehicle in the marketplace in terms of asset-backed portfolio construction. So we couldn't be happier about our current position and feel like we'll accelerate, capture greater market share and investors are really seeing that rather than chasing the hot dot. Operator: Thank you. Our next question is coming from Glenn Schorr of Evercore ISI. Please go ahead. Glenn Schorr: Maybe just continuing your ongoing theme of the total portfolio approach. Excess return per unit of risk. I would imagine at times like this, we're going to see some really differentiated performance. That goes across all your assets. Classes. So I guess I'm curious maybe more on the institutional side, what was the interaction with LPs over the last week or two? Like and where I'm coming from is are there any bigger implications from what happened? Meaning, are LPs rethinking size of allocation to privates in general or just maybe a switch in terms of structure and having more liquid vehicles as part of their mindset. I'm just curious if you'd opine on that. Thanks. Marc Rowan: So it's Marc. Glenn, and then I'll turn it over to Jim after. A lot of what's playing out is playing out in the public markets. Recall and I know the concern on But BDCs and private credit and direct origination as it relates to software, always remind people that that is first lien. Most of the investments that are made into these private BDCs are de-risking for the individual making the investment. They are not selling their treasury exposure. What they're doing is they're selling their equity exposure. They're making an intelligent decision that they can earn roughly long term versus an equity. Equity returns in first lien debt, the equity exposure and the pricing of what's happened in software-related and other related has been extreme. We're talking in some instances quality companies down 50% to 70%. This is why people are in first lien to begin with. When you translate it over to the institutional side, you have a little bit of the same phenomenon. And so I do think that there is going to be increased dispersion amongst managers. It's been easy for a really long period of time. And as Jim suggested in private markets, particularly private equity, it had been almost 30% of the market software had been almost 30% of the market for a decade. Software is still an amazing business. But you may not like the purchase price at which you entered because you get to now look at the same companies down 50% to 70%. And that's the public companies and I have to believe the private marks with leverage will go down equally as much. And so I expect that we will be along with a handful of other managers prettier than we have been historically. The other thing to think about is so much of the conversation has taken place around the alternative bucket. And what we see the vast majority of growth going forward is going to take place outside of the alternative bucket. Some of the wins in fixed income replacement, some of the wins into PRIV, some of the wins into AAA, are institutional and we see and I think you will see an acceleration of the institutional business going forward. I'm going to belabor this a little bit because this will be a theme across our business. Going back to the six markets, the first of course is the institutional alternatives portfolio business. The second has garnered most of the attention which is the wealth business. But if you think about the other buckets, insurance, that's an institutional business. You think about the debt and equity portfolios of institutions, that's an institutional business. The serving of traditional asset managers is an institutional business. 401(k), while we think retail is making a choice, it's actually not. It's an institutional business. Because it's being made primarily by trustees and by consultants and by other forms of gatekeepers. I think you're going to see a change in the dialogue amongst the managers of private assets as they fully embrace this, which is not that wealth is not important, not that it's not going to grow. It's just the most visible. These other markets have every bit as much opportunity. And I continue to come back to the theme I've been on for quite a while. Our business at the end of the day will vary from quarter to quarter, but it is not ultimately constrained by capital. There's plenty of demand for private assets. What it is constrained by is the ability to originate things that are worth buying. We are so focused on getting this origination side right. Not just in terms of volume, but with a principal mindset where we're originating risk, we are prepared to own. It turns out clients like when you are side by side with them as opposed to selling to them. James Zelter: I'd also add, I think there's a I'm taking a step back here, but so much of the conversation in the last several weeks has been about a quick reset of prices in the public equity market and then the impact to non-investment grade software lending, which has been particularly focused well by the non-traded BDCs. We put out a deck in December and all the conversation recently has been about the narrow sector, the 2 to 3 trillion of private credit, and it's really not touching the 35 to 40 trillion in investment-grade private credit. In the last eighteen months, short-duration IG vehicles strategy we really started eighteen months ago is up to over 7 billion in assets. And, again, that's private investment grade the board, a variety of industries. And so it just seems like the headlines are focusing on the small pond, and there's no doubt there's gonna be dispersion among various debt and equity managers who have pursued growth in technology in the last several years. Our fund eleven fund ten eleven are gonna be big beneficiaries of the value versus growth mentality. Again, I really think taking a step back and really understanding how the big boulders are moving. This is a discussion when we talk about non-traded BDCs. About pebbles. What Marc is talking about about boulders, it's much more thematic and truly what's driving our business over the next five and ten years. Operator: Thank you. The next question is coming from Patrick Davitt of Autonomous Research. Please go ahead. Patrick Davitt: Hey, good morning, everyone. I have another question on the total portfolio changes. I agree that that could be a big opportunity for alternatives and specifically Apollo. Big step last year with CalPERS announcing their shift. So curious to what extent you're hearing other large pensions planning to follow suit? And how quickly do you think we'll start to see meaningful reallocations of that capital around the new approach? Thank you. James Zelter: I would just say it's really important when Marc laid out the five additional channels, the speed of which they all individually and collectively adopt is gonna be start-stop. The public institutional marketplace is not known to be a business where those who are in charge take historic institutional risk. And so it's gonna be measured. It's going to be that's why we're focused on all six, not just one. I'll give you one example. Like, the conversations that have been going on in the industry and in particular with us with our Apollo Sports Capital, those are areas where institutions are trying to figure out where the opportunities are not in the narrow definitions of asset classes. What we've done on the insurance, Athene, sidecar, ADIP, those are all areas where institutions have said, how can I let how can I make sure that the normal definitions of equity and fixed income traditionally are not going to limit my ability to perform? And I think whether it's family offices, whether it's institutional buyers, whether it's those at traditional asset managers, they're all trying to find areas outside the norms of the boundaries and that's what's gonna drive this over time. It's really about how to create better risk-adjusted returns and not being a prisoner to the barriers of adoption in terms of your mandate. Marc Rowan: If anything is gonna speed it up, Patrick, it'll be volatility. Public market volatility is ultimately a significant impediment in imperative for seeing an accelerant to people's changing of mindset. Trustees and heads of plans who have watched assets grow pretty consistently over a long period of time. Get a little bit of shock when they see the kinds of volatility in their portfolio and in public markets and they look for the same return or more return but with less risk. Operator: Thank you. The next question is coming from Bill Katz of TD Cowen. Please go ahead. Bill Katz: Great. Thank you very much and good morning, everybody. I want to maybe tie some big picture, some of the boulders together to use Jim's analogy, I like that one. Could you talk a little bit about where you might be on the origination opportunity, clearly running what four years ahead of schedule already? How that may influence the opportunity set in, 27% to 20% FRE margin profile? Thank you. James Zelter: Great. So I think, Bill, the easiest way to answer that is if you look at the $305 billion last year, 245 was really North America. You know, 40 billion Europe, $1,520 billion in Asia. We're taking this strategy global. And when you think about why we were just in Japan, when you think about the industrial renaissance in that part of the globe, Asia Pac, along with how we're focused on Europe. So the answer to your question, big picture is we're gonna take a very successful strategy of integrating origination to every aspect of our business. We're taking it global. And we're gonna make sure that in Europe and Asia Pac, that the same tools, same partnerships, the same platforms are executing in that part of the globe but we're really focused on quality as well as scale. We certainly have shown an ability to originate scale. But it's really growth with intention. And so I want to make sure that we're not overemphasizing the growth from this point. We have a ton of robust yield, robust spread, and that's what we're trying to do. So in my mind, it really is the globalization of the strategy. And it's also into these ecosystem activities like you see in Apollo Sports Capital, I would suspect to see a handful more of those ecosystem strategies where we can be completely relevant in terms of the cost of capital the toolbox to the companies that are embedded in that ecosystem. And why it works so well for sports is very simple. It's one where the quality of cash flows are not a regular manner. They are regular cash flows. There's been a tremendous amount of growth in valuation. There's a limitation to the actual funding and lending in the area. As so many focus so many have focused on the equity returns. And so we're just finding with a holistic toolbox like we did for sponsors there's a great deal of reception. So the answer is global. The answer is focusing on quality and as well as scale. And these focused ecosystem strategies. Marc Rowan: I'm gonna just take the liberty of maybe going off-paced a little bit. We've seen over the past month or so a number of acquisitions in our industry. And I wanted to say that from our point of view, if you think about where our business is going, it's all about origination and having the product and then building the capabilities to serve five markets. That we've never served before as an industry. So all of the firms were built to serve the institutional alternative bucket. Drawdown funds, product-specific sales forces, relatively slow-moving, fine with quarterly marks. These five markets are totally different. You're seeing some of the firms build out significant wealth strategies. But you have yet to see the rest of the industry build out to serve the other markets that are now available to us. And so when you think about what we're trying to do, we're trying to make sure that we don't grow too fast. We can only grow as fast as we originate. Therefore, we want to grow, we have to originate at scale in quality. At the same time, we understand that every time you buy something, it comes with people. And integration on a cultural basis is very difficult. And so unless something is exceptional, we just prefer to build it ourselves. Sports Capital is a really good example, not to say that there's not value in acquisition if you need to. But the ability to put a team on the ground in an industry that is very valuable, growing very fast, that produces uneven cash flows, therefore is not a great industry to bank or for public markets. In addition to deploying the $6 billion or so in the sports capital fund, I believe this ecosystem will generate $30 billion to $50 billion of origination opportunities. I think you are more likely to see us grow, as Jim said, globalizing what we have and then building organically the platforms that we need to penetrate industries that require specialized knowledge and deserve a specialized pool of capital. And so we often say the strategy here let's look through the windshield. Not through the rearview mirror. We have so much white space in front of us. It's up to us to now prepare the business not just to hit the five-year plan, but for what comes next. Martin Kelly: And Bill, let me address your tuck-in question on margins. It's important obviously. So you should expect a free margin expansion over time. And we're always balancing, as you know, investing in new capabilities to build the platform with, you know, with extracting efficiencies from the current business. So I would think something like a 100 basis points annually as we go forward. That's sort of the guidepost that we set for ourselves. With the puts and takes netting into that. Operator: Thank you. The next question is coming from Michael Cyprys of Morgan Stanley. Please go ahead. Michael Cyprys: Hey, good morning. I wanted to ask about fundraising. Had a very strong year in 2025 about over $180 billion organic inflows. I think you mentioned you're targeting $150 billion on an annual basis. So just curious how you think about the outperformance this past year relative to that $150 billion guide? To what extent does that make sense? What might be areas where flows could be slower, I guess, if that does make sense. But then at the same time, it sounds like you're pretty confident in '26 maybe even being better, particularly in Athene. So maybe you could speak to the confidence there, what you see contributing and maybe you could elaborate on what's in the kitchen in terms of things that might be rolling out? Thank you. James Zelter: Yes. So Mike, I would say we feel like we have a tremendous wind to our back across the let's separate Athene and Apollo Asset Management for a moment. On the Apollo Asset Management side, global wealth prime for continued growth. And on the institutional business, we do have fund 11 in the marketplace, but also when you think about the product set of the asset-backed ecosystem, the hybrid ecosystem, sports capital and such. We believe that this year will be the strongest year on record. For us in that area. So we're unambiguous about our ability to outshine on the Apollo asset management side. Again, on the Athene side, you know, numbers across their four channels. We expect that to replicate it. So when you do when you add those two together, we're solidly north of one fifty again for the Apollo and Athene side in collective shape. You know, I would say we feel like we're actually grabbing our fair share in a variety of asset classes that we had not done before. When we think about our whole fixed income replacement product suite, things like the short duration IG vehicle, core IG, the asset-backed area, amongst many we're just seeing a variety of ability for us to pick up. And again, that's the conversation we wanna be having with this group. As you talk about private capital and private credit, the natural tendency is to focus on the small non-investment grade 2 trillion pond. I urge all of you on this phone call focus on the 40 trillion. That's the opportunity set. That's what's driving volume. That's what's driving profitability. That's what's driving scale. And so I know it's great it's great headlines. About the software bump in the road. But, you know, there will be dispersion but there's a bigger, bigger picture, and don't miss that. Operator: Thank you. The next question is coming from Ken Worthington of JPMorgan. Please go ahead. Ken Worthington: Hi, good morning and thanks for taking the question. As we think about performance fees for 2026, you highlighted in the deck that 2025 was light in part due to sizable PE and hybrid activity that was prudently delayed. With market conditions better, can you help us think about your pipeline of deal activity should market conditions remain accommodative and how you see this flowing through into carry on performance fees? Martin Kelly: Most unpredictable part of the earnings stream thus the multiple. Ken, I think we see the optimism in the marketplace, particularly with the bank community. Activity levels are high. There's different ways to exit assets in a pop going through a public process is one and private processes are more complicated. So I would say we are more cautiously optimistic as we sit here now about the year ahead. But it's difficult to predict. And so you know, it's that's why, you know, we have anchored ourselves to a long-term guidepost around PII of $900 million and that remains our target, but it's not going to be a straight line clearly together. Marc Rowan: I'd say this in the portfolio. Fund ten, which is the most recent fund is or the 0.3 plus DPI versus an industry that rounds to zero. The end of the day, when you buy things at reasonable multiples, you can sell them at reasonable multiples. That's what we've seen. That's what we've experienced. That's what I continue to experience. We are not stuck with a portfolio of things that were purchased at very high prices. That now have been reset in the market where they're going to go into Perma Hold. We're in the business of creating value and moving it out. If the market is accommodative, we're going to make it happen. If the market is not accommodative, we will believe, do better than everyone else. James Zelter: I would just add this. Our performance in '20 is not going to be market dependent on the equity market or the equity capital markets. Operator: Thank you. The next question is coming from Benjamin Budish of Barclays. Please go ahead. Benjamin Budish: Wanted to ask maybe a two-parter on just some of the dynamics going on at Athene. I guess first in the pension risk transfer segment, looks like there's been some positive momentum with a number of the cases out there. Any thoughts on your expected contribution from that channel in particular in '26? Or does that require a little bit more time? And then just curious your latest thoughts on competition in the retail side feels like three or four quarters ago that was a bigger issue, doesn't seem to have been bearing its head as much more recently. But similarly high-level thoughts on the current state of competition in that channel? Thank you. Marc Rowan: So the volume targets for the '26 are not dependent on PRT picking back up. You're right. The legal situation around PRT is improving. However, this is all about spread. We do not underwrite to volume. We underwrite to profitability. If you underwrite to profitability, you get to keep doing business. So I think we have more than enough at-bats, lots of new initiatives, broad distribution, I believe the target we've set out which is roughly $85 billion will be the target that we deliver. Demand for retirement products is off the charts, but it has to be done at a margin that makes sense. In terms of competition, we continue to see interesting competition, in some of what I would call the lower quality broker channels, are not as credit dependent. As I've warned on prior calls, the business is ultimately about earnings spread. Spread is created by having an asset origination machine, having a liability origination machine at a low cost, and by having a low OpEx. Most of the companies competing in this industry, including the established players with very few exceptions, do not have origination of appropriate assets. They do not have a low-cost liability. Factory. And they do not produce an efficient level. The only way return can be achieved is by giving away asset management fees and by moving the business offshore to Cayman to places like that that do not require capital. This is not a recipe for success. Ultimately, I believe that will end badly. Hopefully not badly for the industry. And I do not believe that many of these firms will hit escape velocity. Because they will ultimately need to come back for more capital. Athene is a really tough competitor. And as Jim said, this is something we've worked on for the better part of fifteen years. With the team. To put it in the position it's in. I like our chances. Martin gave the guidance for twenty-six and we're working hard to achieve what we've said we're going to do. Operator: Thank you. The next question is coming from Wilma Burdis of Raymond James. Please go ahead. Wilma Burdis: Hey, good morning. Just following up a little bit on the last question. We did see a it looked like improvement in PRC volume for the first time in two years. Maybe you could go into a little bit more detail there. And then as sort of a second part of this question, if you could talk a bit about the FAB environment and the lower flows there. And any drivers whether it's credit spreads or anything else you're seeing in the market? Thanks. Marc Rowan: So again, this is a story of assets and of liabilities. On the asset side, it's all about the capacity to originate. As Jim suggested, this year was a very strong asset origination year, which led to the outperformance of the Target. I expect based on what we've seen thus far 2026 to be an equally strong asset origination year augmented or I should say protected by the ARI transaction, will give us some initial excess flow early in the year. On the liability side, having multiple channels is a godsend. There are places sometimes you don't want to do business. I personally don't think we've missed much in PRT. Over the past year. Not only have there been fewer transactions, but the spreads on those transactions when one ultimately shines a light on them are poor. Winning business is not about volume. Winning business is about capturing profitability. At every point, we're offered the opportunity to do something that's expedient versus something that will build the book of business over the long term. Having a principal's mindset is a very, very healthy way to run the business. Operator: Thank you. The next question is coming from John Barnidge of Piper Sandler. Please go ahead. John Barnidge: Good morning. Thank you for the opportunity. My question is focused on being on the offense. If we can go back to software, dig into that a little bit more could be interesting. Maybe is it private equity, credit, both? And kinda what areas of software do you find appealing? Thank you. James Zelter: Yeah. I'm just gonna answer that generically. You know, we've historically if you go back in our thirty-five years, whenever there's an over-allocation of capital, we tend to be defensive. And whenever there's a withdrawal of capital, we tend to be on our front foot. If you look at the repricing that's happened very, very quickly in the equity market, the valuations are certainly lower but they're not cheap. They're still very, very high from an earnings multiple and such. But many companies had plans to either, you know, grow because of organic, cash generation or equity origination. And those companies may not be able to do so. So there's no doubt that our screen of opportunities from the world of equity, particularly from the world of hybrid and in some degrees in the world of credit, we are as busy as we've ever been. Because there will be a dispersion of returns, some business models will continue to thrive, some will be more challenged. But what Marc talked about earlier, I'm just gonna remind folks on this call, you had companies in this sector that were priced or purchased or valued and 15 times revenue. Several years ago, maybe even 20 times revenue. And now they're trading at 12 to 16 times earnings. And so there's a very large difference in that valuation gap. It doesn't say they're not good companies. But the growth trajectory and the capital availability of them to a, you know, a capital to grow has changed. So yes, there's no doubt that we're going to be much more on the offense but there's nothing that's gonna happen tomorrow that we're going to announce. This is just more of a dispersion over time and plays into how we wanna be a real partner whether it's a sponsor community or the corporate community as they need capital. Operator: The next question is coming from Brennan Hawken of BMO Capital Markets. Please go ahead. Brennan Hawken: Good morning. Thank you for taking my question. I just had a couple on spread within SRE. One, a follow-up from Mike's questions. He spoke to the 50 to 75 basis points greater spread versus new issue. But how should we think about that on the net spread as you reported? So we appreciate that it fits into the 10% total expectation for the year. And also, maybe a bit more broadly, how should we think about the cost of funds side? It sounds like there's a great deal of optimism on the origination in the asset side. Cost of funds though has steadily gone up. We hear about competition in some of those markets. And so is the expectation that the cost of funds increases will stop? Or is it more around the ability to outpace it on the asset side? Thanks for taking my question. Marc Rowan: So it's Marc. I'll give you a business side and then Martin will dig in a little bit. Cost of funds is ultimately a function of bond yields. Historically, it's moved around the BBB corporate spread. Having said that, in individual channels and individual times and individual quarters, it tightens or loosens. We run a business that is competitive in the marketplace with the highest quality companies and liability side spread in mainstream markets are market determined. Most of the new entrants who are paying significant premiums for their cost in their cost of funds. And you can see this in any industry publication. Are in the broker channel. And so it will not surprise you that as a percentage of our business, we do less in the broker channel. At the end of the day, the ability to have a low OpEx and higher than average asset spread allow us to win the fair share of business that we want to win. And we want to win it in a mix. We want some long-dated business, some short-dated business, some policyholder dependent business, behavior dependent business, some non-policyholder dependent business. And ultimately, as I suggested, this iteration of the business of the retirement is a fascinating business. Retirement products are in amazing demand. Having said that, the next leg of this business is not the product set that exists today. It is creating the product set that serves the needs of retirees that is simpler, easier to deliver, and that relies more heavily on the things we do well, OpEx and the origination of spread building out unique or less traffic liability channels is something that we're focused on that will be important not just over the next five years, but for the five years after that. Martin Kelly: On the spread question, Brennan, we operate the business on a spread basis. So the cost of where we write liabilities and the associated cost of funds is connected to where we can invest against that. And we create a net spread which after costs and on a return on equity basis gets to a mid-teens return. So you know, in terms of guidance, we were quite specific at the November day on where we expect the spread to come out assuming all sort of 11% and that was that was a 120 to 125 basis points. That's what we printed for Q4. At 124 basis points. And given the comments that we've made about ARI earlier on the call, I would assume that the same holds true for the year. So, you know, in the 120 to 125 ZIP code, on a reported net spread basis and where we write business and where we can invest against them. Operator: Thank you. The next question coming from Brian Bedell of Deutsche Bank. Please go ahead. Brian Bedell: Great, thanks. Thanks. Good morning. Thanks for taking my question. Maybe just shifting to the 401(k) market, Marc, you could just talk about what kind of progress you're seeing in the DOL and for planned sponsors in terms of their appetite to adopt alternative products. And then if you can add in your strategy with collaboration with different managers. You had Schroders announcement this morning, obviously, Lord Abbott and State Street as well. Should we expect more of these types of announcements? Or do you view yourself as sort of an open architecture collaborator, if you will, or do you feel like you've got, you know, the partners you need, you know, for the future game plan here? Marc Rowan: So let me work backwards in this. We are open architecture. And we are a product supplier to numerous traditional asset managers. Particularly through our ACS business. That is one level of collaboration with traditional asset managers. The next level of collaboration is the creation of a partnership and the serving of joint creation of joint product. I think you're starting to see that in a couple of partners you've mentioned. I think we're going to continue to see that blossom. Having said that, we're all learning right now. And what has to happen in the business is we as an industry, we need to adapt our business to the ways traditional asset managers work. Moving your business to daily NAV is a big deal for our industry. We are in the process of moving, as I suggested on our last call, particularly our high-grade credit business to Daily Nav. That is an unlock. Providing liquidity in markets, many of our industry have spoken against, is an unlock for traditional asset managers. I expect and I've said this previously, I think traditional asset managers done well could be some of the largest opportunity. I expect them to be among the largest buyers. Some of that will be in the existing mutual fund complexes and ETFs complexes. Some of that will be through new products and some of that will be through 401(k)s. On the 401(k)s specifically, the big volumes in 401(k) in my opinion are not going to come until there is a rulemaking. Or at least guidance that will give more clarity to the executive order that has come down. Having said that, Jim and I are the recipients of numerous call reports. If I had to give you my email inbox, the amount of activity taking place in DC in all its quadrants is just off the charts. Every conference, every industry get-together is literally just overwhelmed with the discussion of private assets and for very good reasons. The addition of private assets to a portfolio given the length of time these employees will be in these plans are 50% to 100% better outcomes. And the other interesting piece of this is not so much focused on in the executive order is the opening of 401(k) to guaranteed income. Particularly guaranteed lifetime income. We moved as a world for something that was really good for employees. We've moved from defined benefit. Employees loved it. Guaranteed lifetime income, companies hated it. We then moved to a world of defined contribution, where all of the risk was essentially on the employee and not on the company. It's great for companies, but not so good for employees. Most employees have not made a proactive investment decision within their 401(k). Ever. They are guided by the alternatives provided by the trustees of that plan. I believe the world we're heading to is a more of a hybrid world to use a term that we use a lot around here. Where we will end up with something that looks more closely to define benefit. But will not be provided by the employers. It will be provided by the marketplace. Right now, we're in the baby steps phase. Where every day we're making progress. It will be north of a billion dollars this year. It might have even been, I don't have the number in front of me, of $1 billion last year. But I can see it taking shape. And just like the comments around traditional asset managers, these people need to be not just daily NAV, they need to be daily liquid. The ability to do this, the ability to create the structures, the ability for our industry not just for us to adapt our product set to serve these markets, in addition to the rulemaking, our guidance is going to be what unlocks this opportunity. You can hear from what we're doing and from the comments around margin. We've gone from a business with one market to six markets. The problem is or the opportunity is five of those markets require different product set, different delivery mechanisms, and different surroundings in terms of daily NAV and liquidity and how fast our industry and our firm pivots to that is going to be how fast we're able to grow along with Jim's comments around origination at scale, but with quality. At the end of the day, the thing that is not changing here, we come at this business with a principal's mindset. Whether you are an institutional client, a retail client, a 401(k) client, an insurance company client, you are side by side with us. We're eating our own cooking. It keeps us really focused on the quality of what we do. There is no amount of fee that we can make from an asset. That will overcome a bad principal decision. We reinforce that every day. It's why we're going to be on offense and software. It's why we have the opportunities that we have today. Couldn't be more enthusiastic. Operator: Thank you. This brings us to the end of the question and answer session. I would like to turn the floor back over to Noah Gunn for closing comments. Noah Gunn: Great. Thank you, everyone, for joining us this morning and for all your time. You're spending with us. If you have any follow-up questions, as usual, please feel free to reach out on anything we discuss. Thank you very much. Operator: Ladies and gentlemen, this concludes today's event. You may disconnect your lines and log off the webcast at this time and enjoy the rest of your day.
Operator: Good day, and welcome to the Edgewell Personal Care Company First Quarter Fiscal Year 2026 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask a question. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Chris Gough, Vice President, Investor Relations. Please go ahead. Chris Gough: Good morning, everyone, and thank you for joining us this morning for Edgewell Personal Care Company's First Quarter Fiscal Year 2026 Earnings Call. With me this morning are Rod Little, our President and Chief Executive Officer, and Fran Weissman, our Chief Financial Officer. Rod will kick off the call and hand it over to Fran to discuss our first quarter 2026 results and full-year fiscal 2026 outlook. We will then transition to Q&A. This call is being recorded and will be available via replay on our website www.edgewell.com. Please refer to our website for supplemental information providing more details on the company's divestiture of its feminine care business, which closed on February 2, 2026. During this call, we may make statements about our expectations for future plans and performance. This might include future sales, earnings, advertising and promotional spending, product launches, brand investment, organizational and operational structures and models, cost mitigation and productivity efficiency efforts, savings and costs related to restructuring and repositioning actions, acquisitions, dispositions and integrations, impacts from tariffs and other recent developments, changes to our working capital metrics, currency fluctuations, commodity costs, inflation, category value, future plans for return of capital to shareholders, the disposition of our feminine care business, and more. Any such statements are forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995, which reflect our current views with respect to future events, plans, or prospects. These statements are based on assumptions and are subject to various risks and uncertainties, including those described under the caption Risk Factors in our annual report on Form 10-Ks for the year ended September 30, 2025, and as may be amended in our quarterly reports on Form 10-Q filed with the SEC. These risks may cause our actual results to be materially different from those expressed or implied by our forward-looking statements. We do not assume any obligation to update or revise any of these forward-looking statements to reflect new events or circumstances except as required by law. During this call, we will refer to certain non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is shown in our press release issued earlier today, which is available at the Investor Relations section of our website. This non-GAAP information is provided as a supplement to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. However, management believes these non-GAAP measures provide investors with valuable information on the underlying trends of our business and allow more meaningful period-to-period comparisons of ongoing operating results. Before moving on, I want to clarify how the divestiture affects the way to view our results and outlook. Beginning in 2026, the Feminine Care business is classified as discontinued operations. Prior period results have been recast to reflect this presentation. The results of the Feminine Care business are reported separately from continuing operations. All of our commentary today, unless otherwise stated, on performance and our outlook will reflect continuing operations, including our Wet Shave, Sun, and Skin Care businesses. At the same time, to help investors compare our results and outlook on a consistent basis with our prior outlook, which included Feminine Care, we are also providing selected information on a consolidated basis reflecting both continued and discontinued operations. To facilitate comparability, the press release and our remarks provide bridges to review results on a like-for-like basis and reconcile our outlook between consolidated and continuing operations presentation. With that, I'd like to turn the call over to Rod. Rod Little: Thank you, Chris, and good morning, everyone. We appreciate you joining us for our first quarter fiscal 2026 earnings call. We delivered a solid start to the year with results modestly ahead of our expectations. Our performance in the quarter reflects progress on the strategy we are executing as we continue to concentrate our resources on the categories and markets where we have a clear competitive advantage. While it is still early in the fiscal year, we believe this initial progress demonstrates that we are on the path to delivering on our full-year outlook. Before I get into the details, I want to highlight a significant milestone for Edgewell Personal Care Company. As you saw in our recent announcement, we have successfully closed the sale of our feminine care business to Essity. The transaction closed as scheduled, and importantly, the estimated annualized impact of the divestiture is expected to be favorable to our previous health. This transaction is a pivotal step in our transformation journey and reflects our long-standing strategic intent to sharpen our focus on the categories where we have clear competitive advantages and strong momentum: Shave, Sun, Skincare, and Grooming. By simplifying our portfolio and reallocating capital and resources towards these core businesses, we believe we are strengthening our ability to compete and invest where it matters most. This move, we believe, positions Edgewell Personal Care Company to be a more focused, agile, and durable personal care company. One we believe can drive sustainable growth, deliver stronger margins over time, and create long-term value for our shareholders. Now turning to our performance highlights. We delivered a solid start to the quarter, executing well in a dynamic operating environment. Overall results came in ahead of our expectations as strength in North America offset expected softness in international markets. Organic net sales in the quarter decreased by 50 basis points, reflecting stronger-than-expected performance in North America as certain retailers placed Sun Care orders earlier than anticipated. This strength more than offset declines in international markets, which was anticipated and was primarily due to new product development phasing in Wet Shave in Japan and lower Sun Care sales in distributor markets where we cycled a large sell-in a year ago due to certain formulation changes. From a consumer and market share standpoint, trends were consistent with category dynamics and recent trends. In the U.S., share pressure was modest and concentrated in specific categories, most notably in core Wet Shave, while we continue to see relative strength in men's grooming. Outside the U.S., we delivered share gains across several key markets, including Australia, Europe, Canada, and China, highlighting the resilience of our brands internationally. Over 70% of the markets either grew or held market share in the quarter. From a profitability standpoint, we delivered above-expectation results supported by favorable mix and continued productivity gains. Importantly, this performance was achieved while maintaining our investment priorities. Looking ahead, we remain focused on what we control: driving good execution, making thoughtful investments in the business while simultaneously delivering continued productivity gains to protect and enhance our profit profile, and maintaining disciplined capital allocation. Despite an operating environment that is still choppy, we made good progress across four priority areas that are central to our near-term execution and our long-term strategy: international markets, innovation, productivity, and our U.S. transformation. These pillars are at the core of how we are allocating capital and effort, reflecting where we are concentrating resources and driving the highest returns. Progress across these four areas reflects disciplined execution and reinforces our conviction in the approach we are taking. Let me give you an update on each. First, durable international growth. Our underlying consumption and market share trends were encouraging, particularly in Europe and Oceania. But as expected, organic net sales declined in the quarter, reflecting timing and phasing impacts. With the divestiture of the feminine care business, our international markets now represent nearly half of total company sales, underscoring their importance to Edgewell Personal Care Company's growth profile. Importantly, our international markets remain a core pillar of our strategy, and we continue to expect mid-single-digit net sales growth in international markets for fiscal 2026, with growth expected to resume beginning in the second quarter. Second, compelling innovation. We remain committed to delivering consumer-led, locally designed innovation across our portfolio, and we are seeing the benefits of that focus. In fiscal 2025, we expanded $1 billion to Australia, Bulldog Unit Premium Skincare Across Europe, We took Shook into premium skincare in Japan with the launch of Progista, and we broadened Crema's range in the United States and Europe, driving meaningful growth. Importantly, this translated into improved market performance that carries over into fiscal 2026. As we look to 2026, we have a robust innovation pipeline, including hydro and intuition relaunches in Japan, new Wilkinson Sword and Hawaiian Tropic launches in Europe, as well as meaningful launches across Shave, Grooming, and Sun Care in the U.S. Together, these initiatives reinforce innovation as a key driver of our focused and durable strategy. As we step up A&P, we're doing so with a clear return framework. The focus is on brands and markets where we see the strongest linkage between investment distribution gains, household penetration, and repeat rates. This is not about spending more everywhere; it's about reallocating behind fewer higher-return opportunities and holding ourselves accountable. Third, productivity through supply chain optimization. Our execution against our productivity agenda has been consistent. In the quarter, we generated approximately 240 basis points of gross productivity savings, keeping us on track to deliver on our margin expansion for this year. These actions are critical as we work to offset tariff pressures, reduce complexity, increase speed of service levels, and free up capacity to reinvest behind our core brands and innovation pipeline. Longer term, we continue to see significant opportunity to further optimize our North American Wet Shave business and manufacturing footprint. Consistent with the actions we outlined last quarter, we are streamlining operations, reducing duplication, and unlocking working capital. We believe these actions, combined with our continued investment in blade excellence, next-generation automation, and digital tools, will enable a more agile, resilient, and customer-focused supply chain, positioning us to deliver an accelerated pace of productivity savings in fiscal 2027 and beyond. Stepping back, with feminine care now fully exited, we have a much clearer view of the underlying margin profile of the continuing business. While near-term margins reflect higher inflation, tariffs, and deliberate reinvestment, structurally, we believe this is a business that can return to or above pre-COVID gross margin levels for continuing operations over time. Productivity actions we're taking, particularly in manufacturing simplification and automation, are structural in nature. And as external cost pressures normalize, those benefits will increasingly flow through. Fourth, our U.S. Commercial transformation. As we shared last quarter, we are executing a bold transformation in the U.S. focused on returning the business to profitable, sustained top-line growth over time. Over the past year, we completed a comprehensive strategic review that reinforced the strength of our category positions while also identifying opportunities to improve focus, execution, and speed. We simplified our U.S. structure to reduce complexity and accelerate decision-making, supported by new leadership and higher investment behind core capabilities, including insights and analytics, brand building, and revenue growth management. At the same time, we are sharpening our portfolio focus and recommitting to our shave business, where we hold a differentiated position across both branded and private label. While rebuilding distribution and share will take time, we are encouraged by early progress as we refocus on our strongest offerings and improve execution at the shelf. We will also take decisive action to increase investment in our five focus brands: Schick, Billy, Hawaiian Tropic, Banana Boat, and Crema. Shifting towards sustained brand building and a more balanced marketing mix. As we look to the second half, we expect to see a step-up in brand investment against these brands with full funnel campaigns on Hawaiian Tropic, Banana Boat, Schick, and Billy. This is the first time we have had this across the portfolio of core brands along with strong distribution outcomes on some of our key SKUs. This is particularly true with Hawaiian Tropic and Crema. These efforts give us confidence that we are laying the right foundations to stabilize our U.S. business in fiscal 2026 and position the company for renewed growth over the longer term. As we look at the remainder of fiscal 2026, our outlook for the continuing operations component of our business is unchanged from when we spoke to you last quarter. We believe our plan is balanced and achievable, even as we continue to operate in a challenging macro environment marked by muted category growth, a cautious consumer, and inflationary pressure from tariffs. To reiterate, key underlying assumptions of this outlook: First, we expect to return to organic net sales growth driven by mid-single-digit growth in international markets and a more stable performance profile in North America. Second, we expect gross margin expansion supported by productivity gains that partially offset inflation headwinds, including a net of approximately $25 million impact from tariffs. Third, our plan includes a step-up in investment across trade and A&P to support our U.S. transformation and fuel key brands internationally, which we believe will drive increased household penetration funded in part by margin improvement. Fourth, we are making significant investments for the longer-term success of the company. We continue to prioritize free cash flow generation through working capital improvement and near-term capital allocation choices focused on using the proceeds from the feminine care sale for debt reduction. Underpinning all of this is the strength of our team. The progress we made this quarter and the results we delivered reinforce our conviction in the plan and path ahead. With that, I'll turn it over to Fran to walk you through our results and outlook for fiscal 2026. Fran Weissman: Thank you, Rod. As Rod outlined, we made important progress in the quarter and took decisive actions to further sharpen our portfolio and strategy. We had a solid start to the fiscal year with results modestly better than our expectations on a continuing operation and a consolidated basis. On a consolidated basis, organic net sales declined 30 basis points, adjusted EPS were $0.3, and adjusted EBITDA were $38 million, all better than our outlook. Now let's turn to our performance in the quarter on a continuing operations basis. Organic net sales decreased 50 basis points this quarter, as strong performance in Sun Care and Grooming were more than offset by declines in Wet Shave and Skin. North America organic net sales grew just under 1% in the quarter, driven by meaningful growth in the quarter in Sun Care as certain retailers placed seasonal orders earlier than expected, in addition to strong growth in Grooming, partially offset by Wet Shave and Skin. International organic net sales decreased 1.6% as expected, primarily due to NPD phasing in Wet Shave in Japan and Sun Care sales in distributor markets, where we cycled a large sell-in a year ago as Rod discussed earlier. Outside of this impact, we delivered growth in our other key markets, with Oceania and Greater China experiencing double-digit growth while Europe delivered low single-digit growth. Wet Shave organic net sales declined approximately 4% as substantial growth in preps was more than offset by declines in disposables, and men's and women's systems. International Wet Shave declined less than 1% as volume declines were partly offset by price gains reflecting continued category health, solid distribution outcomes, and strong end-market brand activation. North America Wet Shave declined in the quarter, driven by challenged category and channel dynamics. In the U.S., razor and blades category consumption was down 250 basis points in the quarter. Our market share declined 100 basis points overall. However, our branded value share declined 30 basis points in the quarter while our branded volume share increased 50 basis points. The Billy brand continued to grow share, increasing 40 basis points. Sun and Skin Care organic net sales increased approximately 8% with robust growth in Sun Care and Grooming. Sun Care grew nearly 20% led by nearly 60% growth in North America as certain retailers placed seasonal orders earlier than anticipated. Grooming grew nearly 7% while skincare declined approximately 15%. In the U.S., Sun Care category consumption grew nearly 9% in the quarter, our value share declined 40 basis points in the quarter as gains in Hawaiian Tropic were more than offset by Banana Boat. However, volume share increased by 140 basis points. Grooming organic net sales growth was approximately 7% led by approximately 27% growth in Cremo and 6% growth in Bulldogs, partially offset by declines in Jack Black. Wet Ones organic net sales declined about 15% and our share was approximately 66% as we cycled strong growth in the prior fiscal year period. That strong growth last year reflected a return to normal operations following the fiscal 2024 fire in our facility. Performance was approximately flat on a two-year basis. Now moving down the P&L. Adjusted gross margin rate decreased 210 basis points and was ahead of expectations. Productivity savings of approximately 240 basis points were more than offset by 450 basis points of core inflation, tariffs, and volume absorption. The impact of favorable exchange and mix were broadly offsetting. As previously noted, we expect productivity tariff mitigation efforts and pricing to accelerate in the balance of the year, and for gross margin rate to grow for the full year versus fiscal 2025. A&P expenses were 10.8% of net sales, down from 11.1% last year and in line with our expectations as spending increases are planned in the balance of the year. Adjusted SG&A was 23.7% in rate of sales compared to 23.6% last year. This was primarily driven by higher people costs and unfavorable currency impacts, partially offset by lower consulting and corporate expenses. Adjusted operating income was $8.1 million or 1.9% of net sales, compared to $15.9 million or 3.8% of net sales last year, reflecting primarily the impact of lower gross margins, partially offset by favorable FX tailwinds. GAAP diluted net loss per share from continuing operations were $0.63 compared to a loss of $0.21 in the first quarter fiscal 2025. Adjusted earnings per share from continuing operations were a loss of $0.16 compared to a loss of $0.10 in the prior quarter. Currency tailwinds were a $0.07 favorable impact to adjusted EPS in the quarter. Adjusted EBITDA was $25 million inclusive of an expected $5.8 million favorable currency impact compared to $30.9 million in the prior year. Net cash used by operating activities was $125.9 million for 2026, compared to $115.6 million last year, primarily due to lower earnings. As a reminder, cash flow is presented on a consolidated basis for both continuing and discontinued operations. We continued our quarterly dividend payout declaring a $0.15 per share dividend for the first quarter and we returned approximately $7 million to shareholders via dividend. Now turning to our outlook for fiscal 2026. Before we dive into the details, I want to start with an important update on our full-year outlook. Following the closing of the feminine care divestiture, our outlook is now presented on a continuing operations basis only. Importantly, outside of the adjustment for our feminine care divestiture, the underlying outlook for our continuing business is unchanged from what we communicated previously. In our last earnings call, we expected the impact of the feminine care business on an annualized basis to be approximately $0.40 to $0.50 adjusted EPS and $35 million to $45 million in adjusted EBITDA, net of TSA income. We finalized the net impact as part of our Q1 reporting and our estimates are in line with the range disclosed in November. With that context, let me walk you through the key changes to our updated outlook for fiscal 2026, including the key assumptions phasing behind our guidance. For the full fiscal year, we expect the net impact of the feminine care divestiture to be approximately $0.44 in adjusted EPS and $44 million in adjusted EBITDA. This impact includes twelve months of lost segment EBITDA and stranded costs, net of eight months of expected TSA income, interest savings, and other efficiencies related to the divestiture. On an annualized basis, when normalizing TSA income for twelve months, and interest savings for twelve months, the impact would be approximately $0.20 in adjusted EPS or $36 million in adjusted EBITDA, better than our previous outlook. Now let's turn to the full outlook on a continuing operations basis. Looking ahead to fiscal 2026, on a continuing operations basis, our outlook is unchanged. Our Q1 performance only reinforces our expectation to return to organic sales growth and gross margin expansion, supported by increased brand investment. These expectations reflect known headwinds, including a net tariff impact after mitigation of $25 million, higher SG&A year over year due to lower fiscal 2025 incentive compensation, and a normalized tax rate, partially offset by favorable currency. We also continue to expect a meaningful improvement in adjusted free cash flow, driven by working capital discipline and operational efficiency. For the fiscal year, our net sales range remains unchanged. We anticipate organic net sales growth to be in the range of down 1% to up 2%, excluding 150 basis points of currency tailwind. In terms of phasing, we expect Q2 organic sales to be down approximately 3%, primarily reflecting the phasing of feminine care sales into Q1. For half one, we expect net sales to be down approximately 2%, which was broadly in line with previous phasing. As noted previously, we expect Q3 to be our strongest sales quarter. As we look to adjusted gross margin, our expected gross margin rate growth remains unchanged, where we anticipate 60 basis points of year-over-year total gross margin rate accretion. In terms of phasing, as previously communicated, we expect half one gross margin rate to decline versus the prior year, with a return to year-over-year margin rate growth in half two as pricing actions, tariff mitigation efforts, and productivity initiatives reach full run rate. In Q2, we anticipate gross margin rate to be in the range of 43% to 44%, which reflects the impact of productivity, tariffs, inflation, and FX coupled with the mix impact from Sun Care shipments that shifted into Q1. Our year-over-year A&P rate increase remains unchanged. With increased investment in our brands, we expect A&P to increase in both dollars and rate of sales, with the latter increasing by 70 basis points to approximately 12.3%. Adjusted operating profit margin is expected to decrease in line with our previous outlook, approximately 50 basis points as gross margin improvement is more than offset by higher A&P and higher SG&A. Adjusted EPS is expected to be in the range of $1.70 to $2.10. As outlined earlier, the EPS outlook now incorporates a $0.44 headwind from the feminine care divestiture. In addition, this outlook reflects the impact of expected share repurchases that are needed to offset current dilution and assumes an effective tax rate of 22% to 23%. Adjusted EBITDA for fiscal 2026 is expected to be in the range of $245 million to $265 million, which includes a net $44 million headwind from the feminine care divestiture, outlined earlier. In terms of phasing, in line with our previous outlook, we expect in half two to generate about two-thirds of adjusted EBITDA. In addition, we expect to generate approximately 85% of our full-year adjusted EPS, slightly higher than the previous outlook, driven by the favorable impact of lower interest expense post-divestiture, which will be realized in half two. Adjusted free cash flow, excluding the cash impacts of the feminine care divestiture, is expected to be in the range of $80 million to $110 million for the year, including expected improvements in working capital. Please note adjustments related to the feminine care divestiture include taxes related to the sale, working capital, and deal-related expenses. As we move through fiscal 2026, we are nearing the peak of our elevated capital spending and investment tied to our supply chain transformation. Importantly, this is not an open-ended investment cycle. As the new footprint stabilizes, we expect capital intensity to step down, and benefits show up through improved service, lower unit cost, and working capital efficiency. We've been deliberate in our ramp-up to manage startup risk, and the early execution gives us confidence in long-term returns. And finally, we remain committed to a disciplined capital allocation strategy. The net proceeds from the feminine care divestiture, after tax and transaction costs, have been directed towards strengthening our balance sheet and reducing debt, while also supporting continued investment in our core brands with capital expenditures to drive innovation and productivity. While our near-term priority remains strengthening our balance sheet, as leverage improves and free cash flow expands, we expect to retain flexibility in our capital allocation toolkit. We will continue to evaluate the most value-accretive uses of capital over time, including disciplined reinvestment in the business, share repurchases, and targeted M&A that creates sustainable value creation. For more information related to our fiscal 2026 outlook, I would refer you to the press release that we issued earlier this morning. And now I'd like to turn the call over to the operator for the Q&A session. We will now begin the Q&A session. The first question today comes from Nik Modi with RBC Capital Markets. Please go ahead. Nik Modi: Yes, thank you. Good morning, everyone. Hey, Rod, just in a kind of post-feminine care world, just wanted to get your thoughts on portfolio construction. Obviously, you have proceeds coming in. Just wanted to get your thoughts on how you're thinking about the portfolio, M&A, and any thoughts around just kind of helping to lower the seasonality of the business? When you think about the portfolio long term? Thanks. Rod Little: Yes. Thank you, Nik. Good morning. So from a 150 basis points better in gross margin now without feminine care than we were before. It was capital intensive. And so this was a big strategic move for us to separate and sell this business. The right buyer, which we accomplished. Then what's left is we think a really compelling and interesting company focused on shave, grooming, sun, and skincare. These are global businesses for us. We have scale. We have know-how. And increasingly, the branding and the marketing capability to generate not only awareness but desirability to get through the funnel and household penetration, all the key metrics. Would want that we've been missing in the past. We're focused on those categories. We've got five power brands within those categories. That we're consolidating investment against. And I think we're increasingly confident that we can grow within the range we've always talked about. And two to 3% And it doesn't start next year, it starts in quarter three as we've said, as we get the distribution and planogram outcomes domestically here in the U.S. through which we're positive across the board. We have new innovation launching in the second half. We have higher pricing in international markets in shave primarily coming through. And then we've got our campaigns turning on. As the weather warms up, you'll see our campaigns light up with pretty heavy incremental spend against them because we really like the content. We'll we think we can do. So we're super excited about where we go from here. We've been waiting a long time to get to this point. And we're here now. Nik, on the seasonality question you had, look, Sun Care is a seasonal business. As you know, Q1 is a historic low point, particularly in the Northern Hemisphere. It's obviously the opposite at the Southern Hemisphere. Q2, Q3 are the big seasonal quarters. Behind that. What we are seeing happen though in the sun care category is it is flattening out a bit with a longer season on the front and back end. But we still do have that seasonality in our business that we'll just have to contend with over time. And it's as far as M&A, we're not focused there. We are taking the proceeds towards debt reduction. To get our leverage from you know, more around four to ending the year around three times levered. Which is leverage reduction that we feel good about. Share repurchase at the right price will always be in there as an option. And, you know, if M&A were ever to make sense, it would have to be, you know, super obvious and accretive and makes sense to everybody, including our shareholders, first and foremost. Chris Carey: Thank you. Rod Little: Thanks, Nik. Operator, next question please. Operator: The next question comes from Chris Carey with Wells Fargo. Please go ahead. Chris Carey: Hey, good morning, everyone. Can you just expand on the expectations for fiscal Q2 organic sales, maybe talk about the differences between North America and the shipment timing in the international business and how do you think about the contribution of North America versus international once we get beyond Q2 into the back half of the year? I have a follow-up. Rod Little: Yes. So I'll start with let's talk Q2 for a moment. International. I'll take and then, Fran, you can build on this. In international, we have two things going on in the first half. The first is we've had a sun care shipment to our distributor markets that the entire year's worth of volume went in the first quarter last year, due to a formulation regulatory change and just the timing of how we had to manage that. Regulatory change. This year, that's even across all four periods. As you now get into Q2, we have a phasing around innovation primarily driven by Japan that's fairly material. Where we are taking stock back in the market in Q2. Putting new product, new innovation into the markets, meaningful innovation. Across men's and women's systems that will go into the market in Q3 with higher pricing behind it. So the combination of those two you will actually have international back to growth in quarter two. But it's slight growth International, the first half is going to be somewhere around flat. In the back half of the year, six plus percent. As we see it lining up. So that's the international piece. And, Fran, I don't know if you wanna talk to Sun Care a little bit, America. And then the second half innovation and planogram. Yeah. Fran Weissman: Chris, good morning. Thanks for the question. So just specifically on Q2, we're expecting organic net sales to be down about 3%. There's a little bit of timing shift between Q1 and Q2, specifically around sun care phasing that was probably worth about 150 basis points. And then we also had the anticipated phasing in Japan for some NPD promo phasing that was between Q2 and Q3. I think most importantly for the half one, we're down 2%. That's what we expect it to be. And overall EBITDA profile is about a third of the year, which is what we called out in our previous outlook. So nothing has changed. A little bit of noise between Q1 and Q2. But really, we're lined up well based on this performance to deliver the full-year outlook. Chris Carey: Okay. Thanks. Can you I guess, expand a bit on the implications for feminine care dilution into maybe fiscal 2027? And I say that because I think the impact this year is about two times the annualized impact mean does that mean that should expect above algorithm earnings growth and fiscal 2027 as you cycle that impact from fiscal 2026? Maybe just expand on that a bit. Thanks. Rod Little: Yeah. I think, Chris, we got two things going on. We've got transitional services agreement that we've struck with Essity to provide them services for an extended period of time up to a year in some cases. Around some of the service lines. There's an income stream that comes with that. This year. And for the next twelve months. What we also have then is a second factor is we've got a stranded cost primarily in SG&A let's call it, issue that we have to deal with just as the business comes out of a highly integrated structure, which we had, we've got to go address those stranded and right-size the overhead structure of the company to match the new sales revenue line that we have, and we will do that. That will take us some time, but we're committed to doing that. I don't know if there's anything to add to that. Fran Weissman: Yeah. No. I think what's most important is when we talked about it at the last earnings call, the impact of segment EBITDA was about $26 million. And then you have the impact of stranded that Rod has talked about, which we're estimating to be around $30 million to $35 million. But the TSA income will mitigate probably about 75% to 80% of that, and that will take us the middle of 2027. We've got plans underway right now to start to address those stranded costs, and that will be, you know, probably about eighteen to twenty-four months, post the start of the TSA to really bring that into full realization. So we feel like we're in good shape there. I think, specifically, Chris, to your top-line question, we anticipated that feminine care was going to be within the total company range for our outlook. So about flat before the divestiture. So we do expect as we ramp up performance in North America for our growth profile to accelerate moving forward. Rod Little: Yes. And Chris, I will add, we're obviously not going to guide to 2027. Or beyond today. But I think the one of the points you were making we're going to have a stronger portfolio instead of brands. As we look to next year that we're more confident that we can grow nicely. We also are going to have a more profitable P&L. We pick up 150 basis points with no other changes just by having feminine care out. And so we picked that up. The other thing I will point to is we are going to have a really nice cash flow recovery as we look to fiscal 2027 as well. And we're going to put a marker out. We ought to be at a $150 million plus free cash flow as we look to next year. And so from a recovery standpoint, I think the cash flow piece of this is one of the biggest recovery items we'll have primarily because we have all the one-time spend in the Wet Shave consolidation. Hitting 2025-2026, the bulk of that's behind us, and then we start to get the benefit in 2027. As well as some of the cash conversion inventory things that the shape manufacturing unlocks. So you're right. We will have some natural pickup in 2027. Chris Carey: Okay. Thank you. Rod Little: Thank you, Chris. Operator, next question please. Operator: The next question comes from Peter Grom with UBS. Please go ahead. Peter Grom: Great. Thank you. Good morning, everyone. Two questions for me. I guess, one, just following up on organic sales phasing. So there's a lot of detail that you provided to Chris' question on the timing components. But as you look out to the back half of the year, what are you expecting in terms of category growth? I guess what I'm trying to get at is is the improvement more related to timing and execution and no shifts in category growth expectations? And then my second question is, Rod, you talked about kind of returning to the 2% to 3% top-line growth. And I know there's a lot of moving pieces as it relates to this year. But with the divestiture now in the rearview, can you maybe just talk about your confidence around delivering more sustainable growth in the U.S.? Thanks. Rod Little: Yes. Will do. So on the sales phasing for the balance of the year, let's call it Q3, Q4, we have an assumption that the category growth rates that we planned on at the beginning of the year are still relevant and still the right level of category growth rates to have in there, which is effectively low modest growth, kind of around 1% to 2% on an aggregate basis globally. We are seeing a little bit of slowdown recently in some cases, but I wouldn't say it's meaningful to change our view on the balance of the year. Where you're going to see the second half ramp up and pick up is going to be around better performance relative to the category, i.e., share growth. And you're already starting to see that in some of the consumption reports come through. I think we see it. You all probably see that as well. And what's going to happen as we get into the back half of the year we have better distribution across the board. Cremo and Hawaiian Tropic are leading the way with material increases in distribution outcomes. Those shelves are resetting now over the next six to eight weeks. It'll largely be complete. So as we get into Q3 and Q4, we have the tailwind of that better set of distribution outcomes. We talked about incremental pricing primarily in international markets. Also hitting with new innovation in Q3, Q4, feel really good about that. And from a share perspective, we will see an improved share position in the back half in both Japan and China. With the plans that we have in place and what we know is launching. And we pivoted to positive shave share in Europe. For the first time since separation from Energizer, this company in this quarter. With slight share growth. We expect that to continue into the back half of the year. So the back half is more about share growth than it is about category growth, and then that leads to the last part of your question. Obviously, it gives us more confidence in the future. That we can and will grow. And particularly, the step change in our results starting in Q3, Q4 and then going into next year driven by North America. We've had international consistently in that mid-single-digit growth rate for the last three years. We'll have that again this year. We're confident in that going forward. We're doing well in shave and we've got lots of distribution opportunity across grooming and sun care, which we're starting to realize in bigger ways. So then you come to North America, and we're right on plan. In fact, we're slightly ahead of plan. With the timing of the Sun Care shipments. And the big unlock that makes me more confident that we can really grow from here in North America and be successful. Is the capability. We have better talent, we have better ways of working. Coming in. We're faster, more agile. Bring better innovation, better marketing and activation, and we're putting investment against the business. And these are winning brands. You know, Hawaiian Tropic was the fastest-growing brand in the sun care category out of the top 10 brands last year. Cremo is on fire. In terms of what's happening out in the market. Billy continues to grow share in every single period. They're becoming a bigger piece of the portfolio. And a lot of the work we're doing against those brands are now phasing in to put up against Banana Boat, and Schick master brand as we go forward. So I said a lot, but we're confident and the proof points are there. We're seeing them now. I think we'll only see that accelerate as we go through the balance of the fiscal. Peter Grom: Great. Thank you so much. Rod Little: Thank you. Thank you, Peter. Operator, next question please. Operator: The next question comes from Olivia Tong with Raymond James. Please go ahead. Olivia Tong: Great. Thanks. Good morning. First, just a point of clarification on Sun Care. Part of the Q1 strength in Q1 came from Sun and Skin, and you mentioned that retailers choosing to stock earlier for the season. Why do you think that's the case given that you know, most categories right now, retailers seem to be actively trying to push the pipeline for seasonal categories closer and closer to the start of this season, so basically later. And then following up on that, the full-year outlook for EPS and sales, you did keep an atypically wider EPS outlook despite the feminine care divestiture now having closed. So can you talk about what it incorporates the lower to the upper end? Thanks. Rod Little: Yes. Good morning, Olivia. Look, on Sun Care, I think it's a situation where it's been a good start to the season. Early season in sun care, the category has been growing consistently versus a year ago. And so I think as retailers look at that combined with the timing of when Easter hits this year, it just sets up in some cases for them to be a little earlier on the orders. In this case, a week or two can make a difference. Right? It can come out of early January into later December. And so I think we just saw some of that shifting happening. But look, it's a good start from a category perspective. I think it's the biggest thing driving it. And I wouldn't read more into it than that. We're not changing our outlook for the year for Sun Care. But it certainly gives us more confidence that what we put in is achievable. Fran, do you want to touch on the EPS outlook? Fran Weissman: Yes. Good morning, Olivia. It's important to note that when we thought about our outlook around the key metrics for the prior year, the range really hasn't changed. We had expected on a combined basis that feminine care was broadly going to be in line at the total company level. So pulling feminine care out around organic sales growth, gross margin accretion, the rate year over year remains solid. The only thing that has changed in our outlook is really the impact of the net spend divestiture coming out and that you're seeing that impact in adjusted EBITDA and adjusted EPS. And I'd probably point to the earnings release as well. We included an EndNote eight, a good walk down that takes you through all the pieces of the divestiture. So we're still committed, and believe that the midpoint of the range is where we are targeting for the year. Nothing has changed on that profile. Q1, we delivered slightly ahead of expectations that only reconfirms our commitment to grow in the balance of the year. And I think as Rod alluded to earlier on, really encouraged by the distribution outcomes in North America. That has been at or better than expectations across the board. So once we head into half two and sort of move past the noise of half one, really encouraged to come back to growth. Olivia Tong: Got it. Thank you. Rod Little: Thank you, Olivia. Operator, next question please. Operator: The next question comes from Susan Anderson with Canaccord Genuity. Please go ahead. Susan Anderson: I guess maybe just a follow-up on Wet Shave in North America. And just the promotional level. It seems, you know, it's obviously been promotional for some time. So I guess I'm just curious. Are you seeing it pretty similar across all of the channels or are certain channels more promotional than others? And then also, I guess, do you expect this level to kind of persist the rest of the year? You think there's things going on that maybe will bring that back? Thanks. Rod Little: Yeah. Good morning, Susan. Shave North America, so it's from an off perspective, it's the weakest part of our business. At the moment. Right? If you're looking backwards and looking at printed growth rates. It's a part of the business as we roll forward here again to the second half. We're pretty confident you're going to see a different trend come through and a better trend as we have the new distribution hit, the innovation gets in. And we get into what I would say the peak of the season. But your point around the promotional intensity, the competitiveness of that category still remains very high. We built in, I would say, a slightly higher than typical spend against price promotion dynamics in the category. It's most pronounced in women's, which I would say is the most competitive. We've had competitors driving price discount rollbacks at some of the big retailers. In response to some of the competition that's come in. Frankly, there's too many brands for the space right now. We're very confident that our Schick and Billy brands are part of the future. But as we work through what is a crowded landscape, you just have that promotional intensity in. I suspect it will continue for the balance of this season. As we go through the rest of our fiscal year. We've planned accordingly. We have more tools as we get into the back half of the year along with some new campaigns and incremental investment on both Billy and Schick. As we go forward. So I think our ability to put a better result up in the back half of the year is absolutely there with everything we have line of sight to. I think longer term, as we get more focused on winning in shave, in the U.S., including in men's systems, I think we're confident in our path forward. We've got a really good innovation pipeline. And as I mentioned in one of the earlier answers, we have an increasingly capable team that can build brands in a very interesting way that resonate with the target consumers. And that's been our big missing capability in North America over the last four or five years. Susan Anderson: Okay. Great. Thanks for all the details. Maybe if I could just follow-up just on the inventory at retail. Are there any pockets still of higher inventory across your categories out there, whether that's North America or international? Where you would expect still some retailer destocking. And then also just on private label sales, are you seeing any trade down there at all from the branded business? Thanks. Rod Little: Yeah. We're not aware of any meaningful inventory pockets, Susan. In fact, if you look at our printed results versus consumption, you'd maybe draw the opposite conclusion for our brands and our categories. Right? So we don't see inventory as being any meaningful issue that we have line of sight to anywhere. And I think as we move forward, you know, we're going to be very close to the consumption flows and then feeding it. Fran Weissman: Yeah. And I would say, Susan, what's most important is that we are seeing unit share up. So as we think about value share in the U.S. specifically, we're about flat, but unit share is up, and we're seeing that hold true across our key retailers like Walmart and Target. So inventory levels are really what we believe at a healthy level across retail. Rod Little: Yeah. And then just to close it off, Susan, we're not seeing any meaningful trade down. Private label shares are stable, I would say, in terms of the size of that part of the business. What we are seeing though is consumers deal seeking, value seeking within across all brands. And so there is a lot of price elasticity right now. But I think, you know, to the point Fran's making, the branded piece of this is up. So I think structurally, we're seeing we're still seeing healthy categories with no material trade down. But it's something we're watching very closely because we are seeing a little more pressure come against the target consumer. Susan Anderson: Okay. Great. Thanks so much. Good luck for the rest of the year. Rod Little: Thank you. Thank you, Susan. Operator, next question, please. Operator: There are no more questions in the queue. I would like to turn the conference back over to Rod Little for any closing remarks. Rod Little: All right. Thanks, everybody. Look, there's a lot of noise this quarter with the divestiture of feminine care. And what's continuing versus discontinued operations and all that goes with it. It's complicated, but the key message here is we're on track the first quarter, feel good about the fiscal year. And we have cash in the bank from the feminine care sales. So we feel good about the start. We'll give you an update in early May. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.