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Ken Murphy: Good morning, everyone, and a very happy New Year. Thank you for joining us today for our quarter 3 and Christmas trading update. As usual, I'm here in Welwyn with Imran, and I'll start with a brief overview of our performance before opening the line for your questions. We are delighted with the way the customers have responded to our continued investments in value, quality and service. Group like-for-like sales grew by 2.9% over the 19 weeks, including 3.7% growth in the U.K. Customer satisfaction improved, and our U.K. market share is at its highest level in more than a decade, following 32 consecutive periods of gains. We set ourselves a challenging plan for Christmas, and we delivered in line with that plan. With over 2 billion products going through our tills and more than GBP 6 billion of sales in the 4 weeks to Christmas Eve, our teams right across the group worked hard to deliver the outstanding service that customers have come to expect from Tesco. I would like to start the call today by saying a huge thank you to them for delivering a Christmas we can all be proud of. Our performance builds on last year's successful results and reflects the strength of our core food offer. In a highly competitive market and with customers looking to make their money go further, we saw particularly strong growth in fresh food with like-for-like sales up 6.6% in the U.K. Running alongside familiar festive favorites, we launched 340 new and improved own brand Christmas products, including 180 in Finest. We recognize that for many families, the cost of Christmas can be a stretch. We did everything possible to make sure our customers got the best value from us. Starting with our fresh Christmas dinner for a family of 6 for under GBP 10, and just GBP 1.59 per person, it was even better value than last year. More broadly, our rate of inflation eased through the Christmas period and continues to be materially behind the market. We also invested in making the Christmas shop even easier for customers, including hiring over 28,000 additional colleagues. And with support from AI-powered scheduling tools, we offered more than 100,000 extra online delivery slots in the week before Christmas. Through better forecasting and planning, AI also helped us to deliver best-in-class availability and to optimize deliveries across our network. Customers continue to embrace Finest with sales growth of 13% in the U.K., including a 22% increase in our Finest party food range. Highlights included Christmas center pieces such as our Finest Turkey Crowns and Chef's Collection Beef Wellington as well as our curated Finest gifting range and a long list of award-winning products. We sold around 21 million Finest pigs in blankets, along with 2.5 million bottles of Finest Prosecco. We also saw strong demand for low alcohol options, including selling almost 0.25 million bottles of Nozeco. While Turkey retained its popularity, some customers opted for other meats this Christmas with sales of beef joints up 29%, making it the most popular alternative. Online remains our fastest-growing channel with growth of 11% across the 19 weeks. It was our biggest online Christmas, including our 2 busiest days ever. In the week leading up to Christmas, we delivered on average 2 orders every second. Whoosh also performed strongly with sales up 47% and more than 0.25 million customers trying it for the first time. Both in-store and online, customers benefited from additional value through Clubcard. Alongside thousands of Clubcard prices per week across a broad range of family favorites, we offered customers more personalized rewards, including gamified experiences with Clubcard challenges. Our retail media offering continues to engage customers and brands, including the return of sponsored Christmas Gratis now in their third year. The Tesco Media team continued to make great progress, and we were delighted to be named Media Brand of the Year at the Media Week Awards. In Ireland, we built on last year's strong performance and are now in our fourth year of market share gains with fresh food continuing to lead the way. With 5 openings in the period, including 2 large stores, we now have 190 stores in Ireland. We continue to roll out Whoosh, which is now available in Dublin, Galway and Cork. Booker performed well despite challenging market conditions, with increased customer satisfaction scores in both core catering and retail. Our wine and spirits specialist, Venus, continued to win new business. And in our symbol brands, Premier opened its 5,000th store. In Central Europe, our targeted price investments contributed to growth in both food and nonfood across the period despite a backdrop of subdued consumer confidence and increased competition. Value continues to be a key priority as customers seek to make their money go further, and we're determined to do everything we can to help. Earlier this week, we launched a new commitment to Everyday Low Prices on over 3,000 branded products, alongside our existing Aldi Price Match on more than 650 lines and thousands of Clubcard prices. Our strong performance this Christmas gives us the confidence that group adjusted operating profit will now be at the upper end of the GBP 2.9 billion to GBP 3.1 billion guidance range that we issued in October. We continue to expect free cash flow within our medium-term guidance range of GBP 1.4 billion to GBP 1.8 billion. So as we move to your questions, I just want to say another big thank you to all our colleagues for everything they did to help our customers to have a brilliant Christmas. Thank you all for listening, and I'll now hand back to Sergei. Operator: [Operator Instructions] Our first question is from Rob Joyce from BNP Paribas. Robert Joyce: So the first one, Ken, you referenced the easing food inflation over Christmas. Was that the entire driver of the slowdown versus 3Q? Are we seeing any sort of broader volume slowdown in the market? And do you think the overall market stepped down over Christmas? That would be the first one. And then the second one is probably a bigger question, but clearly guiding to a broadly flat EBIT this year after strong top line performance. What do you think needs to change for you or the market for you to be able to return to profit growth? Ken Murphy: Thanks, Rob. Happy New Year. Two great questions. Look, I think definitely, the very strong trading plan we put together contributed to the drop in the kind of overall market growth. And therefore, the easing of inflation was a material factor. There was also a step down in volume, even though we outperformed the market in terms of our volume growth, and we're really pleased with that consequentially. So I would say that our performance was pitched exactly right. It was an aggressive trading plan, but it was complemented with a fantastic product innovation pipeline and really consistent execution, both online and in stores. So for us, it's been a really pleasing performance. In terms of -- you're right, the guidance is broadly flat year-on-year. I think that's an exceptional performance if you think about where we started this year and some of the competitive activity that we responded to. What I'm really pleased about is how decisively we acted and how we got on the front foot and delivered very strong market share performance consistently across the year. And what's particularly pleasing, Rob, is that we didn't stop investing in the future. So we've been making substantial investments in our store estate, substantial investments in automation to keep our savings programs going, and even more importantly, making substantial innovation, investments in technology for the future. And so we've got a very clear strategy. We believe in the long-term possibilities for this business, and we're quite confident for the future. Imran Nawaz: And maybe if I could just add maybe 2 bullets from my end as well, Rob. Two things on the ability to upgrade the outcome for this year and continue to invest to continue the momentum and continue to protect the position of strength that we have, I think, is not a bad place to be. The second thing to your sort of longer-term question, it's important to go back to the performance framework that we did set out almost 5 years, and we really stick to, which is we are very clear that we want to continue to drive up customer perception, to drive up market share, which in turn drives up profit and drives up cash. And I think you've seen us do that year in, year out. I think this year was an exceptional year with an exceptional reaction to a competitor, but I think we stuck to our guns. We invested into the proposition. We invested into price and truthfully, being able to upgrade is a nice feeling, because it demonstrated that everything we've done really worked out well. Robert Joyce: And just a quick follow-up on that inflation point. Do you think -- is the inflation then more -- the slowdown more driven by your own investment in price relative to your sort of input costs? Or are you seeing input costs falling more broadly? And does the kind of -- I'm just looking at next year and thinking people have got -- markets got Estimates U.K. growing above 3%. Does that look a bit ambitious given the Christmas exit rate? Imran Nawaz: Look, let me take first the Christmas specific question. Look, Kantar calls around an inflation of around 4% or so, slightly north of 4% over the Christmas period. As Ken just said, we made conscious choices to invest. There's no other time when you've got so many customers in your stores and you build momentum. And if you look at our market share gains, our volume market share gains were even stronger than our value market share gains over 12-year records. And I think you get -- that pays back as you then go into Jan, Feb, March and April into the next year. So I'd say to you, it was a conscious decision to invest into value, which we saw pay off in the market share. Then in terms of next year's outlook, you know as well as I do that inflation is a driver of commodities as much as it is of stickier costs on payroll. All of those things are still to be worked out, and we'll see where we land when we talk to you in April. Operator: Our next question comes from Xavier Le Mené from Bank of America. Xavier Le Mené: A quick one actually on the market share. As you said, you've got the strongest market share ever for the last 10 years. But where potentially do you see your peers? Do you still think that you've got opportunity to grow your market share? Or are you more in a position to defend what you've got right now? Ken Murphy: So Xavier, we are always thinking offensively rather than defensively. That's our mindset. And we see it less about the market share per se and more about are we doing the right things for all our stakeholders and particularly our customers. So are we getting our value right? Are we getting the quality of the proposition right from a product point of view? Are we getting our execution right? And are we innovating and thinking about the future in ways that customers' trends and needs are adapting. And that's really where we focus all our energy. And then we look to market share as a measure of how successfully are we executing against that strategy. So we don't see any limits in terms of where we can take market share, but it is not a given. It's something that we have to work very hard to achieve. Xavier Le Mené: Right. And just one follow-up on actually Rob's question. Sequentially, you said you've seen a bit of a slowdown. It sounds like it's also market driven, but do you expect the slowdown to continue heading to '26, or do you think that potentially it's more a question of consumer confidence and hopefully, U.K. consumers getting a bit better going forward? Imran Nawaz: Look, I mean, I think when I look at consumer confidence this year, I would say it's mixed. But it's been mixed throughout the entire year, right? What you saw was people that are -- there's a cohort of groups that are, frankly, in a good place and feeling comfortable with their savings and their spending, and there's a group of people looking for value. I feel we saw that reflected. When you look at Finest's performance, in a way it's a reflection of the fact that people looking for value and quality at the same time were able to hit that. So I think our Everyday Low Price campaign that we're launching, again, hits the bull's eye on that. I think addressing all of those opportunities for those customers looking for value is the right way to go forward. Fair to say that as you -- the question behind the question is, was the market overall a bit softer over Christmas? I'd say yes, on a volume basis. The reality, though, also is because we really outperformed every single month over the last 19 weeks on a volume share basis, we were not really affected by that. And I think one proof point for me is the way we exited the year was very clean on stock. Then how it plays out next year, we'll obviously talk to you again in April. But look, one of the things that we do feel good about in this business is, and I think we've demonstrated that over the last 5 years is, we are very good at adapting ourselves to whatever the environment throws at us. And it's one of the reasons why we've put value at front and center of everything we're doing. Operator: We'll now take our next question from Manjari Dhar from RBC. Manjari Dhar: Just 2 questions from me, please. My first question is on supplier-funded promotions. We've seen them picking up over recent months. Just wondering how much higher could this go? And if it does continue to drift higher, does that change your approach for the Tesco business, maybe for your private label business? And then my second question is on the digital data opportunity. I guess how much further is there to go with Clubcard personalization and AI? And what sort of things should we be expecting this year? Ken Murphy: Thanks, Manjari. So I would start off by saying that kind of supplier-funded promotional penetration or participation is actually only returning to what it was pre-COVID. So it's not like it's wildly out of kilter with historical norms. That's the first thing to say. The second thing is that actually, as you saw from our announcement this week, we have reinvested a lot of promotional funding back into everyday low pricing through the extension of our low-price campaign from 1,000 to 3,000 lines. And that really is based on an insight from customers that say they need reliable low pricing during these months where money is tight and they're watching every penny. And so that is the first signal, by the way, that we are kind of -- we are responding to customers' needs in the moment. So I'm kind of relaxed about that, if you like. I think it's a normal... Imran Nawaz: And maybe to give you a number on that, just to give you a sense to underpin Ken's point, last year's promo percentage was around 33%, and this year was 34% over that 19-week period, which gives you a sense. There was a slight creep up, but not massive. Ken Murphy: Yes. It was artificially depressed during COVID, Manjari. So it was very hard to compare apples with apples. If I go to your second question, which is a very exciting question. It's a question we're really excited about. We don't see any limits to the opportunity around data and particularly the opportunity to serve customers better through data, getting to understand their needs better, responding much more dynamically, using AI to help us be there for customers whenever they need us. And we're investing behind that, and we'll continue to do so. And I think it will be something that you'll see continuous improvement from us over the next number of years. I think there's infinite possibilities. Manjari Dhar: Great. Maybe just a quick follow-up. Should we be expecting investment levels behind that overall group CapEx to slightly step up now as a result? Ken Murphy: Well, we've always been quite clear about our kind of breakdown of CapEx being kind of a 3-part logic, which is part 1 is where we're investing in our core estate renewal and the shopping experience. Part 2 is where we're investing in automation to support our Save to Invest programs, and Phase 3, which is all about innovation, technology investment for optimizing our proposition. And probably the greatest -- we've seen step-up investments across the board actually in all 3 areas. And that's been what's been behind our progressive increase in capital. And actually, as we've gone, we've kept a very close eye on return on capital employed, and that has also been improving over time. So we're very disciplined in how we spend our money. Imran Nawaz: Yes. And also what's really nice is, in the base, we've also reflected already increases year-on-year into our tech organization, because we know that this is an area of opportunity for both on the growth side, but also on the efficiency and savings side. Operator: We'll now move to our next question from Sreedhar Mahamkali from UBS. Sreedhar Mahamkali: Maybe 3 for me, if you don't mind. First one, in terms of improving price position versus the market statement and the comment in the statement, can you talk to us if it's been the case versus all operators as you see it, especially given one of your big competitors reset and continuing investment? That's the first one. Secondly, just trying to understand the new or renewed push on everyday low prices. A couple of questions there. Is this reallocating the promotional funding more to be fully behind Everyday Low Prices versus Clubcard Prices? How do you see the offer to the consumer changing in the round as a result of what you've been executing really well on Clubcard Prices already? And second one, sticking with Everyday Low Prices, is this first signal to us that 2026 is likely to be as big a year of investment as it was in 2025? Is that how we should read this? Ken Murphy: Okay. Thank you very much, Sreedhar. I think I'd start off by saying that our price position has strengthened over the year versus the market generally. And that I think more importantly, the sophistication of our pricing investment has improved through the technology investments we've made such that we focus on the lines that matter most to customers. So we're investing in value, but we're investing wisely and quite judiciously. And I think that is what has helped us to outperform the market. On your point around Everyday Low Pricing, I think that was a response to customer insight, which said they wanted more reliable pricing on everyday essentials in these key periods in January, February. And so we made a long-term commitment to, as you say, invest principally promotional funding back into Everyday Low Pricing. And you shouldn't read it as any more than us responding to a customer insight to give customers the best possible value in these early months of the year. And I don't think it's a signal of anything other than our intent to stay on the front foot from a value for money point of view in 2026. Imran Nawaz: Yes. I think one aspect, Sreedhar, that's important is we already have Everyday Low Prices on 1,000 SKUs. And what we're doing is because it worked so well, we're giving it more visibility, more color, and it's been expanded to 3,000 of people's favorite brands in the country. So from that level, it's also a confirmation of something working really well that we want to double down on -- or triple down on, I should say. Sreedhar Mahamkali: And in the round, I guess what I'm trying to understand is Clubcard Prices have been incredibly successful for you. Is this a recognition, to Ken's point, I guess, some of that needs to be more upfront shelf prices rather than Clubcard Prices. Is that how I should see it? Imran Nawaz: I mean, I think it's a continuous conversation depending on what customers are looking for, but I'd be very comfortable to say to you that as opposed to having only exclusive deals on Clubcard prices, we want to have more, as Ken said, more longer-term price fixes as we've been doing on Low Everyday Prices now rebranded. Operator: We'll now move to our next question from Clive Black from Shore Capital Markets. Clive Black: Also, very happy New Year. Very well done, by the way. Not an easy thing to deliver. The question I have is really around volume. First of all, why do you think volume in the Christmas period was a bit slower than you and maybe the industry expected? And in particular, do you think there are features around alcohol consumption and maybe diet suppressant drugs that are starting to kick in more noticeably in that respect? And then in terms of that volume, is that a key factor why you expect working capital -- or sorry, your free cash generation to come in with the existing guidance, which might mean that working capital is a bit of a flatter benefit year-on-year? Would that make sense? Ken Murphy: Clive, Happy New Year to you too, and thank you for your comments. I'll speak to the volume comment, and then I'll pass over to Imran maybe to talk about working capital. So I'd start off by saying that what was particularly pleasing about our performance is we outperformed the market on volume. I think it's fair to say that the market overall was a little bit softer on volume, but our outperformance was particularly important. And within that, I was particularly pleased with our fresh food performance. So speaking to your point about is there a little bit less alcohol consumption, is there an impact? I think there's a general impact from people wanting to eat and live more healthily. And for sure, within that, GLP-1 will be having an impact. But our fresh food sales at plus 0.6% were particularly strong. So my feeling is that whatever way this trend evolves, we're really well set up to take advantage of it. And we've been investing very heavily in our fresh food proposition over the last couple of years, and it has been the principal driver of our business, which we feel really pleased about. There's no doubt, as you saw from some of the stats that I shared on the call earlier that you are seeing a significant rise in low and no alcohol sales, but we respond to that as well. We have the products and the range to address it. And within our food range, we have a high number of high-protein products that are really well-suited to anybody looking to pursue that kind of diet. So we feel really well set for whatever trends are coming our way. But for sure, trends are emerging and we are keeping a very close eye on them. Clive Black: Sorry Ken. Just in that respect, Ken, are you therefore seeing -- sorry, are you seeing notable step back, therefore, in areas that are more exposed to change in ambient carbohydrates and the like? Ken Murphy: No, not really. I mean, we shifted an extraordinary amount of chocolate tubs over the Christmas period. So I think -- and I was a material contributor to that personally. So no -- the short answer is no, it's been really strong. Clive Black: Sorry, Imran? Imran Nawaz: Yes. No, absolutely. Just on your second question, I mean, just to reiterate what Ken just said, I mean, we -- and how it impacts cash, I mean, obviously, we were less affected by the market slowdown because if I look at Q3 and the Christmas period, we were growing volume every single month and outperforming on market share every single month. So that gives you a sense of it not being a real driver on working capital, because ultimately, volumes are positive. And more pleasingly, I could say that we're exiting very, very cleanly. Actually, I was very happy about that. I mean, we set up a very ambitious Christmas, and we delivered in line with that. And when you exit cleanly, it just helps you get momentum also into January, which is nice. In terms of cash flow, look, we had a very, very strong first half, over GBP 1.6 billion. As you know, typically, our cash flow is skewed towards the first half. And in the second half, you've got the payments out the door from all the supply you bring in for Christmas. So that phasing will play itself out as per normal. And as you know, our guidance on cash is that consistent range we've been giving, GBP 1.4 billion to GBP 1.8 billion. I know we've delivered always to the upside on that one. And so it's never stopped us from doing a good job, and the plan is to continue to do so. But as you also know, the working capital balances at Tesco are enormous. So just to give us a bit of flex in terms of any last-minute payments or receivables or anything like that, it gives us a bit of space to do that. But obviously, cash is important, and the plan is absolutely to continue to deliver within that range. Operator: Our next question is from Monique Pollard from Citi. Monique Pollard: Two from me, if I can. The first one, obviously, good market share gain, U.K. market share gains of 31 bps over Christmas. And from what I understand from the commentary from Imran, the volume market share gains over that period are even stronger than that. What I'd like to understand from customer feedback, the surveys you do, et cetera, are you able to give us some sense of how much of that you think is due to strong price positioning? And you mentioned your price position has strengthened versus the market this year, and you were aggressive in terms of inflation over the Christmas period. So how much of that is price positioning? And how much is things like investment in availability over Christmas, which is probably particularly strong versus particularly some competitors over the period and things like the store estate, staff in stores, et cetera, over that period? And then the second question is just me trying to understand that level of price investment that you've put in, whether some of that was seasonally specific to the Christmas period. As you mentioned, you never get that volume of customers in store and therefore, important to be on the front foot on price, or whether that is sort of something we should expect to be a bit ongoing? Ken Murphy: Right. Monique, so I think the short answer to your first question is that delivering the kind of market share performance we've delivered, not only over Christmas but right across the year, is actually a composite of great value, great quality, great execution. I think you'll have seen amongst some of our competitors that even if you drive a very strong value message, if you don't have the quality and the supply chain precision and the in-store execution to go with it, it's very hard to deliver the performance. So I would say that our market share performance has been a composite performance of everybody in Tesco across all the functions and departments doing their job really well and executing against the plan. So I think that would be the answer to the first question. The second question around price investment is that clearly, Christmas is the FA Cup final for retailers. So we all lean in very heavily to a very strong trade plan over Christmas. And it's also a chance for customers to reappraise your proposition, shop [ B2B ] for the first time and really like and appreciate what they see. So we work very hard from everything from product innovation through to hiring of nearly 30,000 extra people through to the very strong trade plan that we delivered. And that is quite a specific event. It doesn't necessarily mean anything for the rest of the year per se other than the fact that we will continue to invest appropriately. And I think as you saw from our announcement earlier this week, we acted against a specific customer insight for January, February, which said we needed to provide more reliable Everyday Low Pricing on a wider range of products. And so we've traveled our Everyday Low Pricing range to 3,000. And so what you can expect from us is that we will adapt constantly to insights from customers and react, so that we're giving them the best value and that's appropriate for the moment. Imran Nawaz: Another angle, Monique, as well to keep in mind is the perspective on channels. So when you look at where the market share gain came from over the Christmas period, we got it in large stores, which is great, because that's the key estate. But at the same time, that 11% growth we saw in online also led us to continue to gain market share in our online business, which was also great to see. And given the fact that we are over 36% market share in online, that gave us an extra benefit on market share as well. Operator: We'll now take our next question from Matt Clements from Barclays. Matthew Clements: First question was, you often give a very useful insight into the health of the U.K. consumer at your update. I was wondering if you could just talk us through how sentiment and spending evolved through the period, particularly around maybe November with the budget? And how do you think we're set up on consumer health into '26, government policy, et cetera? And then the second question was around Finest, which is compounding exceptional growth now. Any views on Finest into next year? I mean, particularly around the dining-out to dining-in trend? Do you expect that to continue? What's the innovation pipeline like? Anything on that would be helpful. Ken Murphy: Great. Thanks, Matt. So I think the first thing to say on consumer sentiment is that we've definitely seen that consumer sentiment is mixed. I think we have a section of the community that is in pretty good shape from a household budget perspective. And then we have a section of the community that is really struggling to make ends meet. And I think that is playing out overall in terms of how customers are shopping. They're very value conscious. At the same time, though, there is a significant proportion of households that are in decent shape financially, and they are looking for good value for money. And that, I think, is a big factor in what's driving our Finest sales. I think there is that trend towards eating in more and eating well, and that's driving our fresh food sales. And I think the consumer has shown great resilience in a lot of uncertainty. I think the budget is just one factor in a number of factors that's driving uncertainty. But we have seen a pretty resilient consumer in terms of their spending pattern and habits. And we continue to monitor it very closely. But we, to a certain extent, as long as employment remains strong, expect that resilience to continue. And Finest really is a subset of that. I think Finest, for us, is delivering on 2 fronts. It's responding to that trend of wanting to eat restaurant quality food in your home, but it's also responding to the fact that historically, Tesco would have undertraded in that particular meal occasion or mission. And I think what you've seen for us in terms of the amount of product innovation, the bravery to go deeper into distribution, to go into more and more different categories and cuisines has given us the confidence to really fight for fair share in that meal occasion. And so we still believe there's a lot of room for growth in Finest in the coming years. Operator: We'll now take our next question from William Woods from Bernstein. William Woods: Happy New Year. When you look at your success over the last 5 years, you've had great success with things like Aldi Price Match, Clubcard Prices, Finest, et cetera, and your peers have played catch-up. What do you think are the next levers that you can pull over the next 5 years to continue to innovate, continue to lead the market and gain market share? Ken Murphy: Thanks very much, Will. I think first and foremost, we would say that our strategy of focusing on the core basics and executing them brilliantly and consistently remains a fundamental pillar and foundation stone of our strategy going forward. The second thing I would say is that the building out of our proximity to customers in terms of their food needs is equally important. So what we've done in terms of extending our grocery home shopping, slot availability, the work we've done to build Whoosh into a really market-leading from a value point of view quick commerce model. The launch of F&F online are all contributing factors to getting closer to customers and making life more convenient. And then on top of that, we're working very hard to get really close from a data point of view to our customer base. And that is really starting to deliver results for us. And that, I think, is where the greatest opportunity lies is using data and insight to really get closer and closer to customers and anticipate and serve their needs, both digitally and physically. And we see clearly Clubcard at the very heart of that. And we also see dunnhumby as a clear source of competitive advantage to help us deliver that as well. And probably I should finish by saying something that's not necessarily the sexiest thing, but is absolutely critical, which is that we have an incredibly strong Save to Invest program. Imran has led this since he's joined the business. The step-up in our savings has been extraordinary from GBP 300 million a year to nearly over GBP 0.5 billion a year. And that shouldn't be underestimated in what it has allowed us to do in terms of stepping up capital investment, stepping up our investment in value without ever compromising on the customer journey. So they'd be the key pillars of what underpin our future growth opportunity. Operator: Our next question comes from Ben Zoega from Deutsche Bank. Benjamin Yokyong-Zoega: Just a couple of questions, follow-ups from my side. Firstly, on inflation, and secondly, on supply funding. So firstly, you say you've improved your price position against the market. I just wanted to ask, is this broad-based across competitors, or were there particular competitors that you'd call out as closing that gap against? And are there any particular product areas where you focused your price investments such as fresh foods? Secondly, on supplier funding, is it fair to say that the elevated levels of supplier funding in H1 has continued into Q3 and Christmas, particularly as the market turned more promotional? And are you able to comment on the levels of brand support behind the expansion of Everyday Low Prices? Imran Nawaz: Look, I mean, in terms of inflation and strengthening price position, I mean, we take a view, and we obviously have our own pricing strategy, and we have stuck to that since over the last 5 years. And look, we take a broad view that we want to continue to strengthen versus everyone. I mean, ultimately, the ultimate judge of how strong your price really is, is the customer. And the combination of Aldi Price Match, Clubcard Prices and now Low Everyday Prices, in our view, is the right combination, and it's made us stronger and stronger, and it's working well for us. And I would say to you, it's a broad-based strengthening across most of our competitors, which is good to see. Then in terms of promo intensity and supplier funding, look, the truth is, promo funding has gone up a bit. You saw that from the brands wanting to regain volume growth, which is good for us, because it comes under the banner of Tesco and Clubcard Prices. So we like to see that. That's a good thing. You will have noticed that the Low Everyday Prices is -- or Everyday Low Prices is brand oriented, which is good. Brands like to grow, and they can see that they have grown with Tesco online and in-store, and they want to continue to grow, and we have a great partnership with them. As ever, any campaign or events we run, there are always some investments from our side, some investments from the brand side, but you wouldn't expect me to give you some commercial details on the call here in terms of how we execute these. But suffice it to say, they are customer-centric and data-led. And clearly, the idea behind them is to continue to grow and gain share. Operator: And we'll now take our last question today from Karine Elias from Barclays. Karine Elias: Most of them have been answered, but just one final one. In the release, you mentioned, obviously, the competitive environment being as competitive as ever. Just broadly speaking, I think historically, you've called it more rational. Do you feel that that's still the case? Or perhaps there was some intensity going into Christmas? Ken Murphy: So the definition of rational is always a broad one when you're dealing with 10 to 12 different competitors who are all looking to win the basket from you. But I would say that the market intensity in terms of competition, pricing, et cetera, has remained strong since February last year. It didn't really change over Christmas. But I think what, and hopefully, you will have observed is that our response has been really decisive and really quick, and we have maintained that intensity throughout the year. And that's what really helped us underpin the very strong market share performance that you saw over Christmas. Operator: Thank you. That was the last question today. With this, I'd like to hand the call back over to Ken Murphy for closing remarks. Over to you, sir. Ken Murphy: Thank you so much, everyone, who's joined the call, took the time out. I know it's an incredibly busy day with a lot of announcements from various different companies. So we really appreciate you taking the time to join us. Thank you all for the excellent questions. I wish everybody a really happy New Year and a prosperous 2026, and I'm looking forward to seeing you all in April. Thank you. Goodbye.
Operator: Hello, and welcome to the First Quarter 2026 Earnings Conference Call and Webcast. As part of the discussion today, the representatives from NTIC will be making certain forward-looking statements regarding NTIC's future financial and operating results as well as their business plans, objectives and expectations. Please be advised that these forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and that NTIC desires to avail itself of the protections of the safe harbor for these statements. Please also be advised that these actual results could differ materially from those stated or implied by the forward-looking statements due to the certain risks and uncertainties, including those described in the NTIC's most recent annual report on Form 10-K, subsequent quarterly reports on Form 10-Q and recent press releases. Please read these reports and other future filings that NTIC will make with the SEC. NTIC disclaims any duty to update or revise its forward-looking statements. I would now like to hand the call over to Patrick Lynch, President and CEO. Please go ahead. G. Lynch: Good morning. I'm Patrick Lynch, NTIC's CEO, and I'm here with Matt Wolsfeld, NTIC's CFO. Please note that a press release regarding our first quarter fiscal 2026 financial results was issued earlier this morning and is available at ntic.com. During today's call, we will review various key aspects of our fiscal 2026 first quarter financial results provide a brief business update and then conclude with a question-and-answer session. Please note that when we discuss year-over-year performance, we are referring to the first quarter of our fiscal 2026 in comparison to the first quarter of last fiscal year. I'm very pleased that for first quarter, we were able to deliver record consolidated net sales, driven by the strongest year-over-year growth rate we've had since fiscal 2024. Our performance was further augmented by higher sales across key sectors, including ZERUST Oil & Gas, NTIC China and North American Natur-Tec sales. ZERUST Oil & Gas achieved record first quarter sales marking the second consecutive quarter with more than $2 million in revenue, demonstrating improving demand from both new and existing customers. Improving profitability is a top priority for NTIC in fiscal 2026 and we expect to begin to realize the benefits from the strategic investments we made over the past 3 years towards upgrading our global operations and supporting future growth. We are also focused on flattening our operating expenses and driving sales in the higher-margin segments of our business, which we expect will improve our profitability and strengthen our balance sheet this fiscal year. Overall, the start of fiscal 2026 is encouraging, and we expect these trends to support anticipated higher year-over-year sales and profitability as the year progresses. So with this overview, let's examine the drivers for the first quarter in more detail. For the first quarter ended November 30, 2025, our total consolidated net sales increased 9.2% to a quarterly record of $23.3 million as compared to the first quarter ended November 30, 2024. Broken down by business unit, this included a 58.1% increase in ZERUST Oil & Gas net sales a 6.9% increase in ZERUST Industrial net sales and a 2.2% increase in Natur-Tec product net sales. Turning to our joint venture sales, which we do not consolidate in our financial statements. Total net sales for the fiscal 2026 1st quarter by our joint ventures increased year-over-year by 2.9% to $24.5 million, reflecting improved demand across many of our joint ventures partially offset by a mid-single-digit decline at our German joint venture. We continue to closely monitor trends across our European markets for signs of stabilization following years of subdued demand as governments begin to implement targeted economic stimulus packages. We expect that any economic recovery from these stimulus packages will lead to a positive impact on our joint venture operating income in future periods, especially in Germany. Improving sales trends continued at our wholly owned NTIC China subsidiary fiscal 2026 first quarter net sales at NTIC China increased by 23.5% year-over-year to $4.9 million, demonstrating a strong demand in this geography. Furthermore, given that the majority of NTIC China sales are for domestic Chinese consumption, we believe NTIC China's exposure to U.S. tariffs is limited. We expect demand in China will continue to grow and improve in fiscal 2026 helping to support anticipated higher incremental sales and profitability in this market. We believe that China is on its way to becoming a significant market for our industrial and bioplastic segments. So we plan to continue to take steps to enhance our operations in this geography. Now moving on to ZERUST Oil & Gas. First quarter of fiscal 2026 ZERUST Oil & Gas sales were $2.4 million, a first quarter's record and an increase of 58.1% from the same period last year. This growth rate demonstrates the wider adoption of our VCI solutions by new and existing customers across the global oil and gas industry as well as at our Brazil subsidiary. As discussed on our prior call in November 2025, we announced that our 85% owned subsidiary, ZERUST Brazil, secured a 3-year contract for a major offshore project with a leading global engineering, procurement and construction, or EPC company. Under this agreement, ZERUST Brazil will be providing advanced corrosion protection solutions for Floating Production Storage and Offloading Units or FPSOs, with an estimated total value of approximately $13 million over the next 3 to 4 years based on current foreign exchange rates. We expect this project to ramp up throughout the current fiscal year and continue through calendar 2028. We believe this is a significant validation of our engineering capabilities, the scalability of our ZERUST Oil & Gas business and the reputation we've built as a trusted partner to leading offshore operators. Brazil represents one of the fastest-growing deepwater markets globally, and we believe this win provides a strong foundation for continued growth and expansion across international oil and gas markets. As indicated in prior calls, we have continually invested in our ZERUST Oil & Gas business to enhance our sales team and add resources to support anticipated future growth. This has improved our ZERUST Oil & Gas sales pipeline as the size and number of opportunities have expanded among both new and existing customers. Our pipeline includes global opportunities to protect above-ground oil storage tanks, pipeline casings and offshore oil rigs from corrosion. While the nature of this industry will always cause certain fluctuations in our ZERUST Oil & Gas sales, we still expect to see ZERUST Oil & Gas sales and profitability improved significantly in fiscal 2026 as we plan to leverage these investments and rein in operating expenses. Turning to our Natur-Tec bioplastics business. First quarter Natur-Tec sales were a quarterly record of $6 million, representing a 2.2% year-over-year increase and a 16.5% increase from the fourth quarter driven primarily by higher sales in North America. We continue to pursue several larger opportunities in North America and India for our Natur-Tec solutions that we believe holds significant promise to benefit our Natur-Tec sales in coming quarters, including advancing the compostable food packaging solution we mentioned on prior calls. Overall, we believe Natur-Tec is a best-in-class compostable plastic business that is well positioned for significant future growth in the U.S. and abroad, and we expect sales to continue to expand throughout the year. Before I turn the call over to Matt, I want to acknowledge the hard work and dedication of our global team of both employees and joint venture partners. Our success and our ability to navigate more complex economic periods are a direct result of their efforts. With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2026 first quarter. Matthew Wolsfeld: Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales increased 9.2% in fiscal 2026 first quarter, driven by the strongest year-over-year growth rate we have achieved since fiscal 2024 because of the trends Patrick reviewed in his prepared remarks. Sales across our global joint ventures increased 2.9% in the first quarter. Joint venture operating income in the first quarter decreased 5.1% compared to the prior fiscal year period. Primarily due to a slight increase in operating expenses at the joint ventures. Total operating expenses in fiscal 2026 first quarter increased to $9.7 million, a 2.9% increase compared to the prior fiscal year period, primarily due to higher selling and general and administrative expenses, partially offset by a reduction in research and development expenses. We expect quarterly sales to grow faster than operating expenses as we continue to leverage recent investments and upgrades across our global operations. Gross profit as a percentage of net sales was 36% during the first 3 months ended November 30, 2025, compared to 38.3% during the prior fiscal year period. Lower gross margin for the first quarter was primarily due to a temporary supplier lead time issue. We expect gross margin to improve sequentially during fiscal 2026. NTIC reported net income of $238,000 or $0.03 per diluted share for the fiscal 2026 first quarter compared to net income of $561,000 or $0.06 per diluted share for the fiscal 2025 first quarter. For the fiscal 2026 first quarter, NTIC's non-GAAP adjusted income was $344,000 or $0.04 per diluted share compared to non-GAAP adjusted net income of $667,000 or $0.07 per diluted share for the fiscal 2025 first quarter. A reconciliation of GAAP to non-GAAP financial measures are available in our first quarter fiscal year 2026 earnings press release that was issued this morning. As of November 30, 2025, working capital was $19.4 million, including $6.4 million in cash and cash equivalents, compared to $20.4 million, including $7.3 million in cash and cash equivalents as of August 31, 2025. As of November 30, 2025, we had outstanding debt of $12 million, including $9.1 million in borrowings under our revolving line of credit. This is down slightly from outstanding debt of $12.2 million as of August 31, 2025. Reducing debt through anticipated positive operating cash flow and improving working capital efficiencies is a strategic focus in fiscal 2026. On November 30, 2025, the company had $29.3 million of investments in joint ventures, of which 53.4% or $15.6 million was in cash, with the remaining balance primarily invested in other working capital. In October 2025, NTIC's Board of Directors declared a quarterly cash dividend of $0.01 per common share that was payable on November 12, 2025, to stockholders of record on October 29, 2025. To conclude our prepared remarks, we believe our first quarter results demonstrate positive momentum building across many parts of our business. We expect higher year-over-year sales combined with improving gross margins and controlled operating expense growth through the year, which we expect to benefit our profitability in fiscal 2026. We believe we're well positioned for a strong fiscal 2026 and I look forward to sharing the progress we're making in future calls. With this overview, Patrick and I are happy to take your questions. Operator: [Operator Instructions] And our first question will be coming from Tim Clarkson of Van Clemens. Timothy Clarkson: Patrick, Matt, great quarter revenues-wise. Earnings not quite there, but obviously, sharply improved from the fourth quarter. So just getting into some of the color, what are some of the levers you guys can do to improve profitability? Matthew Wolsfeld: I think from an overall profitability standpoint, it still kind of comes back to the key fundamentals of driving sales growth, which is going to obviously increase gross margin, which is going to push money down to the operating profit line. We certainly have an expectation during the current fiscal year and what you saw from an operating expense standpoint of keeping relatively flat operating expenses and still achieving significant growth. I think the majority of the growth, typically our second quarter is one of our lower quarters. We expect it to be pretty consistent with what we saw in the first quarter with a significant amount of growth coming in the third and fourth quarter, which is pretty historically consistent. So as we see that happen, I would expect the profitability is going to stem from the gross margin dollars that are flowing through to the bottom line. The other key contributor here isn't associated with revenue is the joint venture operating profits. And kind of the expectation is that we are going to see certain growth from a joint venture level through the remainder of the year as well. So those should be the key drivers to get us back up to profitability levels that we saw 6 to 8 quarters ago, which is kind of where we expect to be towards the end of the year. Timothy Clarkson: Are there anything you could do on the expense end that would be where you can eliminate some expenses? I know you want to basically keep expenses flat, but are there any opportunities in terms of cost cutting? Matthew Wolsfeld: There are some opportunities, but there's also -- the main situation that we're up against is that we have made specific strategic investments in the oil and gas business around the world and the Natur-Tec business around the world. And additionally, we've made investments in North America from a -- both from a manufacturing investment standpoint and from a new CRM system, things like that. So I don't know that it's necessarily a matter of cutting expenses. It's more a matter of letting the revenues catch up to the increases in expenses that we saw over the past 2 years. So I think that's ultimately how we're going to get long-term profits. We don't want to cut expenses to potentially increase quarterly profits by a few cents and then ultimately hinder what would be long-term growth or the stability that we need and the people that we need for the long-term success of the business as we see Natur-Tec and oil and gas ramp up over the coming 2, 3 years. Timothy Clarkson: Now are you guys pleased with the work the sales team on the oil and gas hires from last year are doing? G. Lynch: Well, they're getting -- they're starting to put business on the books. The biggest increase you saw this year, obviously, was from ZERUST Brazil and that was a 1-year contract. The rest is now starting to pick up that [indiscernible] where they're getting business out of India and Middle East. And we hope to see Europe starting to contribute in the coming months. Operator: And our next question will be coming from Don Hall. Unknown Analyst: Did I hear my name, Don Hall? G. Lynch: Yes. We're happy to take your question. Unknown Analyst: Okay. I believe in previous calls, you mentioned the oil and gas opportunity in Brazil, plus another -- a couple of other major opportunities. Are there still other major ones that you can discuss? G. Lynch: In what business? Unknown Analyst: I am sorry, what? G. Lynch: What you're talking about oil and gas? Unknown Analyst: I can't pick you up. It's kind of fog. G. Lynch: Well, I mean, the biggest contract we have in place right now is the one in Brazil, but obviously, we're talking to other oil companies around the world and starting to make inroads. So we expect to see the business growing all over. Operator: And I'm showing no further questions. I'd now like to hand the call back to Patrick for closing remarks. G. Lynch: Thank you all for joining us this morning, and have a nice week. Operator: And this concludes today's program. Thank you for participating. You may now disconnect.
Operator: Greetings, and welcome to the Citi Trends Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Nitza McKee, Senior Associate at ICR. Please go ahead, Nitza. Nitza McKee: Thank you, and good morning, everyone. Thank you for joining us on Citi Trends' Third Quarter 2025 Earnings Call. On our call today is Chief Executive Officer, Ken Seipel; and Chief Financial Officer, Heather Plutino. Our earnings release was sent out this morning at 6:45 a.m. Eastern Time. If you have not received a copy of the release, it's available on the company's website under the Investor Relations section at www.cititrends.com. You should be aware that prepared remarks today made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance. Therefore, you should not place undue reliance on these statements. We refer you to the company's most recent report on Form 10-K and other subsequent filings within the Securities and Exchange Commission for a more detailed discussion of the factors that can cause actual results to differ materially from those described in the forward-looking statements. I will now turn the call over to our Chief Executive Officer, Ken Seipel. Ken? Kenneth Seipel: Thank you, Nitza. Well, good morning, everyone, and thank you for joining us today for our third quarter earnings call. I am pleased to report another quarter of consistent performance, demonstrating disciplined execution and progress across every area of our business. Our transformation strategy is gaining significant momentum, our operational capabilities are advancing and our customer connection is strengthening. As I shared at a recent investor conference, we're in the early stages of what I believe will be a compelling transformation for Citi Trends. We've established a clear line of sight to achieve approximately $45 million of EBITDA in 2027, which represents a $60 million increase from the 2024 levels. The substantial growth trajectory will be driven by our continued focus on consistent comparable store sales performance, gross margin expansion, operating expense leverage and strategic new store expansion. Today, I'll walk you through the drivers of our third quarter results and provide additional details on how we're executing against this exciting long-range road map. Turning now to our results. In the third quarter, we delivered comparable store sales growth of 10.8%, which represents a 16.5% growth on a 2-year basis. This marks our fifth consecutive quarter and 15th straight month of strong comp growth with total sales up 10.1% as compared to last year in the quarter. Consistent with our year-to-date performance, the majority of our Q3 sales results were due to increased customer traffic. We began the quarter with a strong back-to-school season, and we finished the quarter with an equally strong late fall fashion and pre-holiday product performance with particular strength in Children's, Men's and basic apparel categories throughout the entire quarter. Our Q3 performance brings our year-to-date comp to a 10% or plus 12.3% on a 2-year basis. We're seeing positive sales increases across all store volume groups and geographies as well as across all product categories, underscoring the breadth of the top line improvement across the business. Plus, I am pleased to report that our holiday is off to a good start, and our strong 2-year stack sales momentum has accelerated into the fourth quarter where we are poised to generate our sixth consecutive quarter of year-over-year growth. Gross margin rate in Q3 was consistent with the operating plan expectations and year-to-date 2025 performance. Our merchants have done a nice job of managing product cost while delivering amazing prices in the ever-changing landscape of tariffs. Due to the macro disruptions, the off-price deal flow continues to be robust, which allows us to have confidence in continued margin performance in the foreseeable future. I should also note that we made a tactical decision to pull forward some of the product originally expected in early Q4 into late Q3, which created a purposeful shift of freight expense from Q4 to Q3 this year. And as noted in our press release, the prior year gross margin rate results in Q3 2024 were artificially high last year due to Q2 strategic inventory reset activity, actions that ultimately jump-started the company's top line turnaround last year. SG&A leveraged 130 basis points compared to last year, which includes the incremental funding of performance bonus program for our employees this year. We're making good strides in improving execution consistency in all areas of the business, which, in turn, is having a positive impact on expense control. Looking ahead, we're focused on efficient execution to enable us to continue to leverage expenses as we grow the top line. As a result, we achieved better than planned EBITDA in the quarter, giving us confidence in raising our EBITDA guidance for the year. Now turning to customer dynamics. Our turnaround is rooted in a clear, unwavering focus on the needs of our African-American customer, who is at the center of everything we do. As I mentioned on prior calls, I believe the primary reason for the quick turnaround in our business is our laser focus on the needs of our African-American customer and our highly differentiated competitive advantage of neighborhood-based locations. Our stores are embedded in communities that we've served for years in proximity combined with word-of-mouth serve as powerful traffic drivers. Citi Trends has built a truly differentiated competitive position in this high-performing off-price retail sector. We're really the only off-price retailer specifically focused on the African-American consumer, delivering styles, brands and trends at compelling prices that resonate with this underserved demographic. Our cultural relevance is a significant competitive advantage, African-American consumers are trendsetters and early adopters, and understanding this dynamic allows us to carry assortments with immediate appeal to our core customers. We also know that our customers are discerning. They understand that value is not just about price. They're willing to spend more when the style is for them, the fashion is on trend and the quality is right. Our consistent strong traffic and basket performance in the third quarter provides clear evidence, demonstrating the strength of our uniquely loyal, high-frequency customer base. We continue to strengthen this connection by elevating cultural relevance of our assortments and refreshing the shopping experience to better align with our brand voice. Our brand promise says it all: Styles that see you, prices that amaze you, and trends that tell your story. This holiday, we are launching and have launched the rebranded Citi Trends "Joy Looks Good on You" holiday campaign with updated social media presence under the @wearecititrends tagline. We've also implemented city bus wraps and shelter marketing in key markets to strengthen our local presence. All of this reflects a more refined, culturally relevant, modern brand voice. Looking forward to further enhance our customer relationships and drive deeper engagement, we're making strategic investments in our technology infrastructure, including the design and implementation of a new CRM and loyalty platform. This work will deepen our interaction with our most frequent customers and enhance long-term customer value. While we're in the early stages of this initiative, we're excited about the opportunity to create a more meaningful brand interaction with our best and most loyal consumers. Before diving into this quarter's product performance, let me briefly remind you of our 3-tiered product strategy. What's important to understand is that we're serving customers across all income levels and we have a significant portion of average and higher-income customers, which creates tremendous opportunity for our assortment of recognizable brands at exceptional prices that align with their style and trend preferences. At the opening price point, we offer value-focused basics through our Citi $core program for budget-conscious customers. The core of our business is our better tier, typically priced between $7 and $12, which offers broad selection of on-trend styles that drive loyalty and consistent performance across Women's, Men's, Kids, footwear and home categories. At the top end, we're expanding our best tier through 2 distinct approaches. First, trend-relevant fashionable styles priced well below specialty retail; and second, extreme value opportunities featuring well-known brands at steep discounts, often up to 75% off MSRP. We're targeting this extreme value segment to represent an incremental 10% of total sales as these branded treasures drive both traffic and basket growth while delivering strong margins. With this strategic framework in mind, now let me walk you through our Q3 product performance, which is broad-based and balanced in all categories. Strong results were driven by both apparel and nonapparel categories and all divisions posted increases. But first, I'd like to congratulate our Children's team on their strong double-digit growth in back-to-school and throughout the quarter. As our Children's team continues to improve style curation and product in-stocks, our customers continue to respond positively. Children's is a cornerstone of our business and a model of consistent execution this year. Equally, basic product for Kids, Men's and Women's had a strong quarter, driven by better styles and improved inventory position in store. Our Men's division had another strong quarter of growth, reflecting the team's work to increase trend for our younger male customer while also attending to the fashion sensibilities of our mature male consumer. We're excited about this more comprehensive approach to our male customer. And based on the positive initial customer reaction, we have significant growth ahead in this particular category. We also saw momentum in Women's footwear, which is an area we've been working to regain lost market share. There's still more work to be done in this category, but we're encouraged with Q3 results and customers' response to our branded product at extreme values. Looking ahead in product, we're focusing on strengthening our product offering in all categories. Our Creative Director has significantly raised the bar and is focused on curating trends to ensure our product is always trend right. From the opening price product to our best branded fashions, our merchant team is finding ways to elevate trends and styles at amazing prices. In Q4, we're repositioning the Men's store presentation to highlight increased emphasis on young Men's trend apparel while maintaining our core and classic portions of the assortment. We're in the early stages of repositioning our Women's area to better reflect the style, trend and sizing opportunity that we see for the business and plan to introduce an improved assortment to our customers in Q1 of next year. As I've mentioned before, we're continuing our focus on growing our anticipation classifications, which includes Big Men's, plus sizes and family footwear, all of which have significant upside potential in the future. Turning now to operations. As I've discussed in the past, our transformation is guided by a 3-phase framework designed to deliver sustainable, profitable growth. In the repair phase, we focused on restoring fundamental business practices to ensure a strong foundation for growth, including sharper clarity around our African-American consumer, our 3-tiered product assortment and implementation of AI-based allocation software to improve in-stocks, reduce markdowns and accelerate inventory turns. We are now firmly in the execute phase, focused on implementing best practices across all areas of the business to improve productivity and enable SG&A leverage. This includes increasing supply chain speed, reducing working capital costs and aligning our teams around KPIs and performance linked compensation to drive continuous improvement. From an operational standpoint, we made continued progress on these phased initiatives in the third quarter. I want to congratulate the entire team, specifically our senior leaders for improved business execution in Q3. One of the keys to our success was consistent execution of a detailed plan to emphasize tactical excellence to win the quarter. We continue to improve our inventory efficiency, supporting a 10.8% comp with overall 3% less inventory than the prior year. Due to speed improvements in our supply chain, we are also able to execute a 4.5% higher average in-store inventory. In the supply chain, improved work processes, productivity standards and day-to-day leadership enables us to efficiently reduce in-process inventory. This improved efficiency drives working capital optimization and provides flexibility and speed to react to sales trends while protecting gross margin. In the quarter, we finalized the implementation of our AI-based allocation system across all merchandise categories, and we remain pleased with the results. We're now turning our attention to an AI-based planning system to help streamline sales and inventory planning processes for our merchant teams. As I said before, retail is detail, and execution without measurement is just guesswork. Our use of KPIs and dashboards across all key functions provides the visibility that helps our teams stay on track and drive continual operational improvement, which is the core element of our execute phase strategy. Looking ahead, while we've made good operational progress. As I said earlier, we recognize a significant opportunity remains to improve execution in many areas of our business. As we advance through our execute phase and improve consistency, we expect continued SG&A leverage to enhance flow through of sales to profit. Now turning to our growth strategy. We remodeled 24 stores in the quarter, including 15 high-volume stores. Year-to-date, we've remodeled 62 locations and now have about 30% of our fleet in an updated format. These refreshed stores inspire our teams, elevate brand perception in the community and send a strong signal that we're investing in local neighborhoods. In the third quarter, we opened 3 new stores in Jacksonville, Florida; Columbia, South Carolina; and Bainbridge, Georgia, bringing our store count to 593 locations across 33 states. In addition, we remodeled 5 stores in Columbia, South Carolina and 4 stores in Jacksonville, Florida. And in support of these new stores and remodels, we added local marketing, which included wrapping city buses with the Citi Trends brand message. These openings are part of our pilot market backfill approach, which we are opening new stores in conjunction with remodeling existing locations to increase market share by strengthening our store presence and reinvigorating our brand. In the first few weeks of business, the new stores and markets have responded above expectations. I look forward to giving you a more thorough update on our next call after we have a full holiday season of results in these markets. These market investment tests will inform our approach as we accelerate growth in 2026, when we plan to open about 25 new stores, followed by at least 40 stores per year in 2027 and onward. This expansion strategy will take our store count to around 650 stores by the end of 2027, focusing on backfilling existing markets where our brand awareness and performance are proven while selectively entering new markets with strong demographic alignment to our customer base. Our positioning of Citi Trends for strategic new store growth is guided by a disciplined data approach. Our new store expansion combines advanced AI-driven analytics, local market expertise and strict financial criteria. Using AI tools, we have analyzed 3 years of actual transaction data from every store location, combined with comprehensive geolocation studies to understand the specific market characteristics that drive our success. This data-driven approach has demonstrated about 90% accuracy in predicting sales, helping us identify and replicate our most successful store profiles while minimizing risk. We're applying disciplined financial hurdles to every new store decision, targeting mature store averages of about $1.5 million and mid-teens 4-wall contribution. Looking ahead, we continue remodeling about 50 stores per year as a part of our ongoing fleet maintenance and market investment strategies. This disciplined approach allows us to progressively upgrade our store base while achieving planned returns on invested capital and positioning us to expand intelligently while -- excuse me, while maximizing return on investment. Longer-term growth in early October, we had a chance to share our multiyear growth plan at an investor conference. The presentation we shared is available on our Investor Relations website. But I do want to take a minute just to review some of the key objectives of our long-range plan. The first objective is to grow sales to $900 million or more in fiscal 2027 with consistent comp store sales growth plus the addition of about 25 new stores in fiscal 2026 and 40 stores in 2027. We plan to achieve a gross profit rate of 42%, a 400 basis point expansion compared to fiscal 2024, and we plan to leverage expenses by 200 basis points to a rate of approximately 37% or less. Resulting EBITDA is expected to be $45 million or more in fiscal 2027, a $60 million improvement to 2024 and an EBITDA margin rate of approximately 5%. These are not distant goals. They're achievable outcomes driven by the actions we are actively executing to drive the turnaround of this important business and with our fiscal 2025 results to date. I think it's fair to say that we're off to a pretty good start. With that, I'd like to turn the call over to Heather to discuss our financial performance for the quarter in more detail and our outlook for the fourth quarter. I'll return after Heather for some closing remarks. Heather? Heather Plutino: Thank you, Ken, and good morning, everyone. I'm pleased to walk you through the details of our third quarter performance, which demonstrates once again the consistency and effectiveness of our transformation strategy. That clear strategy plus the foundational improvements made to date have created remarkable momentum across the business, and we are delivering measurable progress across key operational metrics. Starting with the top line, Q3 total sales were $197.1 million, up 10.1% compared to Q3 2024. Comparable store sales increased 10.8%, 16.5% on a 2-year stack basis. Ken said this already, but it's so good it warrants repeating, our Q3 performance marks our fifth consecutive quarter and 15th straight month of strong comp growth, a remarkable feat, particularly in the current retail environment. We delivered strong comps in each month of the quarter and saw consistent year-over-year growth in both traffic and basket as our revised merchandise assortment, including off-price deals and more branded extreme value product continues to resonate strongly with our customers, enabling us to gain market share. We also saw positive results across all climate zones across all store volume groups and across all product categories, demonstrating the broad-based nature of our improving results. Third quarter gross margin was 38.9%. While 90 basis points lower than Q3 2024, these results were in line with our expectations. Recall that in the second quarter of last year, we incurred significant markdowns from our strategic inventory reset, allowing us to exit aged and slow-moving products while freeing up open-to-buy for our revised product strategy to fuel our top line growth. As a result, markdowns and shrink in Q3 of last year were unnaturally low, creating an unfavorable comparison for the current year period. As Ken mentioned, early in the third quarter, we decided to shift inventory and related freight expense from Q4 into Q3 to better manage freight flow for the distribution centers. Doing so drove additional freight expense in Q3, about a 40 basis point impact to margin rate while accomplishing the smoothing we wanted to achieve, protecting the holiday and delighting our customers with earlier access to holiday goods. Importantly, product margin was consistent with the results from the first half of the year due to the hard work of our merchant teams, as Ken remarked on earlier. Third quarter adjusted SG&A expense totaled $79.5 million compared to $74.6 million in the prior year period. The increase to last year was driven by $3.2 million of higher incentive compensation accrual and store and DC expenses to process higher sales. As we've shared in previous calls, we reinstated an incentive compensation accrual at the beginning of this fiscal year after incurring very minimal related expense in fiscal 2024, causing the bonus to no bonus comparison again in the third quarter. In addition, due to improved expected financial results for the year, we set the bonus accrual to the max payout, driving a catch-up accrual in the third quarter. On a rate basis, Q3 adjusted SG&A was 40.4%, 130 basis points lower than last year. Adjusted EBITDA for the quarter was a loss of $2.9 million, in line with management expectations and better than a loss of $3.3 million a year ago. Before turning to the balance sheet, let me provide a few details on our performance through the first 9 months of fiscal 2025. Comparable store sales for the first 9 months increased 10% with a 2-year comp stack of 12.3%. Comps were driven by a 6% increase in transactions. This is a metric we're most proud of as it is evidence that our loyal customers are responding positively to the changes we've made in our assortment strategy and to the in-store experience. Adjusted 9-month EBITDA was a loss of $0.1 million, an increase of more than $21 million to last year. EBITDA growth was driven by more than $47 million in incremental sales, 290 basis point margin rate expansion and 100 basis points of SG&A leverage, so improvement across the board. Now turning to the balance sheet. Total inventory dollars at quarter end decreased 3.1% compared to last year with average in-store inventory up 4.5% as we strategically positioned ourselves for holiday sales, including the pull forward of inventory receipts from Q4 into Q3. As Ken mentioned, our success in driving double-digit sales increases with a modest increase in in-store inventory reflects our work to improve inventory efficiency through higher turns and improvements in supply chain speed. As we enter the important Q4 holiday selling season, we remain pleased with our inventory level, composition and freshness. At the end of the third quarter, we remained in a healthy financial position with a strong balance sheet, including no debt, no drawings on our $75 million revolver and $51 million in cash. This financial strength continues to give us the flexibility to invest in our growth initiatives while ensuring operational stability throughout our transformation. Now turning to our fiscal 2025 outlook. Based on our results through the third quarter and our confidence that the effectiveness of our turnaround plan will continue through the fourth quarter, we are pleased to update our outlook for 2025 as follows. With sales momentum of the first 9 months of the year continuing into early Q4, we now expect full year comp store sales growth of high single digits at the high end of our previous outlook. We now expect full year gross margin expansion of approximately 230 basis points versus 2024, also at the high end of previous outlook due to continued progress on inventory efficiency and planned supply chain improvements. 2025 SG&A is expected to leverage approximately 90 basis points versus last year, reflecting continued expense control. Once again, this is at the high end of our previous outlook of 60 to 90 basis points leverage versus '24. With these updates, we now expect full year EBITDA to be in the range of $10 million to $12 million, an increase to the $7 million to $11 million range in prior guidance. The revised guidance is $24 million to $26 million above fiscal 2024 results. There is no change to our expected effective tax rate of approximately 0% for the year. For the year, we will open 3 new stores and will remodel 62 locations. Both of these targets have been achieved as of the end of the third quarter. In addition, we are planning to close 4 stores in the fiscal year, just above our previous guidance of 3 closures. And finally, full year capital expenditures are now expected to be approximately $23 million, at the lower end of our previous outlook of $22 million to $25 million. While we don't provide quarterly guidance, given where we are in the fiscal year, we want to offer our thoughts on our expectations for the fourth quarter. Q4 comps are expected to be up high single digits with a 2-year stack in the mid-teens. Q4 gross margin is expected to be in the range of 40% to 41%, up to prior year. SG&A is expected to be approximately $82 million, and Q4 EBITDA is expected to be in the range of $10 million to $12 million. Before I turn the call back to Ken, I want to emphasize that our third quarter results reflect more than just 3 months of strong execution. They demonstrate the durability of our business model, the effectiveness of our strategic initiatives and most importantly, are a continuation of the improvement we've achieved across the last several quarters. As we look towards the fourth quarter and into fiscal 2026, we remain committed to our disciplined approach while maintaining the flexibility that has served us well throughout this transformation. The foundation we've built gives us confidence in our ability to deliver sustainable, profitable growth while continuing to create shareholder value. I'm excited about the opportunities ahead as we continue to execute against our strategic plan. With that, I'll turn the call back to Ken. Ken? Kenneth Seipel: Thank you, Heather. Before I turn the call back to the operator to facilitate Q&A, I do want to emphasize that the transformation of Citi Trends is well underway. We remain guided by our 3-phase framework to deliver -- designed to deliver sustainable profit growth. The first phase, repair, is about restoring fundamentals and establishing a strong foundation for growth. The second phase, execute, focuses on hardening consistent best practices to drive reliable, predictable performance. And the final phase, optimize, leverages the work of the first 2 phases to accelerate our EBITDA growth. As a result of our efforts, in the first 2 phases of this transformation, we've made meaningful improvements, including an improved product assortment strategy, a better in-store stopping in-store shopping experience for our customer and improvements in many processes and systems. Our 5 consecutive quarters of comp store growth is a proof point that our strategy is working, our execution is getting better, and our customer connection is stronger than ever as we firmly establish ourselves as a leading off-price retailer for our customers. While we're proud of our results so far, we fully recognize there is significant opportunity ahead. I want to emphasize that we're in early stages of this transformation. There's still work to do, processes to refine, categories to optimize and systems to build, but the path forward is clear. We are confident in our ability to deliver continued transformation, drive shareholder value and expand our role as the leading neighborhood retailer for African American families. I want to thank the entire Citi Trends team for executing with discipline, driving quickly towards our stated goals and most of all, for delivering results. The team is doing the hard day-to-day work to unlock sustainable growth and shareholder value, and we are just getting started. Thank you, everyone. And now I'd like to turn it over to the operator for questions. Operator: [Operator Instructions] then return to the queue. Our first question is coming from Michael Baker from D.A. Davidson. Michael Baker: Great. Great quarter. So if I think about the 2-year plan to get to about $900 million, it probably implies another $85 million or so in sales growth in '26 and '27. You talked a lot about some merchandising opportunities and categories. But a little bit more detail on where are the biggest holes or opportunities in your merchandising right now, either by product category or buy good, better, best or however you want to articulate, where does that -- those incremental sales come from? Kenneth Seipel: Yes, for sure, Mike. Thanks. We, as I mentioned in the script, we are seeing broad-based growth throughout all the categories. And so at the top level for all categories, we've really sharpened our focus on better trend product. And we have seen good reaction to that this year and continued reaction. I mentioned briefly that we have just implemented a young Men's category, that's actually just setting in the stores right now. We're seeing good reaction to that. And as we begin to understand a little bit more about that dynamic, there's significant opportunity there. Equally across the aisle in our Women's category, we've always had a pretty strong juniors business, but we recognize that there's a missing component of that as well as plus sizes that needs to be fully matured. And then on top of that, overlay trend product and those categories as well. And so that's a little bit of a new business for us relative to those 2 categories getting reset. And then across the fleet. We're just getting -- going in shoes in our footwear category. The team, as I remarked, had a pretty good Q3 in Women's. We're off to a good start there. But we have significant opportunity, multiple millions of dollars of opportunity to grow our shoe business back to even, say, historical levels, let alone to catch up to where we are in the overall store. So there's significant opportunity there. And then I would highlight, and I don't mean to make this so broad based, but it really truly is how we're looking at it. In Kids, for example, as we continue to build that business, it gets stronger and stronger and stronger. We've been executing quite well in Kids. But as we continue to invest in inventory, we see it grow. So there's areas throughout the store that we see that they just offer tremendous opportunities for growth. And then I guess I'll put the punchline for all this. The other piece of it. Don't forget that we have the extreme value opportunity. And we're doing a fairly small percentage of our business and extreme value right now. It's working quite well, and we see significant growth there. All of that actually totals up to, in my mind, a very obtainable $900 million. Michael Baker: Great. If I could ask a follow-up, I suppose, by virtue of the 10.8% comp, your trends are probably consistent throughout the month. You talked about consistency by product category and store cohort. Can you talk about the pace through the quarter? And if there was any impact from the government shutdown, SNAP, anything during those few weeks? Kenneth Seipel: Yes. I'll make some high-level comments, and then Heather can fill in any of the specifics here. But the good news about our consumer right now, they've shown remarkable resiliency with all of the macro changes around government SNAP and different programs like that. And candidly, we've really seen no major impact as the shopping patterns have remained consistent throughout the quarter. As I mentioned, we got off to a really good start in August. August was tremendous for us, led by our Kids division. All divisions did well, but Kids really had a tremendous back-to-school period. And then I was really pleased with how we finished the quarter. October, particularly the last 3 weeks of October really accelerated quite well. I mentioned in the script that we advanced some of our freight from Q4 into Q3. When that hit our stores, we actually saw a really strong consumer reaction. Heather Plutino: Yes. Mike, the only thing I would add to that is that it was a pretty tight band. It looks a little bit like a barbell, stronger in the beginning, first month, third month, middle month was a little softer, but the range is like 9.5% to 12%. So it's not like a severe dip in the middle, or severe spike. So yes, pretty consistent. Operator: Next question today is coming from Jeremy Hamblin from Craig-Hallum. Jeremy Hamblin: Congrats on the impressive results. I wanted to just come back to the point, Ken, that you were making on some of these extreme value deals, which we saw some of those drop towards the end of the quarter, some notable deals with products like UGG, HOKA, Timberland brands, Jordan brand, et cetera. And that did seem to be a big driver of your strong traffic. But where are you in terms of extreme value as kind of a portion of the product inventory and sales today? And I think you mentioned that you're expecting over the next couple of years to get that up to about 10%. How do you expect that to progress over time? And what type of visibility do you have on continuing to drive deal flow across kind of major name brands? Kenneth Seipel: Yes. Good. Thanks, Jeremy. I appreciate it. A couple of things in our current status, extreme value deal flow, as I mentioned, continues to be very robust for the team. And we're being pretty discerning about what's being brought into the business right now. Many -- I guess we probably passed on a 3:1 ratio of adoption of deals that come across the desk, maybe even more. And as a result of that, the current sales performance of extreme value deals is probably in the 2% to 3% of business range, and that I'll just give you a broad range right now. It varies a little bit by category. And back to your point, we've seen a path to getting that closer to 10% as we continue to mature. So there's a significant opportunity there. And we're learning a lot as we're bringing some of these deals in. Many of them have really responded much better than anticipated. If you have been a little bit slower than anticipated, a lot of it has to do with consumer acceptance and reaction of it. But as we're getting better and understanding how to do extreme value deals, particularly with our supply chain processing, we see that, and I believe that remains to be a competitive weapon for us going forward. Jeremy Hamblin: And then switching gears here to talking about the store fleet. And as you are rolling out stores for '26 and seeing a nice uptick in your unit growth, what do you expect the cadence of openings to be in '26? And then you mentioned 2027, is that going to be kind of consistent in terms of store openings now that you've got visibility on the number of units that you're planning to open? Kenneth Seipel: Yes. I'll give you a little bit of color on the process going forward into 2027. Our real estate team right now is working on a number of deals in the pipeline. And our goal will be, going forward, to open up our stores really at 3 distinct times of the year. We'll be opening up stores in early spring, going into the spring period, the [indiscernible] season. We'll be opening up stores in July, going into back-to-school. And we'll open up a group of stores in October going into holiday. And so I would expect that, that fleet going forward, the 40 stores that I mentioned earlier, you can probably divide that equally by 3 into those time frames and probably have a really good view of how we're looking at the business from our side. In 2026, we'll have lighter openings in the spring. We're just getting caught up there. Most of those openings will be more in July and August, probably equally split there -- or excuse me, July and October, equally split between those 2 months, to give you an idea as we get caught up and get this engine moving forward in new store growth. Jeremy Hamblin: Great. And then just one more for me. I know that you've got a lot of initiatives that are going on, a lot of technology initiatives. But I wanted to ask about your shrink mitigation efforts. I know this is something that you've been working on very diligently. And I think you had a pretty decent gap to close of where you wanted to get that, too. But any color you can share on the progress, on those efforts? What the impact is to your gross margin? And what do you expect to pick up from that kind of in 2026? Heather Plutino: Jeremy, I'm going to grab that one. So we've rolled out new camera systems in about 1/3 of our stores in 2025. And these new camera systems not only provide what you would expect visibility into the store, but they're AI-capable and allow for our loss prevention team to use facial recognition, which you can imagine is helpful not only to protect our stores, but to engage with local law enforcement and to help the community, not just our Citi Trends stores. So we're excited about that. Those cameras also have, outside of loss prevention and shrink prevention, they have heat mapping capability, which will help us understand customer shopping patterns and they have traffic counting capability, which obviously is an important component as well. So we're excited about that. We're going to roll out to more than 2x that number of stores into 2026, so that we can leverage that very, very quickly. You and I talked about this before, but our break rate in 2025, it still remains what I understand to be in line with averages for retail. So we're not satisfied yet. And that means that it's less than 1.5% of sales, right? So still higher than we want it to be, less worried about the rate than I am about the dollars. I think we still have a few million to give back to the company on shrink mitigation over time. Now as I look at 2026, our plan assumes a decrease in both dollars and rate in 2026 based on technology, based on talent. We are upgrading and updating our talent in our loss prevention teams. And based on processes, we are training regularly our store management teams and our district managers on shrink mitigation. So all of that comes together to say that we expected a decrease in 2026 and a further decrease in 2027. Jeremy Hamblin: Fantastic. Last one for me. So you also noted the implementation of technology, improving CRM. Can you elaborate at all in terms of how you plan to use that as the company continues to gravitate to using a bit more digital marketing efforts. Are there -- is there a thought around kind of loyalty program that you're leaning into? But any more color you might be able to share on kind of the timing of when the CRM update is happening and what you expect the outcome to be from that? Kenneth Seipel: Yes, for sure, Jeremy. We are in the process, as I mentioned, of really getting it out and testing and developing the systems and the processes that go along with that. Our goal will be to launch a CRM in Q1 of this next year. And we don't have an exact date yet. We're still trying to pin down some stuff on the technology and its readiness and so forth. But think about a Phase 1 implementation in Q1. And then there will be a Phase 2 implementation in the fall of 2026. The way I want you to think about CRM and loyalty for our business is we're actually going to be calling it "The Insider's Club." We'll have a much better title I'm sure by the time we get to it. And it's effectively going to be a way for our customers to tap into emerging trends and deals. You think about the value of being a part of our loyalty club and being one of the first ones to know about some of these amazing extreme value deals that are coming down the pipeline. We have the ability to notify our best customers. They can kind of come in and shop first, invest, and be kind of in the know, if you will, around emerging deals that are coming to the store. We believe that there will be a significant interest in that. And that actually has the ability then to drive incremental traffic with some of our best and most loyal consumers. And beyond that, we're also trying to build in additional tools to make the shopping experience easier for our best customers. As an example, one of the things that they'll gain is actually the ability to have electronic receipts. And so quickly, they can have that stored and be on their phone and eventually we'll have an app on there that they can just simply access that had also a layaway programs and things of that nature will have digital access. So the goal here is to make it in Insider's Club, and then to find ways to make the shopping experience a little bit easier and more convenient for our consumer. And then as you mentioned, the intangible value for us is we're going to have a pretty significant database of consumers that are highly engaged that we can speak to with regularity via these marketing ideas. Operator: We reached the end of our question-and-answer session. I'd like to turn the floor back over for your further closing comments. Kenneth Seipel: I'd like to thank everybody for attending today's call. We look forward to talking to you next quarter. Operator: Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator: Greetings. Welcome to the Aehr Test Systems Fiscal 2026 Second Quarter Financial Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Jim Byers of PondelWilkinson, Investor Relations. You may begin. Jim Byers: Thank you, operator. Good afternoon, and welcome to Aehr Test Systems Second Quarter Fiscal 2026 Financial Results Conference Call. With me on today's call are Aehr Test Systems' President and Chief Executive Officer, Gayn Erickson; and Chief Financial Officer, Chris Siu. Before I turn the call over to Gayn and Chris, I'd like to cover a few quick items. This afternoon, right after market closed, Aehr Test issued a press release announcing its second quarter fiscal 2026 results. The release is available on the company's website at aehr.com. This call is being broadcast live over the Internet for all interested parties, and the webcast will be archived on the Investor Relations page of the company's website. I'd like to remind everyone that on today's call, management will be making forward-looking statements that are based on current information and estimates and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These factors are discussed in the company's most recent periodic and current reports filed with the SEC. These forward-looking statements, including guidance provided during today's call, are only valid as of this date, and Aehr Test Systems undertakes no obligation to update the forward-looking statements. Now with that, I'd like to turn the conference call over to Gayn Erickson, President and CEO. Gayn Erickson: Thanks, Jim. Good afternoon, everyone, and welcome to our second quarter fiscal '26 earnings conference call. I'll begin with an update on the key markets we're targeting for semiconductor test and burn-in with a particular focus on the common growth drivers we're seeing across these markets, which is namely the massive explosion of AI and data center infrastructure. After that, Chris will walk through our financial performance for the quarter, and then we'll open up the call for questions. While second quarter revenue was softer than anticipated, we made significant progress in both wafer-level burn-in and packaged-part burn-in segments and are very excited about our prospects moving forward. Based on customer forecasts recently provided to Aehr, we believe our bookings in the second half of this fiscal year will be between $60 million and $80 million, which would set the stage for a very strong fiscal '27 that begins on May 30. During the quarter, we made substantial progress with wafer-level burn-in engagements and production installations across AI processors, flash memory, silicon photonics, gallium nitride and hard disk drives. We're encouraged to see that one of our key growth strategies focused on reliability solutions for the exploding demand for AI and data center infrastructure is beginning to bear fruit. In packaged-part burn-in, we secured key new device wins for our Sonoma system supporting high-temperature operating life qualifications for AI devices. These wins are expected to drive additional capacity at test houses, including at least one customer that has elected to move into production in late calendar '26, which we believe could result in meaningful volumes of Sonoma production systems. In addition, in the last month, we received a very large forecast from our lead Sonoma production customer for AI ASIC production capacity. This forecast is expected to drive very strong and potentially record bookings for the company this fiscal year and position us well for significant revenue growth next fiscal year with their requested shipments starting in the first fiscal quarter of our next fiscal year. Taken together, our increased visibility across multiple end markets gives us great confidence in our outlook. As a result, we're reinstating financial guidance in fiscal '26, which we'll touch on later in today's call. Now let's talk about our key segments. Starting with our wafer-level burn-in during the quarter, we expanded engagements and completed additional production installations across several end markets. Our lead AI wafer-level burn-in customer continues development of its next-generation processor and is currently discussing additional capacity with us. They're forecasting additional system and WaferPak capacity orders this fiscal year and plan to transition to our fully integrated automated WaferPak aligner for 300-millimeter wafers. We expect this customer to continue scaling and excited to support their growth. We also announced a strategic expansion of our partnership with ISE Labs during the quarter to deliver advanced wafer-level test and burn-in services for next-generation high-performance computing and AI applications. This partnership accelerates time to market, improves performance and gives customers the option of either packaged-part or wafer-level test and burn-in for their production volumes. ISE, together with its parent company, ASE, represents the world's leading outsourced semiconductor assembly and test or OSAT platform, serving a global roster of top-tier semiconductor customers. As part of our benchmark evaluation program with a top-tier AI processor supplier we announced last quarter, we completed development of our new fine-pitch WaferPaks for wafer-level burn-in of high-current AI processors. These are currently in test with this potential customer's processors and are designed to validate our FOX-XP production systems for wafer-level burn-in and functional test of their high-performance, high-power AI processors. We're currently completing start-up procedures such as power-up sequencing, thermal profiling, test vectors, timing and high-speed differential clocks and expect to complete data collection this quarter. While we're demonstrating our new fine-pitch high-current WaferPaks for this benchmark, many customers can utilize lower-cost WaferPak designs if certain design for test rules are incorporated upfront. These approaches reduce cost and lead time and are especially attractive to customers focused on faster time to market for wafer-level high-temp operating life qualification. We also have 2 additional AI processor companies planning wafer-level benchmark evaluations since last quarter's earnings call. These benchmarks typically take about 6 months, and we expect to make meaningful progress beginning this quarter. Both customers are evaluating wafer-level test and burn-in as an alternative to packaged-part or system-level test for large advanced AI modules that combine multiple AI accelerators and stacked high-bandwidth memory. Moving burn-in upstream to the wafer-level significantly reduces cost and yield risk by avoiding scrapping expensive substrates and memory stacks when early failures occur later in the process. We have seen estimates that show the cost of the substrate is more than a single processor and the cost of the high-bandwidth memory is even higher. Turning to flash memory. We completed our wafer-level benchmark with a global leader in NAND flash just prior to the holidays. The customer has now taken the wafers back for further processing to validate correlation with their internal process. This benchmark demonstrated our ability to test flash memory wafers with significantly higher parallelism and power than is possible using traditional probers and group probers from companies such as TEL or ACCRETECH. We've also proposed a next-generation solution enabling test of a new emerging flash memory device called High Bandwidth Flash or HBF, designed for AI workloads. This proposed solution leverages our FOX-XP platform, WaferPaks and auto-aligner technology and would support single touchdown high-power test on 300-millimeter wafers. While development of this system would take over a year following customer commitment, we believe this represents a compelling entry point into a large and evolving memory market. We look forward to sharing more details as this progresses. Turning to silicon photonics. We believe that silicon photonics is used -- we believe that silicon photonics used in data center and also chip-to-chip I/O is going to be a significant market driving production burn-in capacity for our FOX wafer-level burn-in systems and WaferPaks. Our lead customer has now firmed up its production ramp, which we expect to begin early next fiscal year. While this timing is later than previously expected, it aligns with recently announced AI processor platforms and positions us well for calendar 2026 orders and deliveries in fiscal '27. We've also finalized a forecast with another major silicon photonics customer initially targeting data center applications with a road map toward optical I/O. We expect to book their initial turnkey FOX system soon with delivery planned for May of this year. In gallium nitride power semiconductors, we continue to support our lead production customer, though we experienced delays related to unanticipated high-voltage fault conditions that required WaferPaks and protection circuit redesigns. This delayed approximately $2 million in WaferPak shipments from last quarter into this quarter, along with some in-system -- along with some system enhancements. Shipments have now resumed and lessons learned have significantly strengthened our GaN power supply burn-in capability. If anyone tells you that testing and burning-in full wafers of GaN power semiconductors with up to 600 volts or more is easy, don't listen to them. We also continue to engage with multiple new potential GaN customers and are developing WaferPaks for several new device designs that are expected to go to high-volume production for applications like data center infrastructure and power delivery, automotive electrical power distribution on both ICE and hybrid electric vehicles and even power semiconductors used for electrical breakers. Aehr has a unique solution that can deliver full turnkey, fully automated wafer handling and probing for test and burn-in of GaN wafers in sizes from 6 to 8 inches and even 12 inches or 300-millimeter wafers. Turning to silicon carbide. As we previously discussed, silicon carbide demand has been weighed toward the end of this fiscal year. Customers continue to be optimistic about this market and their capacity needs. But we've tried to take a very conservative stance that is mostly show us the orders before we believe them. Our lead customer recently transitioned from 150 millimeters to 200-millimeter wafers, nearly doubling output without adding new FOX-XP systems and supported by Aehr's proprietary WaferPaks that we developed to accommodate both 150 and 200-millimeter wafers contacting 100% of the die on each in a single touchdown. They're now seeing additional needs for WaferPaks this year, but additional capacity for systems appears to be a year out. We pushed out expected orders until next fiscal year from our near-term forecast, but have capacity of systems or WaferPaks to continue to support their surge capacity needs as well as our other silicon carbide customers. While electric vehicle-related demand has slowed industry-wide, we remain well positioned with the most competitive wafer-level burn-in solution available, and we expect to benefit when growth resumes. In semiconductors used in data center hard disk drives, we're installing the additional FOX-CP systems for a major supplier of hard disk drives for wafer-level burn-in of their special components in their drives. They've indicated plans for additional purchases later this calendar year. While their device unit volumes are very large, the overall revenue opportunity remains modest due to short stress times and the massive parallelism achieved on our FOX-CP system and proprietary high-power WaferPak wafer contactors. Now let me talk about packaged-part burn-in. We're seeing continued momentum in packaged-part qualification and production burn-in for AI processors, driving growth in our new Sonoma ultra-high-power packaged-part burn-in systems and consumables. As we announced today in a separate press release, during our fiscal third quarter to date, we have received orders from multiple customers totaling more than $5.5 million for our Sonoma ultra-high-power packaged-part burn-in systems, including initial orders from a premier Silicon Valley test lab for our newly introduced higher-power configured Sonoma system that can also support full automation. These orders already exceed the total Sonoma orders for the entire second quarter, highlighting the accelerating demand we're seeing for our package-level burn-in of high-powered AI and compute devices. This quarter, we also secured key new device wins on the Sonoma platform for high-temp operating life qualification. These wins are expected to drive additional capacity at test houses, with at least one customer planning to transition to production later this calendar year, generating significant system demand. Our lead packaged-part burn-in production customer for AI processors continues to ramp and is forecasting substantial growth in 2026 and beyond. Although we have not yet received the purchase order, we have received a substantial forecast from this customer for AI ASIC production capacity with requested Sonoma production, packaged-part burn-in system and BIM shipments beginning in the fiscal first quarter of '27. That starts May 30, which we expect to contribute to very strong bookings in fiscal '26 and generate significant revenue growth in fiscal '27. This customer also plans to introduce much higher power ASICs later this year for which we are already developing the high-temp operating life qualification burn-in modules and sockets to be used on the Sonoma systems at one of the premier Silicon Valley test services companies that have many systems installed. This AI accelerator ASIC processor is also forecasted to go to production burn-in and drive even higher volume needs for production burn-in systems downstream at the OSATs in Asia. We feel we're very well positioned with our Sonoma system for this production capacity need and believe this could drive very substantial volumes of Sonoma systems in our next fiscal year. During the quarter, we completed development of a next-generation fully automated higher-power Sonoma system, supporting up to 2,000 watts per device. This system enables continuous flow operation, improved throughput and seamless transition from qualification to high-volume production using the same fixtures and sockets. These capabilities enable customers who are focused on high-temp operating life reliability testing to have a system that is fully software and hardware compatible with the Sonoma systems they have installed, which simplifies and accelerates time to market that is critical for HTOL testing of new AI processors. This Sonoma burn-in system can also simply bolt on a fully automated handler developed and sold by Aehr Test as a turnkey solution to allow hands-free operation with less than a couple of minutes of overhead per burn-in cycle, which is amazing for production burn-in needs. We're also seeing increased demand for our lower-power Echo and Tahoe packaged-part burn-in systems, driven by our installed base of more than 100 systems across over 20 semiconductor companies worldwide. But I'll wait for another call to discuss these systems and the markets they serve in more detail. As stated last quarter, the rapid advancement of generative AI and the accelerating electrification of transportation and global infrastructure represent 2 of the most significant macro trends impacting the semiconductor industry today. These transformative forces are driving enormous growth in semiconductor demand while fundamentally increasing the performance, reliability, safety and security requirements of the devices used across computing and data infrastructure, telecommunications networks, hard disk drive and solid-state storage solutions, electric vehicles, charging systems and renewable energy generation. All these -- as these applications operate at ever higher power levels and an increasingly mission-critical environments, the need for comprehensive test and burn-in has become more essential than ever. Semiconductor manufacturers are turning to advanced wafer-level and package-level burn-in systems to screen for early life failures, validate long-term reliability and ensure consistent performance under extreme electrical and thermal stress conditions. This growing emphasis on reliability testing reflects a fundamental shift in the industry from simply achieving functionality to guaranteeing dependable operation throughout a product's lifetime. A requirement that continues to expand alongside the scale and complexity of next-generation semiconductor devices. This year, we're making significant progress expanding into additional key markets for our semiconductor test and burn-in solutions, including AI processors, gallium nitride power semiconductors, data storage devices, silicon photonics integrated circuits and flash memory. This diversification of our markets and customers is significant given our revenue concentration in silicon carbide for electric vehicles the last 2 years. This progress and key initiatives expands our total addressable market, diversifies our customer base and provides us with new products, capabilities and capacity, all aimed at driving revenue growth and increasing profitability. The progress we made this quarter with a significant number of customer engagements and production installations provides improved visibility into future demand. As a result, we're reinstating guidance for the second half of fiscal '26. For the second half of fiscal '26, which began November 29, '25 and ends this May 29, '26, Aehr expects revenue between $25 million and $30 million. As stated earlier, although we're not providing formal bookings guidance, based on customer forecast recently provided to Aehr, we believe our bookings in the second half of this fiscal year will be much higher than revenue between $60 million and $80 million in bookings, which would set the stage for a very strong fiscal '27 that begins on May 30, 2026. With that, let me turn it over to Chris, and then we'll open up the lines for questions. Chris Siu: Thank you, Gayn, and good afternoon, everyone. I'll begin with bookings and backlog, then walk through our second quarter financial performance, cash position, outlook and investor activity. The company recognized bookings of $6.2 million in the second quarter of fiscal 2026 compared to $11.4 million in the first quarter. At the end of the quarter, our backlog was $11.8 million. Importantly, during the first 6 weeks of the third quarter, we received an additional $6.5 million in bookings. This increase was driven primarily by an order from a premier Silicon Valley test lab for our newly introduced high-power configured Sonoma system, which we announced this afternoon. Including these recent bookings, our effective backlog has now grown to $18.3 million, providing increased visibility as we move through the remainder of fiscal 2026. Turning to our second quarter results. Revenue was $9.9 million, down 27% from $13.5 million in prior year period. The decline was primarily driven by lower shipments of WaferPaks, partially offset by stronger demand for our Sonoma systems from our hyperscaler customer. Contactor revenues, which include WaferPaks for our wafer-level burn-in business and BIMs and BIBs for our packaged-part burn-in business totaled $3.4 million, representing 35% of total revenue. This compares to $8.6 million or 64% of revenue in the second quarter last year. Non-GAAP gross margin for the second quarter was 29.8% compared to -- with 45.3% a year ago. The year-over-year decline reflects lower overall sales volume and a less favorable product mix as last year's quarter included a higher proportion of higher-margin WaferPak revenue. Non-GAAP operating expenses in the second quarter were $5.7 million, down 4% from $5.9 million in Q2 last year. The decrease was primarily due to lower personnel-related expenses, which were partially offset by a high research and development costs, including high project spending as we continue to invest resources in AI benchmark initiatives and memory-related programs. As previously announced, we successfully closed the Incal facility on May 30, 2025, and completed the consolidation of personnel and manufacturing into Aehr's Fremont facility at the end of fiscal 2025. During the quarter, we negotiated an early lease termination with the landlord, reducing our obligation by 5 months of rent. As a result, we recorded a reversal of $213,000 related to a previously accrued onetime restructuring charge. During the quarter, we recorded an income tax benefit of $1.2 million, resulting in an effective tax rate of 27.3%. Non-GAAP net loss for the quarter, which excludes the impact of stock-based compensation, acquisition-related adjustments and restructuring charges was $1.3 million or negative $0.04 per diluted share compared to net income of $0.7 million or $0.02 per diluted share in the second quarter of fiscal 2025. Turning to cash flow. We used $1.2 million in operating cash during the second quarter. We ended the quarter with $31 million in cash, cash equivalents and restricted cash, up from $24.7 million at the end of Q1. The increase was primarily due to proceeds from our at-the-market equity program. As a reminder, in the second quarter of fiscal 2025, we filed a new $100 million S-3 shelf-registration that was approved by the SEC for 3 years, followed by an ATM offering of up to $40 million. During the second quarter of fiscal 2026, we raised $10 million in gross proceeds through the sale of about 384,000 shares. At quarter end, $30 million remained available under the ATM. We intend to utilize the ATM selectively with a disciplined approach focused on market conditions and shareholder value. Looking ahead to the second half of fiscal 2026, which began on November 29, 2025, and ends on May 29, 2026, we expect total revenue between $25 million to $30 million and non-GAAP net loss per diluted share between negative $0.09 and negative $0.05 for the 6-month period. On the Investor Relations front, last month on December 17, 2025, Lake Street Capital initiated analyst research coverage on Aehr Test, along with equity research firm, Freedom Broker, which initiated coverage last June. There are now a total of 4 research firms covering the company. Lastly, looking at the Investor Relations calendar. We will meet with investors at the 28th Annual Needham Growth Conference in New York on Tuesday, January 13, and then return to New York in February for the 15th Annual Susquehanna Technology Conference on Thursday, February 26. We will also be participating virtually in the Oppenheimer Emerging Growth Conference on Tuesday, February 3. We hope to see you at these conferences. That concludes our prepared remarks. We're now happy to take your questions. Operator, please go ahead. Operator: [Operator Instructions] Our first question comes from Christian Schwab with Craig-Hallum. Christian Schwab: What wasn't clear to me exactly is on the booking strength -- potential booking strength of $60 million to $80 million in the second half of this fiscal year. Is that almost entirely on the AI accelerator processor line? Gayn Erickson: There's some silicon carbide, not much, like not very much at all. There is some silicon photonics for sure. But the bulk of it is across wafer-level and packaged-part burn-in for AI processors, yes. Christian Schwab: Okay. Perfect. And then given that such a material bookings from the AI processor market, can you give us any indication or idea? I know we've talked about the opportunity in that marketplace being bigger than silicon carbide. But let's narrow it down to kind of a multiyear time frame kind of including '27 and '28. Do you see that business after initial orders expanding meaningfully from there? Gayn Erickson: We do. We do. And we've been taking a pretty conservative stance on how large, particularly the AI and the wafer level side of it is. And I want -- conservative may not be fair. Candidly, we're still trying to get our arms around how big it is. What we get is visibility of a specific GPU or CPU or network processor or an ASIC. And then we hear these things from the customer and then we look externally and what are they telling the Street and try and correlate to those lookups. And I'd say pretty consistently, we hear bigger numbers from the customer than the Street. I'm not sure what that all means, okay? And then as they give us test time estimates of what the burn-in conditions are, we can start to put some numbers around it. But a single processor for some of these big guys at wafer-level burn-in is 20, 30 systems or so. And these are $4 million, $5 million machines. So you get a feel for the size of what that looks like. And the estimates of -- today, if you were to look at AI spend in test between test and burn-in, is it $8 billion, $10 billion to maybe $15 billion or so. I mean it's a really large number. So we don't want to get ahead of ourselves here. But when customers ask you things like how many can you make, right? So can the AI business be measured in hundreds of millions of dollars for Aehr Test a few years out? Yes. for sure. Now what's interesting is that we're in this -- I think it's an awesome position to be in because our -- the Sonoma system is a highly preferred system for HTOL, the high-temp operating life reliability testing for these AI processors. It has the largest installed base in all the test houses around the world. We're getting people that approach us because we are the -- we are like -- I don't want to say we're the de facto standard, that's probably bold, but we have more capacity than everybody else. And therefore, they are saying, you're kind of the go-to guy. I like those words. And so -- and we can build lots of them. So customers are using that, and we get a front row seat to actually bring them up. Then we say, "Oh, by the way, if you want, you can take this machine, add production handling to it and do production on it." In the meantime, if you come to our facility and you do a tour and you can see that production test cell for the Sonoma automation, we, of course, will walk you by a FOX wafer-level burn-in test cell and mention, "Oh, by the way, that happens to be doing a benchmark on a 300-millimeter wafer, we can't tell you who it is." And so they're like, well, what is that? So we are in a position to be able to talk about both of them. And the ASPs are actually higher on the wafer-level side of things. And -- but the value proposition way outweighs that because of the yield advantage of doing at wafer level. The yield savings [ dwarfs any of the ] costs or the cost to test the wafer-level burn-in. So as we get our arms around the market, the market data that would be out there would be packaged part because no one is doing wafer level except for us. And so we're creating our own models related to, okay, for that unit capacity, if you went to wafer-level burn-in, what would that look like? Kind of similar to what we had to go through in the original silicon carbide side of things of -- if the whole market -- and we're not seeing -- everybody including NVIDIA and Google and Microsoft and Tesla and these guys all went with us how big is that market? We haven't really tried to put our arms around that yet, but it's substantial. Christian Schwab: Great. And then I guess one last question, if I may, and follow up on your comment about capacity. How many systems do you think you're capable of manufacturing in a year for wafer level? Gayn Erickson: We have talked to customers about capacities exceeding 20 systems a month at either package or wafer level. If we had to, we could ship 20 systems a month of each during this calendar year. Now that's bigger than our forecast by a lot. But you know what, when people are saying, could you do something like this and intercept something, it's like if they gave you an order for 50 or 100 Sonomas, like how long is it going to take you to build them? Makes sense? Christian Schwab: Makes perfect sense. No other questions. Operator: The next question comes from Jed Dorsheimer with William Blair. Jonathan Dorsheimer: Yes, I guess maybe just to start, on the wafer level, I think your prior comments around the timing of the benchmark, it seems like that's taken a little bit longer. And I'm just wondering, is that a function of -- is it because it's new and what you're seeing is from the customer is that they're changing parameters that's extending that out? Because I think you had maybe talked about by February time frame, and we were almost... Gayn Erickson: Do you want me to throw my customer under the bus? Is that what you're trying to tell me, but... Jonathan Dorsheimer: No, no, no... Gayn Erickson: Let me answer that. No, I got it. I got it. No, that's totally fair, okay? What I do in all of these things is try to describe exactly what we feel, what we know, what we knew at the time. This -- one of the things that's very interesting and fun about this particular customer who is a very notable customer, okay? When they gave us, and I don't think I'm [ overstating, ] when they gave us the vectors, the test vectors, et cetera, they were giving it off of a platform from package level, okay? Package and wafer are different. We had a huge arm wrestle with them related to what they could actually do at wafer level and ultimately, we're able to demonstrate to them significant DFT, lower pin count modes, et cetera, to be able to do it at wafer level, which was a big deal because they never understood that because, of course, nobody has ever done this before with us, okay? I'll just leave it at this. They actually gave us some things that were implied based upon package that didn't really weren't totally applicable to wafer level, and we struggled with some of that. And it turns out -- so it actually did delay a little bit. I think they -- it's mutually understood. It's like, "Oh, sorry, that we were thinking in package, we forget about wafer and sort." And that's a growing thing. We've seen this with other customers. On the very first time you're doing wafer level burn-in, you just don't think about it from the challenges or the differences at what happens when you're talking about a device that shares common substrates or from a probing environment. So is it longer? Maybe a little bit, measured in weeks or a couple of months or something. But some of the things that like mechanically wafer physical contact to the device using our auto aligner to pack these new fine-pitch WaferPaks, the test plan itself, the vectors, those things were all going along pretty well. So I wish it was a little bit sooner, but I think we're still very much on track to try and get them some data over the next couple of months here or even maybe even this month. So now the question, of course, parlays into what do they do with it? What's the timing? Do you understand what device they want to cut in? We do. We're not going to share that with you guys. are we going to make it? We believe we're still -- there's lots of reasons to actually want to cut in wafer-level burn-in and the sooner, the better. So I'm actually -- we're really excited about this particular one. And then now we've got another couple of guys that are saying, "Pick me, pick me too" and are generating the information to give us so that we can actually do design reviews and walk through a WaferPak design for them as well. Jonathan Dorsheimer: Got it. That's helpful. And I just want to address the potential of cannibalization between package and wafer level. And if I read through your comments, it seems like the AI processor is what's moving along with this customer on the wafer level. You had mentioned briefly actually on the ASIC side. Do you -- are you anticipating that the ASICs basically run with package level and that AI processors are wafer level? Or are you anticipating both at wafer level? Gayn Erickson: Yes. Okay. Okay. So vocabulary for everybody that's’ listening out there, right? So there -- when you talk about processors in the AI, arguably, there's even maybe at least 2 or 3 different broad flavors of them, okay? You're going to have the actual GPU, if it's an NVIDIA or ASIC when you talk about everybody else's. In reality, the GPU is kind of an ASIC at NVIDIA too. Jensen said that at one point. These are AI accelerator platforms, okay? And then there -- and they can be used for large language models or for inference type things. There's also processors that like CPUs, like Intel or Grace or Vera-type CPUs and others that are making them that are also going through a burn-in process. And then there's -- you could argue there's even network processors and things like that. But generally, when we talk about AI processors, we're generally in the CPU and GPU type or ASIC type that are combined together in these AI processor clusters. And things like you hear at GB200 is Grace CPU and 2 Blackwell AI accelerators in 1 package, if you will, or in 1 cluster. What's happening with the road map is that devices are going from a single AI accelerator or CPU on a -- in a package to a package that includes embedded memory, like high-bandwidth memory and high-bandwidth flash over time and then to having more than 1 compute chip in it. So having 2 processors in it or 4 or 8, like you look at the Intel or the AMD road map. Everyone has a road map to 2 or 4 more AI processors on a single substrate. What's happening is that there is a -- the qualification of those are all done today in a full package. The whole device in a big substrate is done, and it can take months to even go to get the packaging and qual that. So there are people that would like to be able to qual the processor inside when it's still in wafer form, right? From a production perspective, the value proposition is you're burning in these devices and when they fail, you take out the other compute chip and all the memory plus the co-os substrate, which costs more than the silicon of the compute chip itself. So the road map is getting more intense. So there's people that are like, oh, I want to evaluate this for this device, this would make sense. But boy, the next one makes twice as much sense and the one next to that is 4x as much sense because of this evolution. So a lot of trends we discussed, okay, is there a window. Like what happens if you just missed this one device, it doesn't feel like that it's a treadmill of you can always step on. And the customers are like, okay, how do I cut you in? I've said publicly that our large package part production customer, we've talked about it as an ASIC hyperscaler. They're actually on Sonoma production. We're qualifying their next device that's going to go to production, we believe and hope it will go on Sonoma as well. okay? The third one that are giving us design files of so we can make sure that Sonoma is ready for that, but they've also said, you know what, by then maybe we want to consider FOX wafer-level burn-in. And an interesting thing is it's like, well, what will you do with all the package systems from us, who cares? It's like, what? Because if I could move it to wafer level, I don't need to do it a package anymore. Now will it cut over just like that, we'll see. I think the world is going to be both for a long time, and we're in a great position to do both. But is there cannibalization? For sure. We had a customer come in who wanted to talk about what we thought was packaged part burn-in. Alberto, our VP over the packaged part business, and I met with them and 15 minutes into the meeting, he goes, I'd like to talk about wafer level. Alberto looked over at me and I'm like, okay, new slides. So at least we got both. And we're in a great position. And actually, I would say it's all 3, we do the high-temp operating life today only at package over time at wafer level, and we do production burn-in either package or wafer level. So a great front row seat. Operator: Our next question comes from Max Michaelis with Lake Street Capital. Maxwell Michaelis: First one for me, just around the bookings guide. I know you previously shared that majority of around AI. But just given the distinction between the low end and the high end, if we just take the midpoint of around $70 million, I mean, what -- to get to that $80 million, is that all basically around AI? Or does that suggest any improvement around silicon carbide or GaN? Gayn Erickson: It's the least in that number is silicon carbide, okay? And then GaN is pretty close. Hard disk drive is a little bigger. Then silicon photonics is a chunk. I mean we've got production systems in there for our production -- our lead customer. We have a new customer that wants a system. They want a chip by May. We're suggesting to them that they really should get their order in before we ship it, joke, joke. I'm kidding, it's a challenge right now because they're like, please, please build it. we actually have a system on our floor. And if they get their PO in if you're listening, you get to get it, if not, we'll give it to the next guy, but anyhow. And then it would be wafer-level burn-in. And then I think package is the biggest. I'm sorry, wafer level burn-in AI and then packaged part AI is the biggest. Maxwell Michaelis: Okay. So -- and yes, that's just actually, the $60 million to $80 million, the $80 million suggests just greater volume orders from wafer level burn-in... Okay. And then lastly, I haven't had time to run through the entire press release, but that $5.5 million order you noted in your prepared remarks. Can you go any -- can you share some more detail on that? Is there anything new that we should be looking for? Or is just kind of standard? Gayn Erickson: You know what, it has a mix of some customers that already had Sonomas that were buying more that were AI related. It had some burn-in modules. That was important because it was for a new design of a really expected to be high runner that's going to production. It has a big order from a what we call our a premier Silicon Valley test services company, we'll leave it to that. They actually bought a number of the new Sonoma configurations, which are the very high power ones that allow them to go to 2,000 watts. We have some devices that we're going to be testing this spring that are almost 2,000 watts per device, right? And everybody is out there talking about how can you do -- what does it take to get to 1,000 watts, we're jumping right past that. And this is in a high-volume Sonoma system. So they'll be able to test a large number of devices in that system. And I'm trying -- I think the numbers I should note this number. I think it's 44 devices. But I mean it's a large number of devices to be able to test those. And it's -- by the way, it's either 22 or 44. I should know that. Sorry, folks. Go through the math on that particular application because of the number of resources and power supplies and things. But it's the biggest part we've seen that's in development, and that's going to be going to production. So that's a big deal. So it's a combination of several different orders. Every one of them is kind of sort of strategic to us. Operator: The next question comes from Larry Chlebina with Chlebina Capital. Larry Chlebina: We try to line up your ramp or at least your demand for the systems that you're working on developing for these customers on the AI processors with what's publicly disclosed in terms of the product launch. Is there a case where they may start up on packaged part wherever they have the capacity to do that. And then when they feel comfortable, maybe if it's after the products launched, would they cut over the wafer level burn-in because it's so much more efficient and saves them money? Would they do that? Or would they just do it initially on a brand-new product launch at the beginning? That's kind of -- do you have a sense of that? Gayn Erickson: Okay. So I wouldn't -- there's 2 things in there. What I definitely see happening is we know for a fact a customer was doing system level or rack test, okay? The only time they identified infant mortality or early life failures was when it's installed in the data center pretty nasty okay? That's test or not or burn-in. So they said, we'll run it for 2 weeks, and it hasn't died we'll accept it kind of thing, and then they'll actually plug it into the network, pretty expensive way of doing it. Then there are companies like AEM and Advantest and Teradyne that have talked about system-level test machines, which is a type of ATE machine, that is designed to be doing a high-speed insertion and boot up like the operating system. It's a great way to do a very high degree of test coverage for a specific application. People were saying, oh, we're going to do burn-in with that. Well, that doesn't really -- those systems are designed for high speed. They're designed to be at the user mode. They're designed to run cold. They're not really designed for burn-in, and they're quite expensive and large. But the market was pulling on that because it's sure better than doing it in a rack. And there wasn't another system available in what a lot of people refer to us as ovens, which is a large-scale system that you put lots of burn-in modules or trays with lots of devices and test all at once. Those were like from KYC or maybe 600 watts and below or something. And there really wasn't a tool out there for that. This is where Sonoma was pulled up because we were doing -- Incal was using it for the Hi-Tec operating life, but it's like, well, wait a minute, can I use that in production? Can you add automation? Can you do these things support? And can you quadruple or 50x your capacity? So that's where Sonoma is coming in. When Sonoma enters that market doing system-level test or rack test makes no sense whatsoever. So it's highly competitive as that. Now having said that, wafer-level burn-in is even better. But a lot of people may say, well, I need to think through that. Where do I put that insertion, I might need to implement some design for test modes to be able to implement it at least to take advantage of the very low cost full wafer contactors from Aehr Test and things like that. So I think it's an evolution. But I think the conversation we have with customers is they're like, I need package for burn-in, let's talk about that. But boy, wafer-level burn-in would be better, how do we engage on that? And then specifically on a per customer basis, I don't want to get too carried with our strategy. But if you have an installed base of something, a packaged part burn-in systems or I could go in and displace you with maybe Sonoma but it's probably better for me to go displace you with wafer level burn-in because it's not even a price thing in that sense. It's yield. It's so -- or capacity. So we -- it depends on the customer, and we have some customers that have some devices that want to think about wafer level, something they want to think about package, something they want to think about package and then eventually the wafer level over time. I hope that was -- as I look back, that was pretty confusing. But there's -- it's an evolution of it. And guess what we do, the customer is always right. You tell me what you want and we're in. Larry Chlebina: Well, if the -- if you -- all these evaluations, they have going on with wafer level burn-in, if it takes longer and the product ends up getting launched, would they still cut over to some portion of the production on wafer level burn-in once it's proven out for the particular product or the predictor -- would they do that midstream? Gayn Erickson: I think it depends -- I don't -- it's not a slam dunk. I mean, I think traditionally, people will start a product and do the release of that one product on one test platform or something. And then you cut in on the next one. I think that'd be fair to say, but there are certain devices we know that their intended application, there's 2 or 3 different applications for it. So for a large language model, maybe they think about it one way, but if it's going to be automotive, then that's a different thing, right? So even within a product, there might be an evolution or they get by until they can implement wafer level burn-in. That particularly comes in the fact when you think about a multichip module, right? As soon as you could do wafer-level burn-in, if I could save you 1% yield per die on a 4-die AI processor that has a $15,000 BOM. Of course, you would do that, right? Larry Chlebina: I'm not sure if they would. Gayn Erickson: Yes. So we're trying to be as open as we can. We know as much as we know, but there's definitely advantages to do wafer level. I mean ultimately, that's the most -- kind of the best place you could ever do it. And if you implement some DFT and some of the things we do, I can build you a WaferPak in 8 weeks. Have you on wafer. Larry Chlebina: I'll shift gears on the flash benchmark that you completed right a little bit ago before holidays. When do you expect the customer to get back to you and more importantly, when do you expect them to come with an order. Gayn Erickson: I was waiting for somebody. Yes, that's where my head's at, too. My guess is, Larry, in the next couple of months or so for them really to get back, depending on how they -- the wafer is going back to test, which is tested at wafer. I don't think they're going to package it up and go through some stress qualification, that might be something. But we've already had some design reviews with them on our new tester and planted the seeds, they were very impressed is how I would describe it. The big trend -- the big shift here was when we even started this thinking to do the benchmark with them, which is what like a year ago, if I get that right. Larry Chlebina: Yes, over 1.5 years ago. Gayn Erickson: Yes. Yes. Fair enough, right? When we were starting to even build up to get the design files and what wafer we are going to be testing with them, it was not aimed at high bandwidth flash because that didn't even exist, right? They were looking at it for like commodity data center SSDs. Now with the HBF, it broke their infrastructure, the power supplies, IO pins, et cetera, and parallelism, and now they have a power problem, which we love. Well, we're good at power. So people that have power problems that's music to our ears, so yes. Larry Chlebina: I recall you originally said the driver, their motivation was as the 3D NANDs got higher levels of -- they're even talking about getting the 400 level. Gayn Erickson: Layers, layers, yes. Larry Chlebina: Layers, that required more power and exceed the power in their existing systems so that they need your high power. So here we are 1.5 years later. And so how are they getting by to this point? And don't they need your high-power capability? Gayn Erickson: They're doing -- they're having to -- they can't test a whole wafer in one touch down as an example. But that -- what I described there, which people -- if you follow along with that, that was actually referred to as hybrid bonded flash same letters by the way, right? Hybrid bonded flash was a novel idea that the base substrate layer was logic done on the logic process and then you build up just the stacked memory, and you do that in a memory process and then you bond them together. The result of it is that memory stack is a taller building with a smaller footprint, so you get more die per wafer. That's good, right? But the power was much higher, HBF as in high-bandwidth flash is, in some ways, architecturally similar, except for its more power because of its speed it has additional power supplies, and it's taller, it actually is even more of a problem for them, which I guess, if you're a tester guy, the bigger the problem, you have more to solve. But we had to go back and redesign the tester because we were originally aiming it at the other device. Larry Chlebina: I would think they would need more capacity for the enterprise flash part of it before they ever start needing something for HBF. So the enterprise flash, I'm wondering when is something going to happen there? It seems like it's overdue. Gayn Erickson: Yes. I mean our goal, in this case, would be -- we had originally hoped to finish the benchmark at the end of last year, okay? So like we're 6 months later. And I think as shared with you, if you read through all of the notes, around March, it was like it felt like you're pushing a rope, something was going on. If you knew who the company was it'd be the very obvious what was going on, okay? But that what really happened is they kind of shifted from enterprise focus to HBF. And so that slowed some things down in terms of even reviewing our tester. And then they came back to us in the summer and we're like, okay, here's the new tester we'd like. So okay, maybe that's good. It's for people that you're tapping your fingers, it's taking a long time, but that's part of what happened there. But at this point, again, we walked up there actually -- they thought we were just going to take their wafer and stick it into one of like our NPs with a manual setup and we showed them a fully integrated machine. So they walked up and we put their wafer at a FOP, put the FOP onto the Sierra automated WaferPak Aligner, ran the wafer. It opened up the blade, stick the wafer -- put the wafer in the WaferPaks, put the WaferPaks in the blade, close the blade, ran the tests, gave them the results. It's pretty impressive. Larry Chlebina: So you're ready to go for production. So it seems like they need. They're going to need more capacity based on everything that's going on in the memory market. Gayn Erickson: Exactly. And right now, they're all flushed with margins. How is that, right? So I agree, you know what, we've been, Larry, you as people that follow Larry is our greatest cheer leader, along with me in memory strategy for us. We are spending money, okay? It is part of -- as Chris alludes to, we could be doing better, well, at these revenue levels, this is -- we're not happy with these revenue levels, right? We're not making money at these levels. But we would be making more money. We're spending money. We got our foot on the gas. And in fact, it's our expectation that we'll increase the R&D spend particularly in the AI wafer-level burn-in, a little bit in the package because we spent a lot of money on that in just this last year for package getting this new product out and then the memory system which will be a blade in our FOX system basically. Larry Chlebina: It should be -- it should pay off. Let's -- so hopefully soon, sooner rather later. Gayn Erickson: I vote yes, too. As a shareholder, I think it's good money to be spent. Larry Chlebina: That's all I have. Thank, Gayn. Gayn Erickson: Thank you, Larry. Operator: [Operator Instructions]. Okay. I'm showing no further questions in the queue. I would like to turn the call back to management for closing remarks. Gayn Erickson: Thank you, operator, and thank you, everybody. We really appreciate you guys taking the time to spend an hour with us. I think about that exactly again. And we'll keep you guys updated. Stay tuned. We're really excited about this and hope that the orders will come in shortly enough to be able to make this less dramatic as we go forward and set us up for a really strong year heading into next year. So I appreciate it. If you are in town, we are in Fremont, California, Silicon Valley, give us call, set something up, come by take a look at the facility. If you haven't seen our tools, they're very impressive and get a feel of the capacity because we have a lot of systems on the manufacturing line right now. So take care, and Happy New Year to everyone. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Good afternoon, everyone, and welcome to PriceSmart, Inc.'s Earnings Release Conference Call for the First Quarter of Fiscal Year 2026, which ended on November 30, and 2025. After remarks from our company's representatives, David Price, Chief Executive Officer; and Gualberto Hernandez, Chief Financial Officer; you will be given an opportunity to ask questions as time permits. As a reminder, this conference call is limited to 1 hour and is being recorded today, Thursday, January 8, and 2026. A digital replay will be available shortly following the conclusion of the call through January 15, 2026, by dialing 1 (800) 770-2030 for domestic callers or 1 (647) 362-9199 for international callers and entering replay access code 5898084#. For opening remarks, I would like to turn the call over to PriceSmart's Chief Financial Officer, Gualberto Hernandez. Please proceed, sir. Gualberto Hernandez: Thank you, operator, and welcome to PriceSmart Inc.'s earnings call for the first quarter of fiscal year 2026, which ended on November 30, 2025. We will be discussing the information that we provided in our earnings press release and our 10-Q, which were both released yesterday on January 7, 2026. Also in these remarks, we refer to non-GAAP financial measures. You can find a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP measures in our earnings press release and our 10-Q. These documents are available on our Investor Relations website at investors.pricesmart.com, where you can also sign up for e-mail alerts. As a reminder, all statements made on this conference call other than statements of historical fact are forward-looking statements concerning the company's anticipated plans, revenues and related matters. Forward-looking statements include, but are not limited to, statements containing the words expect, believe, plan, will, may, should, estimate and similar expressions. All forward-looking statements are based on current expectations and assumptions as of today, January 8, 2026. These statements are subject to risks and uncertainties that could cause actual results to differ materially, including the risks detailed in the company's most recent Annual Report on Form 10-K, the quarterly report on Form 10-Q filed yesterday and other filings with the SEC, which are accessible on the SEC's website at www.sec.gov. These risks may be updated from time to time. The company undertakes no obligation to update forward-looking statements made during this call. Now I will turn the call over to David Price, PriceSmart's Chief Executive Officer. David Price: Thank you, Gualberto, and good morning, everyone. Thank you for joining us today. I want to begin by expressing my gratitude to our employees across all the regions where we operate. This first quarter through December represents our peak season, our most demanding period, and our teams rose to the challenge. From our clubs to our distribution centers to our offices across all of our countries, every part of our organization contributed to our success. Their execution was outstanding, and their dedication and commitment to serving our members continues to be the foundation of our success. It's a pleasure to be back with you for my second earnings call as CEO. I'm now about 128 days into the role, and I've spent this time visiting clubs, distribution centers and offices across our markets. What strikes me most is the strength of our culture, teams across 13 countries united by a commitment to doing the right thing for our members and their communities. This foundation, combined with the opportunities ahead, gives me great confidence in our future. I'm energized by what we can accomplish together. I'm pleased to share that we delivered strong results across our key performance areas. Our membership growth, solid sales performance and continued operational discipline reflects both resilient consumer demand and the outstanding execution by our teams. Now I'd like to highlight some of our sales results for the first quarter. Net merchandise sales and total revenue reached almost $1.4 billion during the first quarter. Net merchandise sales increased by 10.6% or 9.5% in constant currency. Comparable net merchandise sales increased by 8% or 6.9% in constant currency. During the first quarter, our average sales ticket grew by 2.1% and transactions grew 8.4% versus the same prior year period. The average price per item increased 1.8% year-over-year while average items per basket remained relatively flat. First, in Central America, where we had 32 clubs at quarter end, net merchandise sales increased 9.6% or 9.2% in constant currency. Comparable net merchandise sales increased 5.4% or 5.1% in constant currency. All of our markets in Central America had positive comparable net merchandise sales growth. Our Central America segment contributed approximately 320 basis points of positive impact to the growth in total consolidated comparable net merchandise sales for the first quarter. Second, in the Caribbean, where we had 14 clubs at quarter end. Net merchandise sales increased 5.7% or 7.8% in constant currency. Comparable net merchandise sales increased 5.6% or 7.7% in constant currency. All of our markets in the Caribbean had positive comparable net merchandise sales growth. Our Caribbean region contributed approximately 160 basis points of positive impact to the growth in total consolidated comparable net merchandise sales for the first quarter. Last, in Colombia, where we had 10 clubs opened at the end of our first quarter, net merchandise sales increased 27.8% or 15% in constant currency. Comparable net merchandise sales increased 27.9% or 14.7% in constant currency. Colombia contributed approximately 320 basis points of positive impact to the growth in total consolidated comparable net merchandise sales for the quarter. In terms of merchandise categories, when comparing our first quarter sales to the same period in the prior year, our foods category grew approximately 11.3%. Our non-foods category increased approximately 7.2% and our food service and bakery category increased approximately 10.1% and our health services, including optical, audiology and pharmacy, increased approximately 17.8%. Membership accounts grew 6.7% year-over-year to over 2 million accounts with a strong 12-month renewal rate of 89.3% as of November 30. A key focus of our membership strategy is growing Platinum memberships. Platinum is our premium tier designed for our most engaged members. These members receive an annual cash back reward on eligible purchases which drive loyalty, increases purchasing frequency and rewards their continued business with us. By focusing on Platinum growth, we are investing in our highest value member relationships. As of November 30, Platinum accounts represented 19.3% of our total membership base, up from 14% in the same period last year. This growth reflects our targeted promotional campaigns and increased focus on the segment. Membership income as a percentage of revenue increased to 1.7% compared to 1.6% in the prior year period, driven in part by the shift towards Platinum membership. These strong results reflect our team's execution and the strategic initiatives we have underway. Let me walk you through the progress we're making across real estate expansion, supply chain transformation and technology investments that are enhancing our ability to serve our members. In the third quarter of fiscal year 2025, we purchased land for our sixth warehouse club in the Dominican Republic in La Romana. That's about 73 miles east of our nearest club in Santo Domingo. The club will be built on a 5-acre property and is expected to open in spring 2026. In Jamaica, we're expanding from 2 clubs to 4, in the first quarter of fiscal year 2026, we purchased land in Montego Bay for our third club, and that's about 100 miles west of Kingston. This will also be a 5-acre site anticipated to open in fall 2026. Also in the first quarter of fiscal year 2026, we finalized the land lease for our fourth Jamaica Club on South Camp Road. That's about 6 miles from our existing Kingston Club. This will be a 3-acre property also anticipated to open in winter 2026. The opening time line for our Jamaica clubs has been adjusted as we address operational disruptions caused by Hurricane Melissa and support recovery efforts across the island. I'm pleased to report that our existing clubs in Kingston and Portmore weathered the storm well, and we're back serving members almost immediately. We do not anticipate any further delays to our new club openings at this time. In addition, in the second quarter of fiscal year 2026, we purchased land for our 10th warehouse club in Costa Rica, Ciudad Quesada. That's approximately 47 miles north from our nearest club in Costa Rica. The club will be built on a 6-acre property and is anticipated to open in fall of 2026. Once these 4 new clubs are open, we will operate 60 warehouse clubs in total. We are advancing on our plans to enter Chile, a market that we believe offers strong potential for multiple PriceSmart warehouse clubs. As part of this initiative, as you know, we've hired a country general manager and signed executory agreements for 2 prospective club sites. While we haven't announced target opening dates, we're moving quickly in managing key factors that influence timing, such as permitting and construction. In addition to opening new clubs in existing markets and Chile, we're continuing to optimize our current footprint, increasing club size, improving efficiency and expanding parking spaces at high-volume locations remains some of the most effective ways to drive sales and enhance the member experience. To support this strategy, we will begin warehouse club and parking lot expansion and remodels in fiscal year 2026 in Portmore, Jamaica and Barbados. Now turning to our supply chain transformation strategy. One of the key drivers in keeping prices low is improving how we move and distribute merchandise to our clubs. Today, we operate major distribution centers in Miami, Costa Rica, Panama and Guatemala. During the first quarter, we successfully adapted our Panama facility to handle cold merchandise and began operations at our new distribution center in Guatemala. We now plan to open distribution centers in Trinidad, Colombia and the Dominican Republic during fiscal year 2026. Our goals with these distribution centers are to improve product availability, reduced lead times and lower landed costs, among other efficiency gains. Alongside these new distribution centers, we've begun implementing third-party distribution centers in China to consolidate merchandise source in the country, driving greater efficiency and lowering costs. In select countries, we've also introduced our own fleet of trucks to deliver merchandise directly to our clubs and capitalize on backhaul opportunities. We continue to advance our migration to the RELEX forecasting and replenishment platform, and we remain on track to complete the full implementation in fiscal year 2026. This upgrade is a critical part of our supply chain strategy and is expected to boost productivity, improve inventory management and increased in-stock availability, ultimately driving sales growth and operational efficiency. During the first quarter, we advanced our multiphase implementation of the e2open global trade management platform designed to enhance automation, compliance and controls across global import and export operations. We believe this platform will strengthen trade compliance, improve data visibility and support scalable international growth once fully implemented. Turning now to other ways we're enhancing membership. For the first 3 months of fiscal year 2026, private label sales represented 27% of total merchandise sales, down 70 basis points from the same period last year. This was impacted by a reclassification of the produce category. And on a comparable basis, we would have had a 70 basis point increase in penetration of our private label. Our private label brand, member selection is a cornerstone of our strategy. What makes our private label program unique is that we develop products both centrally through our U.S. buying team and locally through our country-based buyers. This development approach enables us to source private label products globally, regionally and locally providing flexibility to deliver the best quality and value. Together, this allows us to offer member selection products that combine global scale and quality with local relevance. Private label serves multiple strategic purposes. It allows us to offer high-quality products at lower prices than national brands, driving member loyalty. It improves our margins. and it gives us leverage with national brand suppliers by providing a trusted alternative that keeps them competitive. We're committed to growing this penetration through strategic product development, for example, recent additions like Organic Maple Syrup, Aged Scotch Whiskey and premium deli meats demonstrate our focus on delivering exceptional value across key categories. In the Dominican Republic, we've enhanced our co-branded consumer credit card with our new partner, Banco Santa Cruz, which launched in November 2025. This new agreement offers 6% cash back at PriceSmart Clubs, adding even more value for our members in that market. We continue to invest in omnichannel capabilities to meet our members where they are. In the first quarter, digital channel sales reached $89.8 million, up 29.4% year-over-year, representing 6.6% of total net merchandise sales. This marks our highest digital contribution to date. Orders placed directly through our website or app grew 18.1% with average transaction value up 10.1%. As of November 30, 73% of our members had created an online profile and 27.1% of our membership base has made a purchase on pricesmart.com or our app. We see continued opportunity in this space and we'll keep investing to enhance the digital experience we offer our members. During the first quarter, we began migrating our mobile application to fully native iOS and Android architectures to enhance speed reliability and accessibility. This foundation will allow faster deployment of new features and help us deliver an outstanding member experience in our digital channels. Turning to technology investments that enhance both member and employee experience and operational efficiency. In the first quarter, we completed implementation of our new point-of-sale system, ELERA a Toshiba product in all English-speaking Caribbean markets. Later in fiscal year 2026, we will begin rolling out this system in our Spanish-speaking markets. ELERA will help us achieve faster checkout times, improve productivity and expand payment options among other benefits. Also, in the first quarter, we began implementing Workday's human capital management system to replace legacy HR applications. This upgrade is designed to enhance the employee experience with modern, user-friendly tools while improving processes and strengthening compliance. Additionally, the platform will provide scalable, integrated data to support our future growth. Before I turn it over to Gualberto, I want to address a few additional topics. First, regarding U.S. tariffs. Approximately half of the merchandise we sell is sourced locally and regionally within Latin America. The other half is sourced from the U.S., Europe, China and globally. While we consolidate many of these products through our Miami distribution center, they are shipped in bond and are not nationalized in the United States. We also take advantage of free trade agreements where we can. Additionally, we've been leveraging our expanding distribution center network and China consolidation capabilities to shift direct to market where feasible, further optimizing our supply chain. As a result, U.S. import tariffs do not apply to most of our merchandise. We continue to monitor the evolving trade policy environment, but to date, current U.S. tariff policy has not impacted our cost structure or business operations. We are also monitoring remittance flows to Latin America and the Caribbean. Remittances represent a significant portion of GDP in several of our markets. including Jamaica, Honduras, El Salvador, Guatemala and Nicaragua. While there has been reporting on changing remittance patterns from the U.S. to the region, to date, we have not seen changes in consumer demand or purchasing behavior in our clubs. We continue to watch this factory closely given its importance to the economies we serve. In addition, over the weekend, there was major news out of Venezuela. We are alert and monitoring the situation closely. It's still very early to understand how this will evolve or what the implications might be for our business or for U.S. companies operating in the region. And lastly, I want to provide a preview of our holiday season performance. Comparable net merchandise sales for the 9-week period ended December 28, 2025, grew 7.1% in U.S. dollars and 5.4% in constant currency. This represents solid performance as we continue to comp against increasingly strong prior year periods, though it does reflect the deceleration from our first quarter's growth rate. December specifically was impacted by several transitory factors. Government elections in Honduras created consumer uncertainty. Panama's extended rainy season disrupted both traffic and logistics and supply chain timing issues created out of stocks in several high-volume food items, a situation we identified and are addressing. Looking forward, we are encouraged by what we are seeing. Colombia continues to deliver strong momentum, and we are seeing positive trends across many of our markets as we enter calendar 2026. With that, I'll turn it over to Gualberto to walk you through the financial details. Gualberto Hernandez: Thank you, David. Continuing with the income statement. Total gross margin for the quarter as a percentage of net merchandise sales remained strong and unchanged at 15.9% versus Q1 last year. Total revenue margins improved 30 basis points to 17.7% of total revenue from 17.4% in the same period last year. This was mainly driven by the good results in membership renewals and Platinum growth, as mentioned before, by David. On overhead costs, Total SG&A expenses increased to 13.1% of total revenues for the first quarter of fiscal year 2026 compared to 12.8% for the first quarter of fiscal year 2025. The 30 basis point increase is primarily related to our continued investments in technology and to the compensation of our Chief Executive Officer. During his tenure as our interim Chief Executive Officer from February 2023 to August 2025, Robert Price declined any compensation for his services. Operating income for the first quarter of fiscal year 2026 increased 8% from the same period last year to $62.9 million. Below the operating income line, in the first quarter of fiscal year 2026 we recorded a $7.2 million net loss in total other expense, almost unchanged from $7.3 million net loss in total other expense in the same period last year. The primary cause of our net loss in total other expense is due to foreign currency-related losses. In terms of income tax, our effective tax rate for the first quarter of fiscal year 2026 came in at 27.9% versus 26.5% a year ago. Primarily, due to nonrecurring items such as the tax contingency approval and foreign exchange rate fluctuations. Finally, net income for the first quarter of fiscal year 2026 was $40.2 million or $1.29 per diluted share, up from $37.4 million or $1.21 per diluted share in the first quarter of fiscal year 2025. Adjusted EBITDA for the first quarter of fiscal year 2026 was $86.9 million, compared to $79.1 million in the same period last year, a growth of 9.8%. Moving on to our balance sheet. We ended the quarter with cash, cash equivalents and restricted cash totaling $249.6 million, plus approximately $114.2 million of short-term investments, typically held in certificates of deposit. When reviewing our cash balances, it is important to note that as of November 30, 2025, we had $80.2 million of cash, cash equivalents and short-term investments denominated in local currency in Trinidad which we could not really convert into U.S. dollars. Turning to cash flow. Net cash provided by operating activities reached $71.2 million for the first 3 months of fiscal year 2026, an increase of $32.7 million versus the prior year period. The increase is primarily due to $18.7 million of overall net positive changes in our previous operating assets and liabilities mainly due to recoveries in our VAT receivables and increases in accrued Platinum rewards as well as improvements in working capital that contributed $10 million to the overall increase. Net cash used in investing activities increased by $61 million for the first 3 months of fiscal year 2026 compared to the prior year, primarily due to a net increase in purchases less proceeds of short-term investments of $39.8 million, an $11.9 million increase in purchases of long-term investments and a $10.4 million increase in property and equipment expenditures to support growth of our real estate footprint compared to the same 3-month period a year ago. Net cash used in financing activities in the first 3 months of fiscal year 2026 remained relatively flat compared to the same period a year ago. In closing, we're pleased with our start to fiscal year 2026 and the momentum we're building. The investments we're making in real estate, supply chain infrastructure and technology are positioning us for sustained growth. Combined with our team's exceptional execution, we're confident in our ability to continue delivering value to our members and driving long-term performance. I will now turn the call over to the operator to take your questions. Operator, you may now start taking our callers' questions. Operator: [Operator Instructions] Your first question comes from the line of Jon Braatz with Oppenheimer. Jonathan Braatz: A couple of questions. David, when you spoke a little bit about the December comps. You mentioned some issues in Honduras and Panama in the supply chain. Specifically, when you look at Honduras and Panama, were the comps positive despite these issues in the month of December? David Price: We usually don't share that level of detail, Jon, in terms of country by country, so I want to make sure I'm consistent. But in Honduras with the election, there was some front-loading of purchasing in November leading up to the election, and we've seen a good recovery now that there's been an outcome of the election and a definitive President. And in Panama, we're well into the dry season and seeing okay results there as well. But I can't share that level of granularity with you. Jonathan Braatz: Okay. So those -- basically, those issues that you saw are behind you at this point? David Price: Yes. Jonathan Braatz: Okay. Okay. Good. And can you speak a little bit about Colombia. Colombia has been very strong for the last year, maybe even more than a year, comps have been well into the double-digit area. Anything you can put your finger on as to the strength there? David Price: Sure. Thanks for the question. So a couple of different things. I mean, both kind of internal and external factors, starting with the external, I think that the strength of the peso certainly helps. The merchandise mix there, we have more local items than in other markets. But the -- when things are -- when we're under COP 4,000 to $1 on the peso, that definitely helps not only purchasing power but also consumer sentiment. I think confidence in the market from the consumer standpoint. In addition, I have to just give credit to the team. We have an excellent team, both in buying and operations there, and it's really -- there's some great items coming out of Colombia, even some that we're starting to export to other markets. So the item development, both locally and then in terms of the imports also is driving nice differentiation. Jonathan Braatz: I know it's -- you spoke a little bit about the issues in Venezuela. And are there -- what kind of problems might Colombia face if there is sort of a migration and from Venezuela -- additional migrations from Venezuela to Colombia, does that put economic pressure? What kind of economic pressure might that place on Colombia? David? Operator: Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today's conference. Please hold, and the call will resume momentarily. Thank you for your patience. [Technical Difficulty] Mr. Braatz , your line is open. Jonathan Braatz: David, I was just going to ask you all the issues that we're seeing in Venezuela. Could some of -- could there be pressure on the Colombian economy if there's more migration of people from Venezuela to Colombia. Can that put any pressure on the economy?. David Price: It's -- I don't want to speculate, Jon. The diaspora has been going on for a long time. And there's been Venezuelan migration all over the region. And so I want to be careful not to speculate on something I really don't have any data to share on. But from what we're seeing, consumer demand is strong in Colombia, and we have a good brand position. Jonathan Braatz: Okay. And 1 last question. If I saw it correctly, at the end of fiscal 2025 you had about USD 60 million in Colombia -- in Trinidad. And at the end of the first quarter, you have $80 million. why the increase from $60 million to $80 million in the first quarter? Gualberto Hernandez: Jon, this is Gualberto. Thank you for the question. Trinidad, as you know, is something we're looking careful and there is a lot of fluctuations in the availability of U.S. dollars. There is no specific reason. It's a little bit of high season now after Christmas. So there is more cash on our side. And it's a bit more difficult to cover everything. But we don't see any material changes in the conditions there. It continues to be difficult, I wouldn't say it's more difficult than before, and it just fluctuates depending on the availability of dollars, as you know, in the market in every month. Nothing in particular to highlight there. Operator: Your next question comes from the line of Hector Maya with Scotiabank. Héctor Maya López: On Chile, very quick, it is really nice to hear that you are moving quick on certain important steps, usually, permits tend to be -- tend to take a bit of time. So that is nice to hear. But what have you learned so far from the market or potential competition, and are there any surprises or takeaways or things that you are not expecting maybe in Chile? And on Colombia, with a good momentum there, how sustainable do you think is the revenue growth that we are seeing in the country? And how concerned are you about the minimum wage hikes in the country? Or what effect do you expect from that? David Price: Okay. Let me take the first 1 with Chile. I wouldn't say there's anything necessarily that has surprised us. But I will say, Chile, of course, is a very competitive market and highly digitalized with a high expectation from the consumer. It's also very open from the standpoint of free trade agreements. And so there are a lot of imports as well. There are no club models in Chile. There are Mayorista models, as you know, that are kind of more like the Atacadao kind of Brazil type wholesale model, but nobody doing what we do. So we operate in other competitive markets, and so we feel optimistic. And in terms of Colombia, in terms of minimum wage. I don't want to comment on -- in terms of -- there's a sovereign country making its own policy decisions, but we don't have any sort of issue there because we aim to pay a living wage in every market and pay above minimum wage, where that doesn't align with the living wage. And so that's kind of our approach, and we want to be -- have our pay and compensation benefits be 1 of the differentiators from the standpoint of who we employ. I mean that's a really important part of our philosophy as a business being an employer of choice. And so I don't anticipate any issue in Colombia as a result of that. And in terms of future looking, I can't comment on future growth. But as I mentioned to John, we're feeling confident in terms of our results in Colombia and the brand position in the market as well as our product mix and what we're able to offer. Gualberto Hernandez: Absolutely. I mean to complement that, our operations in Colombia and growing more and more efficient. So we're confident on our abilities to be successful and to have the right to win in the market. But as you, of course, understand there are a lot of macroeconomic and political elements that we don't control. Héctor Maya López: Excellent, excellent to hear. Also on warehouse and parking expansions and remodeling just how much opportunity or boost in operations are you expecting from this by country or by region? And where do you see the most potential here? David Price: Well, I can't share by region or by country or club, but I can tell you that when we do warehouse expansions, remodels or parking expansions, it helps on several fronts. I mean, first and foremost, it's helping our members. In the case of the parking, we have the good problem of having busy locations. And so when we offer more parking, it helps our members get in and out quicker, but also enables us if there's better flow to turn spaces a little faster, which can help. And then in terms of the sales floor, it helps from an efficiency standpoint, and then, of course, also in terms of selling pilot positions, which is helpful as well, both in terms of items, but also in terms of show stock and availability on the floor. So I can't mention beyond that but there are various factors that drive where we select to do this and also how it impacts. And so far, we've been happy with the results where we pursued remodels and the parking lot expansions Héctor Maya López: Perfect. Congratulations. Operator: That concludes our question-and-answer session. I will now turn the call back over to Gualberto Hernandez for closing remarks. Gualberto Hernandez: Thank you, operator, and thank you, everybody, for joining the call today. Happy New Year to everybody, and looking forward to our next call. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning, ladies and gentlemen. And welcome to the Neogen Corporation Second Quarter FY 2026 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. At any time during this call you require immediate assistance, please press 0 for the operator. This call is being recorded on Thursday, 01/08/2026. I would now like to turn the conference over to Bill Waelke, Head of Investor Relations. Please go ahead. Bill Waelke: Thank you for joining us this morning for the discussion of the second quarter of our 2026 fiscal year. I'll briefly cover the non-GAAP and forward-looking language before passing the call over to our CEO, Mike Nassif, who will be followed by our new CFO, Brian Rigsby. Before the market opened today, we published our second quarter results as well as a presentation with both documents available in the Investor Relations section of our website. On our call this morning, we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliations of historical non-GAAP financial measures are included in our earnings release and the presentation Slide two of which provides a reminder that our remarks will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward-looking statements. These risks include, among others, matters that we have described in our most recent annual report on Form 10-Ks and in other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements. I'll now turn things over to Mike. Mike Nassif: Thank you, Bill. Good morning, everyone, and thank you for joining the call today. I continue to be energized by the significant opportunity ahead at Neogen. Working alongside our highly engaged global team as we transform the company with a clear focus on improved top-line growth and profitability. We are the scale provider in a highly attractive industry, supported by strong long-term secular trends. And I have high confidence in our ability to overcome recent macroeconomic and execution-related headwinds. Our second quarter performance represents encouraging early progress. With a return to positive core growth across the enterprise and adjusted EBITDA margins improving nearly 500 basis points sequentially. The initial phase of our transformation is centered on stabilizing and strengthening our core. Providing a solid framework for future innovation. We began with cost structure improvements implemented in the second quarter, expected to deliver approximately $20 million in annualized savings. We will continue to rigorously evaluate resource allocation opportunities and instill a culture of disciplined operational execution across the organization. Turning to our commercial teams. We are implementing a rigorous process-oriented approach to commercial excellence. Emphasizing strong, operational planning and data-driven decisions. In food safety, where our scale and breadth of offerings provide a clear competitive advantage, we see significant opportunity to shift towards solutions-based selling. This approach should increase customer stickiness and drive greater cost portfolio penetration. Globally, over 75% of our food safety customers already purchase multiple product categories from us. And we have targeted initiatives underway to increase that percentage further by delivering comprehensive solutions tailored to their needs. In animal safety, we are focused on elevating our portfolio of products through our long-standing partnerships and have made investments to enable our commercial teams to drive growth. To accelerate all these priorities, we have strengthened our leadership with highly experienced operators. Including our new CFO, Brian Rigsby and our new chief commercial officer, Joe Friels, Joe is a seasoned diagnostics executive with extensive senior commercial experience at Abbott and Cepheid. He understands what world-class sales execution looks like, and I'm confident he will help transform our sales culture. We have also added Tammy Rennelly as senior vice president and general manager of our food safety business unit, James Meadows as head of North America food safety and Jeremy Yarwood as chief scientific officer. These leaders bring proven track records from top-tier companies and will accelerate both innovation and execution excellence at Neogen. In parallel with our commercial focus, we are applying the same discipline and urgency to operational efficiency in key project execution. We saw early benefits in the second quarter from our cost actions, which attributed to the sequential adjusted EBITDA margin expansion. We have continued to make progress on our sample collection product line and expect it to become a positive contributor to gross profit in the second half of this fiscal year. While there remains room for further improvement, we're committed to fully optimizing sample collection over the long term alongside broader enhancements in inventory management and operational efficiency. Another key priority is the integration of Petrifilm. Which remains on track for the 2027 timeline previously shared. We're currently in the latter stages of the production testing process, which has gone well. In parallel, we have moved into the initial stages of product validation, which is a comprehensive internal process to validate our ability to produce each of the 17 SKUs that we expect will be completed this summer. As part of the testing and initial validation work we have done so far, we've demonstrated the ability to manufacture petrifilm plates. These plates will continue to be subjected to a wide range of internal quality and performance testing. But the early results have been encouraging. As Brian will discuss later in the call, we are making positive progress on the previously announced sale of our genomics business. The completion of which will provide an opportunity to accelerate the deleveraging of our balance sheet. As a reminder, this past summer, we divested our cleaners and disinfectants business which allowed us to pay down $100 million of debt. To wrap up my opening remarks, I'm pleased with the initial progress we've made over the past few months. Which has led us to raise our outlook for the year and represents a solid step in the right direction. We are still in the early innings of our transformation journey. And the end market backdrop is not without some challenges. However, we believe they are solvable or transitory in nature. I have every confidence in our ability to exit this fiscal year as a stronger, leaner, and more disciplined organization positioned to increasingly focus on innovation, and the next leg of growth in fiscal 2027 and beyond. I look forward to meeting with many of you at the JPMorgan conference next week, where we will provide more details on our operational strategy. With that, I'll now turn the call over to Brian to share some details on our results and our updated outlook. Brian Rigsby: Thank you, Mike. And welcome to all the investors and analysts joining us on the call today. Similar to Mike, I'm incredibly excited to be part of the team at Neogen and emboldened by the significant opportunity ahead of the company to drive shareholder value. To that end, we saw a return to positive core growth in both segments for the first time in four quarters with total second quarter revenues of $224.7 million increasing 2.9% on a core basis. Looking at the components of growth, foreign currency added 0.9% and divestitures and discontinued products were a headwind of 6.6% compared to the prior year. The impact from divestitures was attributable to the sale of the Cleaners and disinfectants business which was completed in July 2025. At the segment level, revenues in our food safety segment were $165.6 million in the quarter, including core revenue growth of 4.1%. We saw the strongest growth in our indicator testing and culture media product category, led by sample collection, which benefited from an easy prior year compare, and petri film, which saw a nice recovery from the first quarter and returned to high single-digit growth. Double-digit growth in pathogens led the and general sanitation product category while the allergens and natural toxins category saw growth in allergens offset by a decline in natural toxins. From a macro perspective, we continue to see disruption at the customer level with food production volumes estimated to generally still be down across major producers a year-over-year basis. Additionally, there have been several major plant closures and food producer bankruptcies across the industry in the last twelve months. Given the short-term fundamental backdrop that we believe is primarily driven by inflationary cost pressures, we are even more encouraged by the strong results in the second quarter. While macro trends remain negative, there are signs some of the headwinds may begin to abate as we transition into fiscal year 2027 and beyond. Quarterly revenues in the Animal Safety segment were $59.1 million including core revenue growth that was approximately flat compared to the prior year quarter. We experienced solid growth in our product category led by higher sales of insect control products due in part to market share gains. In the veterinary instruments product category, lower sales were primarily driven by needles and syringes, while lower sales in the life sciences product category were largely driven by timing of orders and fulfillment. Our global genomics business had core revenue growth accelerate to 6% in the quarter, with solid growth in the bovine market partially offset by weakness in companion animal testing. From a macro perspective, we have also seen challenges in animal safety as a part of a multiyear trend with production animal herds, declining in The US to record lows. Most forecasts have this trend reversing next year as ranchers begin to invest again given record beef prices. But we will continue to take a more cautious approach as we approach guidance until evidence of positive improvement is more apparent. From a regional perspective, core revenue growth in the second quarter was led by our LatAm region, up high single digits with strong sales of pathogen detection products and petri film. The US and Canada region had core growth in the mid-single-digit range, with food safety up mid-single digits and animal safety about flat. Strong growth in sample collection as well as in petri film pathogen detection, and allergens was partially offset by a decline in food quality and culture media. The APAC region saw low single-digit core growth that was led by pathogen detection products, sample collection, genomics, offsetting declines in culture media and allergen test kits. Our EMEA region had core growth decline low single digits with growth in sample collection food quality, genomics, and petri film offset by declines in natural toxins culture media, and general sanitation products. Gross margin in the second quarter was 47.5% a sequential improvement of two ten basis points from the first quarter. With the increase due primarily to volume and lower tariff costs Excluding the impact of integration-related and restructuring costs, the second quarter gross margin was 50.3%. Addressing the production efficiency of our sample collection product line has been a priority and we saw improvement in the quarter, which is a trend we expect to continue in the second half of fiscal year. With an increased focus on inventory across the organization, we did see an elevated level of inventory write-offs in the quarter. We have described this as a multi-quarter process to return to more normal levels of scrap and continue to expect to see improvement in the second half as this is an item of high emphasis for our operations teams. Adjusted EBITDA was $48.7 million in the quarter, representing a margin of 21.7%. An improvement of four seventy basis points from the first quarter. The margin improvement was driven primarily by the higher gross margin and the headcount reduction implemented during the second quarter. Second quarter adjusted net income and adjusted earnings per share were $22.6 million and $0.10 respectively, compared to $9.4 million and $0.04 in the prior quarter due primarily to the higher level of adjusted EBITDA. Moving to the balance sheet, we ended the quarter with gross debt of $800 million, 68% of which remains at a fixed rate and a total cash position of $145.3 million. We remain in compliance with all debt covenants and remain comfortable with our position as we look to the second half of the fiscal year. Free cash flow in Q2 was $7.8 million representing an improvement of $20.9 million from Q1. The result of lower CapEx and improved trade working capital efficiency. Importantly, we expect that routine CapEx will trend towards more normal levels of 3% to 4% of revenues starting in late fiscal year 2026 which will further improve free cash flow trends. As Mike noted earlier, we are raising our full-year guidance for fiscal 2026 to reflect the second quarter performance being ahead of our expectations. We now expect revenue to be in the range of $845 million to $855 million and adjusted EBITDA to be approximately $175 million for the fiscal year. This updated guidance reflects a cautious approach to the second half of the year given the lingering weakness in our end markets opportunities. and the fact that we have a new team on board that is still settling in and evaluating As a management team, Mike and I take very serious the commitments and guidance we provide to investors. Looking on a quarterly basis, our guidance contemplates revenue in the fourth quarter being modestly higher than the third quarter which we are assuming will step down from the second quarter due primarily to seasonality. And that adjusted EBITDA margins will follow a similar trend. We continue to expect our capital expenditures for the year will be approximately $50 million and that free cash flow will be positive. We have also previously disclosed that we have a process underway to divest our global genomics business. The process continues to move along. And while the timing of such processes is inherently difficult to predict, we anticipate being able to make an announcement in the fourth quarter of the current fiscal year given the current stage of the process. In addition to the net proceeds being prioritized for debt reduction, this divestiture will further simplify and focus the business and also position the business for enhanced incremental margins. I'll now hand the call back to Mike for some final thoughts. Mike Nassif: Thanks, Brian. When I joined Neogen, I was thrilled to lead a company with strong leadership positions and highly attractive end markets. While we have faced both macroeconomic headwinds and execution challenges, we believe these are solvable. And that Neogen's best days lie ahead. Now nearly five months into my role, I've had the privilege of meeting many of our customers and team members around the world. These interactions have only strengthened my optimism and deepened my appreciation for the power of the Neogen brand. Our customers don't see us simply as a supplier. They view us as a true partner and a trusted authority in food safety. We are committed to further strengthening these vital partnerships. Accelerating groundbreaking innovation, and delivering greater value to our customers than ever before. In my interactions with team members across the globe, I've been deeply encouraged by the passion and commitment I've witnessed firsthand. The thoughtful dialogue and sharp insights shared in these conversations reaffirm what I already knew. We have an exceptional team that is fully invested in our mission. We now have a strengthened leadership team in place. Seasoned executives with deep experience driving in global life sciences and diagnostics businesses, They bring a disciplined, fundamental focused approach centered on process excellence clear prioritization, cross-functional collaboration, transparency, and accountability. Importantly, we are already seeing strong buy-in across the organization as we implement these changes. A clear signal that we are aligning around the right strategy to unlock Neogen's potential. In closing, I want to extend my heartfelt gratitude to every employee around the world for your hard work, resilience, and unwavering dedication. It is your talent and commitment that will drive our success. And I'm more confident than ever in our ability to deliver outstanding results for both our customers and shareholders. Thank you, And now I'd like to turn things over to the operator to begin the Q and A session. Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift a handset before pressing any keys. Your first question comes from Bob Lovick with CJS Securities. Your line is now open. Bob Lovick: Good morning. Congratulations on the strong results in Outlook. Thanks, Bob. People on board and and and for everyone to know, gel and make a difference and and you know, start start operating as one. Yeah. Thank you for that question. Know, the great news is we've attracted top-tier talent to this company, which speaks highly to the opportunity we have at Neogen. In turning this business around. I was recruiting for the talent, I was really looking for very experienced leaders in diagnostics or life sciences that have been part of large organizations that understand the discipline and complexity of managing global businesses But more importantly, we're operators, though they were able to zoom in and zoom out really help the organization accelerate know, the basics that I've talked about before. And I think that's extremely important because know, we've got a great workforce And in some cases, you know, we're trying to implement global processes that require a lot of hands-on initially to get everybody going in the same direction. So I'm I'm very, I'm very proud, and I think we're extremely lucky to have attracted the talent that we've attracted. As far as how long it's gonna take to get them up and running, I would say that given the talent caliber and experience of these professionals, they're already hitting the ground running. You know? And our business is not so different than the than the human diagnostics business. So from a technology and go to market, there's a lot of similarities there. So we've got a very robust onboarding plan for all of the leaders and we are starting now to meet as a full management team and really focusing on the priorities, which have not changed, which are all about driving top line, optimizing our growth, and really focusing and becoming masters in the fundamentals. Bob Lovick: Okay. That sounds great. And then maybe just one more question. I'll jump back in queue. And obviously, good quarter, strong sequential margin improvement. But you know, I think you said you'll get better improvement in sample handling in the back half. I'm trying to get a sense what was the headwind to margins maybe from sample handling? Or or maybe said another way, once you get that to the margins you want, what would be the equivalent or close EBITDA margins at current levels? And then obviously, as top line grows, you can grow that from there. Mike Nassif: Yeah. I mean, let me give you a little bit of my thoughts on sample collection. And then I'd I'd like to ask Brian to share his thoughts as well, more specifics. But listen. Sample collection is is a challenge for us. We've been pretty transparent about that. We're working it. Multiple fronts from making sure that pricing is reflective of the average price in the market We are taking all of the improvements on improving the efficiency on the line. I think the great progress that we have made in in getting back getting out of backorders means that we can reduce the temporary labor, some of the scrap, and other things that were impacting our large to kinda get it more steady state You know? And we are 100% focused on improving profitability on the product. But this continues to be a gateway product that our customers need. But it leads to other, you know, other purchases within our portfolio. And I I personally don't think the product's ever going to be as profitable as other parts in our portfolio but we're not giving up, and we're gonna continue to be focused on that. But I would say high level, we would expect this product to return to some profitability in the second half. And I'd to ask Brian to share any thoughts on that. Brian Rigsby: Yeah. Thank you, Mike. But my comment would just be, I think if you look at the at our non-GAAP reconciliation schedule where we've been excluded the negative impact of that previously. Can see that it was Q4 in Q4, it was around $10 million. In Q1, it was $6 million. Q2, it was around $3 million So the trend is favorable. And, again, to Mike's comments, we expect to turn positive as we move into the back half of the year. Bob Lovick: Okay. Super. Congrats again. Thank you. Brian Rigsby: Thank you. Thanks, Bob. Your next question comes from David Westenberg with Piper Sandler. Your line is now open. Congrats on a really good quarter here. David Westenberg: So I'll just start off with why the implied HD growth, or margin, a little bit higher falling, you know, a really good quarter. Do you think is this conservatism? Or like first quarter for both the CFO and I guess second quarter for the CEO, You just wanna make sure that every everything's right here. Mike Nassif: Yeah. Let me start. I'll I'll I'll share some thought. Thank you for the question. I think that's a very fair question. And we'll ask Brian to jump in. I mean, I think, listen. What what you see contemplated in the guide is our prudent approach approach to beginning to return the business to sustainable performance. You've heard me talk about that last time, and I'm very much focused on driving free. Predictability in this business and consistency. Listen. I'm happy with how the org is reacting to the new ways of working in the very short period time that we've been here. And Q2 is is is a great quarter, but it's one data point. We've also got a brand new team that's gonna be settling in and learning how to work together and really start to scale these things that we put in place. And I would say just as important, and Brian and I talk a lot about this, we understand the importance of our commitment to investors and building credibility. That's extremely important to us. And so with that said and the lingering macroeconomic weaknesses, tariffs, uncertainty, and what have you, you know, we feel confident with the trajectory. The early progress we've made. And taking all of that into account, we believe it's appropriate to take a conservative tact for the remainder of the fiscal year. And the last point I'd make is it's important to note that we are now forecasting a positive growth for the year given this latest update on the guide. Brian? Brian Rigsby: Yeah. I would just echo Mike's comment in terms of, you know, it's one data point. We did raise the guide to reflect the over delivery in Q2. But, you know, we we've got a new team in here I've been here for two months now. And and we just wanna make sure that we know, take the right approach that relates to how we manage the guy. David Westenberg: Perfect. And, just asking one more kind of basic blocking tackling question as we look at our models. Were there any onetime revenue tailwinds in the quarter? And we think about recurring adjustments how do we think about those cycling through for the rest of the year? I think, with the recurring adjustments, it's one of those, have limited time. But, I mean I mean, I guess, you always have new ones. So I guess anyway, anyway to think about that, like, Anyway. Brian Rigsby: Yeah. Sure. I I'll take the question. Mike can add anything you like. The the only thing I would recall, we we did have about $2 million of insecticide tailwind in Q2 in the animal safety segment. But but, really, that would be the only thing of note that I would call out as a as a onetime. Mike Nassif: Yeah. The only thing that Yep. Yeah. David, what what I would just add is that you know, we saw you know, it's it's it's crazy when, you know, the simplicity sometimes is you get what you measure. So know, driving the commercial excellence, focusing on key products, when you think about you know, petri film, pathogen, allergens, which have been a focus for us in that quarter, you see very healthy returns on those when you drive the right focus. And so you know, we were we were very pleased with how the organization's responding to the additional focus. And we feel that a lot of this growth was due to driving the specificity and commercial excellence. So the organic growth is is great, and now we're looking to you know, scale that and accelerate it. David Westenberg: Got it. I'll just give it a two knowing that, know, you still have a few more analysts to ask for questions on. Okay. Mike Nassif: Thanks, David. David Westenberg: Your next question comes from Brandon Vazquez with William Blair. Your line is now open. Brandon Vazquez: Hey, good morning, guys. Thanks for taking the question and congrats on a nice quarter as well. Mike, maybe as you sit, you know, you're maybe about six months into the seat now. You guys have had a a strong quarter here. Talk to us a little bit about specifically what in the commercial organization has changed that is working. This is probably the first time in several quarters, if not a couple of years, where you've been able to kinda accurately forecast the business and actually give improving expectations for the business on a go forward basis. So what is working and what's giving you the confidence to raise guidance already less than a a year into the c in the CEO seat? Mike Nassif: Yeah. Thanks, Brandon. And listen. I wish I can tell you something that makes me look really smart. Reality is it's just focusing on the basics and driving simplicity. You know, I think that, you know, last quarter when we were talking about know, in in the quarter, discussion, but also on the one on ones, You know, specifically, the organization was very comfortable doing monthly forecasts for example. And very early on, that didn't seem like the right approach given our history of missing our forecasts. So we instituted a weekly latest best estimate process where we bring in all of the sales leaders and all of the supporting functions on a weekly basis reviewing the forecast, reviewing the risks and opportunities, reviewing the targeted accounts, discussing what needs to be, what do we need to do to enable the sales team to deliver on the commitments to the customers, And, you know, I would say in the first couple weeks, it was a little bit rough. But now you see the leaders running the calls and the whole organization is really focused on enabling the commercial team. And and one of the things that I think I've shared and I've been trying to instill in the organization is our commercial team needs to be very customer centric. The rest of the organization needs to be in service of the commercial team. And that is how we're driving this. And so early signs is that this is really resonating with the organization, and I think we can kinda see that the in the Q2 performance. Now that said, we don't wanna get ahead of our skis. We're gonna continue to do the same thing this quarter that we did last quarter. Get the new leaders on board, drive more com you know, drive more specificity making sure we're really looking at the opportunities, addressing the concerns, you know, that we have and the headwinds in the market. And I think, really, that is the the formula for success. Brandon Vazquez: Got it. Great. That's that's helpful. Then of the other big questions I get a lot with investors now, and and I'm sure you're aware, is just the feature film manufacturing process. You made a couple of comments in your prepared remarks. On some confidence there. Can you maybe just spend another minute on, like, what is it that's giving you confidence that this is continuing on time And Yeah. Know, what are you seeing in the early ramp of that facility? Mike Nassif: Yeah. Absolutely. And this is a super important project for us. In Q1, I shared that early on, I knew this was a priority, and I spent a lot of time with Jim Walters, our head of operations and the manufacturing team really looking at the at this plan. You know, having been in biopharma businesses and med tech businesses, any tech transfer has a lot of challenges. In this case, we're doing 17. On 17 SKUs. And I was very proud and, and happy, pleasantly surprised, I guess, happy of how the team has thought about all of the potential factors and things that can come to play in in making sure that this transition is is extremely successful. And I think that since then, we have executed that plan. That plan remains the same. We remain, extremely focused, and the process of doing that is starting to you know, demonstrate some results. And so we're we're still on track for the November 2027 timeline. We're in the late stages of production testing, which has gone very well so far. In parallel, we've begun initial phases of product validation. Which we expect to continue into the summer. You know, as I mentioned, in the opening remarks, throughout the course of production testing and the initial product validation work, we've demonstrated that we can manufacture petrifilm. On the new equipment, which is a very important milestone. You know? And so gonna continue to execute the plan. We've got the right talent, the right resources. This is the top focus for us. We are not sparing any any any focus or resource required. And, that's what gives me confidence. Brandon Vazquez: Got it. Thanks a lot, guys, and congrats again. Mike Nassif: Thanks, Brandon. Your next question comes from Subbu Nambi with Guggenheim Securities. Your line is now open. Thomas DeBourcy: Hi, guys. This is Thomas on for Subbu. Thanks for taking our questions. For the growth in indicator testing and culture media, much of that was volume driven, and then how much was on price? Just trying to gauge how we should think about growth for the rest of the year and if that's sustainable. Mike Nassif: Yeah. I can share some thoughts, and and maybe wants to add a few things. I would say that most of it is organic growth. You know, these are these are product lines that we drove specific focus on. And so there are some you know, last quarter, we did share that there was a part of the decline of petri film was due to a inventory correction in our major distributor in The United States, We've seen that distributor go back to normal levels. And when you look at sellout data, it's around 9%. You know? So the the PFM market continues to be healthy. We continue to be the market leader and growing, you know, at that pace. I think pathogens is also another one where we're seeing significant growth, but organic growth. Just due to you know, all of the illnesses, the rise in illnesses and other things, you know, that you see then with allergens, know, that was, as you guys might be aware, you know, we've had some supply issues in the past. We're not through those. Working we've worked through all of the back orders. And we're regaining some lost customers. And we're really looking to get that platform back on state growth. Brian, anything you wanna share there? Brian Rigsby: Yeah. I would just say, total, you know, up 6% and and just more volume than price. Would be the only thing I would emphasize. Thomas DeBourcy: Okay. Awesome. And then maybe just to stay there on Petrie Film. What are your updated assumptions around the 2026 growth rate? And then just how should we think about this longer term, if feature film? much of the growth was volume, is there pricing power still available in the market to take for Thank you, guys. Mike Nassif: Yeah. I mean, I think the, there's always there's always pricing opportunity. And in fact, that's it. Standard language in all of our contracts. One of the things that you know, is not unique to this business is that we have different contract durations and different contract expiry. So as new contracts come on board, certainly, the inflationary pricing adjustments are are introduced. And, of course, when we launch new Petri film, tests, that we always, you know, price that accordingly. I think there continues to be an opportunity to adjust for inflationary measures as new contracts come up for renewal Yeah. I think the only thing I would add is just that you you may recall that in Q1, we had one our largest U. S. Distributor adjusting their inventory levels, which provided for a headwind in Q1 even though the end market Yeah. That's a good one. Yeah. Was still strong. And so that phenomenon wasn't there in the second quarter, so we would expect the remainder of the year for that product to look more like Q2. Operator: Your next question comes from Thomas DeBourcy with Nephron Research. Your line is now open. Thomas DeBourcy: Hi. Thanks, for taking the question. I was just wondering, like, just in terms of, you know, I guess, help me get to the CEO role, your feedback from customers, you know, the business overall. Obviously, they've had to deal with some stockouts of certain products, like a tip collection and just their willingness to kind of work with you as you you know, ramp up production to get back towards more normal inventory levels and then just overall, the business is there a rough breakout you could give in terms of volume versus price in term of the organic growth? Thanks. Mike Nassif: Thanks, Tom, for your question. You know, by now, I have visited all regions and have visited customers distributors, direct customers from around the world. And I honestly have to say, you know, I've never been in a market where customers are rooting for you. Like they are for Neogen? We are a food safety company. I can't tell you how many customers know, some more impacted than other with our supply issues. But they want us to succeed. They see us as a vital partner in their food safety quality program. If, you know, if you if you look at food safety quality program at sites, these are cost centers. You know? These are you know, they're doing the testing required and sometimes they have a lot of turnover. And when there are gaps in their competency or gaps in their training, or knowledge, They rely on Neogen to help fill that gap. And I think that is one of the one of the advantages that we have in addition to having a full food safety portfolio is that we are seen as the experts in the food safety business. And so it has been consistent around the world. Yes. Some customers are frustrated. But they very much want us and need us to succeed because that means that their food safety programs will also succeed. Brian, I don't if you have anything more to just say similar to my earlier comment. Around another product category. It was it was positive, but more volume than price. Thomas DeBourcy: Yeah. Great. Thank you. Operator: There are no further questions at this time. I will now turn the call over to Mike Nassif for closing remarks. Mike Nassif: Great. Thank you, everybody, for joining and all of the conversations and the feedback. I very much look forward to seeing many of you, next week at JPMorgan to continue the conversation. Have a great rest of your day. Operator: Ladies and gentlemen, this concludes the conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Good morning, and welcome to the Acuity Brands, Inc. Fiscal 2026 First Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, the company will conduct a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Charlotte McLaughlin, Vice President of Investor Relations. Charlotte, please go ahead. Charlotte McLaughlin: Good morning, and welcome to the Acuity Brands, Inc. Fiscal 2026 First Quarter Earnings Call. On the call with me this morning are Neil Ashe, our Chairman, President, and Chief Executive Officer, and Karen Holcom, our Senior Vice President and Chief Financial Officer. Today's call will include updates on our strategic progress and on our fiscal 2026 first quarter performance. There will be an opportunity for Q&A at the end of this call. As a reminder, some of our comments today may be forward-looking statements. We intend these forward-looking statements to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, as detailed on slide two of the accompanying presentation. Reconciliations of certain non-GAAP financial metrics with their corresponding GAAP measures are available in our 2026 first quarter earnings release and supplemental presentation, both of which are available on our Investor Relations website, www.investors.acuityinc.com. Thank you for your interest in Acuity Brands, Inc. I will now turn the call over to Neil Ashe. Neil Ashe: Thank you, Charlotte, and thank you all for joining us today. We delivered strong performance in our 2026. We grew net sales, expanded our adjusted operating profit and adjusted operating profit margin, and increased our adjusted diluted earnings per share. We generated strong cash flow and allocated capital effectively. Acuity Brands Lighting performed well in a tepid lighting market. This is the result of the cumulative effect of our strategy to increase product vitality, elevate service levels, use technology to improve and differentiate both our products and how we operate the business, and to drive productivity. Our product vitality efforts continue to deliver value for our customers and for us. This quarter, we launched our new EAX area luminaire product family by Lithonia, an outdoor luminaire that can be used in any environment, from walkways to large parking spaces. EAX is available in our design select portfolio and has over 60 configurable options, including an option to embed RN-like controls. This makes it easier for our agents to choose the right option for our customers and ensures flexibility for multiple types of projects. ABL is winning in new markets through the combination of our luminaires and electronics. Interestingly, our Nightingale brand won several 2025 Nightingale Awards by Healthcare Design Magazine because of our patient-centric approach to product design. Our Nightingale solutions are engineered with the entire patient journey in mind, creating an environment that supports medical teams while ensuring patient and visitor comfort. For example, the Attend sconce and the Asure Nightlight deliver functional low-level illumination that supports patient sleep while enabling caregivers to perform essential duties. In the Refuel segment, we continued to expand and upgrade our lighting solutions. We initially entered the market with the development of our canopy lighting products. In this quarter, we began delivering a comprehensive offering by incorporating AIS products, including our Atrius software and Distech controls, into the refuel solution. By addressing the canopy lights outside, to refrigeration controls in the back of the convenience store, and everything in between, we are creating value throughout the location. The industry continues to recognize the strength of our products. This quarter, several products in our portfolio were awarded Grand Prix de Design Awards and Lit Lighting Design Awards. Two products recognized by both include the Cyclone Lupa, a contemporary outdoor luminaire that focuses on pedestrian safety and security in public spaces like campuses, parks, and city streets. The Eureka segment, a slim minimalist linear LED pendant light designed for a variety of indoor commercial and hospitality environments. Now switching to Acuity Intelligence Spaces, which continues to deliver strong performance. Through Atrius, Distech, and QSC, we have unique and disruptive technologies that are driving productivity for people experiencing spaces and for the people who are providing those spaces. Spaces that range from amusement parks to theaters, university campuses to healthcare facilities, sports stadiums to your office. Atrius and Distech control the management of the space, and QSC manages the experiences in the space. Over time, we will use data from both to enhance productivity outcomes through data interoperability. Taken together, this is how we can make spaces autonomous. This quarter, we began to change customer outcomes by combining our Distech Resets Move, our Q SYS platform. RESETsmove is a multisensor device that uses thermal, light, sound, air quality, temperature, and humidity sensors with AI at the edge, helping users understand how their space is being used. Data collected by the resets move drives changes in the room, including the ability to adjust the screens, cameras, and microphones from our Q SYS platform. Q SYS Reflect is then able to monitor outcomes and performances of the devices within the room. We are then able to further layer lighting controls and shade controls into the solution for an autonomous room experience. We demonstrated this solution to a large multinational technology company in our experience center, and they chose to implement it throughout their headquarters. AIS is also being recognized for the strength of their product portfolios. During the quarter, Atrius Facilities was named a winner in the smart buildings category of the 2025 Facilities Net Vision Awards. Our Q SYS full stack AV platform, the National Systems Contractors Association's Excellence in Product Innovation Award in the category of best centralized AV platform for command and control. And our Q SYS Core 24F processor was recognized with a ProAV Best in Market 2025 award. Before I turn the call over to Karen, I want to reiterate that both ABL and AIS are performing well in a challenging market. In Acuity Brands Lighting, we continue to experience a tepid lighting market. The market appears to be waiting for clarity around interest rates, inflation, and policy. In Acuity Intelligent Spaces, Atrius, Distech, and QSC are working well together, both from a customer perspective and an operational perspective. Our AIS business is strategically differentiated and positioned for value creation. We continue to control what we can control, and we are confident in the long-term performance of both the lighting and spaces businesses. Now I'll turn the call over to Karen who will update you on our first quarter performance. Karen Holcom: Thank you, Neil, and good morning, everyone. We had a strong start to fiscal 2026. We grew net sales, improved adjusted operating profit and adjusted operating profit margin, and increased our adjusted diluted earnings per share. For total Acuity Brands, Inc., we generated net sales of $1.1 billion, which was $192 million or 20% above the prior year. This was driven by growth in both business segments and includes three months of QSC sales. During the quarter, our adjusted operating profit was $196 million, up $38 million or 24% from last year. Adjusted operating profit margin during the quarter expanded to 17.2%, an increase of 50 basis points from the prior year. Our adjusted diluted earnings per share was $4.69, which was an increase of $0.72 or 18% over the prior year. ABL delivered sales of $895 million, an increase of $9 million or 1% versus the prior year, primarily as a result of growth in the independent sales network. As we mentioned last quarter, the independent sales network benefited from an elevated backlog that resulted from orders that were accelerated in advance of price increases in 2025. The higher backlog favorably impacted the fourth quarter of last year and the first quarter of this year. Adjusted operating profit increased $6 million to $160 million. This improvement was driven by our efforts to lower operating expenses. We delivered an adjusted operating profit margin of 17.9%, which was up 60 basis points compared to the prior year. Now moving to Acuity Intelligent Spaces. Sales for the first quarter were $257 million, an increase of $184 million with the inclusion of three months of QSC. Both Atrius and Distech combined and QSC grew in the mid-teens this quarter. Our AIS business also benefited from an elevated backlog that resulted from orders that were accelerated in advance of price increases in the back half of fiscal 2025. The higher backlog favorably impacted the fourth quarter of last year and the first quarter of this year. Adjusted operating profit in Intelligent Spaces was $57 million, with an adjusted operating profit margin of 22%, which was up 100 basis points compared to the prior year. Now turning to our cash flow performance. In the first three months of fiscal 2026, we generated $141 million of cash flow from operations, which was $9 million higher than the same period in fiscal 2025, primarily due to higher profitability. During the quarter, we allocated $28 million to repurchase over 77,000 shares at an average price of around $357. We additionally repaid another $100 million of our term loan during the quarter and have now repaid half of the $600 million of debt used to finance the QSC acquisition. In summary, we started the year with strong performance. We grew net sales, improved margins, and increased adjusted diluted earnings per share. We generated strong cash flow from operations and allocated capital effectively. Thank you for joining us today. I will now pass you over to the operator to take your questions. Thank you. Operator: Our first question comes from Christopher Snyder with Morgan Stanley. Your line is now open. Christopher Snyder: Thank you. I wanted to ask on gross margin. Typically, every year, I think gross margin peaks in Q3 and then down in Q4 and again sequentially into Q1 on the volume declines. The last couple, those step downs have been more significant, I guess, on a six-month basis than typical, which I assume is the result of tariffs coming in and pressuring that margin rate. But I guess, as we look forward and it seems like that's now in the base, do you think the business is, you know, positioned to kind of deliver typical gross margin seasonality, including the step up into the back half of the year? Any color on that would be helpful. Thank you. Neil Ashe: Yeah. Good morning, Chris. I'll start, and then Karen please fill in. So first of all, I think you're really referring to ABL when you talk about that kind of gross margin profile. There is so much noise, I think, in the last call it, nine months, and that'll work its way through the system over the next several. So I think a couple things are going on. First of all, obviously, the tariffs, as you mentioned, those have been inconsistent. So I think the headline is they all happened on April 2, but that's not really what's happened. So there's been a series of different the two thirty-two tariffs to steal, those sorts of things. Have come in and out at different times. So we have then reacted to that by driving and accelerating productivity efforts, number one. And then number two, taking price strategically in different parts of the portfolio. That's the bay that's what you see kind of cascading through the income statement today. As we look forward, and I say this, you know, not on a quarter basis, but on a longer-term basis, we're confident in our ability to continue to drive the margins at ABL. So, you know, as we've said, we're targeting 50 to 100 basis points of operating profit margin improvement per year. We're kind of right in that range now. It just so happened this quarter that was the benefit benefited more from OpEx than we did from gross profit margin. But we feel really good about where we're going. It doesn't mean that everything's gonna go up every quarter, but we feel good about where we are. Christopher Snyder: Thank you. I appreciate that. And then maybe just to follow-up on some of the ABL commentary. You know, I think, typically, we would see a pretty material step down in ABL SDNA from Q4 to Q1, you know, as the volumes drop. You know, I know the OpEx there did come down, but it was pretty muted. Step down Q4 to Q1. Was that a function of some of these productivity investments you just referenced? Or are there other things that are kind of going on on that, the OpEx line, line within SD and A? Thank you. Karen Holcom: Yeah. I think, Chris, overall, when we look at OpEx and you see what ABL did in the third quarter of last year, we started to take costs out. So when you look at the fourth quarter and the third quarter, that really is reflective a lot of those realigning the work and taking some of costs out of the business. So that's probably why it was a little bit more muted as we had already taken a good chunk of those costs out. But overall, you know, we were focused on driving that operating profit margin improvement year over year, and they improved by 60 basis points despite the decline in gross profit that we talked about. So we feel really good about their performance this quarter. Christopher Snyder: Thank you. I appreciate that. Operator: Our next question comes from Tim Wojs with Baird. Your line is now open. Timothy Wojs: Maybe just my first question, Neil. You know, you talked about some if you want to call them, sell deployments between ABL and AIS. And both the fueling market and in some office markets. As you're, you know, kind of going through, you know, those types of, you know, those types of sales and those types of, you know, RFPs and things, are there any sort of gaps in terms of the product portfolio that you're kind of finding that you need? Or do you feel like, you know, the products that you have in both of those spaces is kind of, you know, good for what you're trying to do in those verticals? Neil Ashe: Yeah. Great question, Tim. And let me start philosophically first, which is that it's our view, it's my view that cross-sell opportunities should be driven by customer. So, if the customer realizes the benefit that we're providing across an entire solution, then that will get pulled through the channel as opposed to us, you know, trying to push it. So that's our philosophy. So by as a result, when we start to talk about these things, it'll be because customers have pulled them through, not because we're aggressively pushing them. Net net, it might take a little bit longer, but we'll have a much more durable relationship with those customers. We chose to highlight the two, the two that we highlighted. So first, within AIS, the cross-sell opportunity between the Distech portfolio and the CUSYS portfolio, because it really was the first coming together of the basically inside the space and the management of the space. So that for the benefit of, for the benefit of autonomous room experience. So, there are things we can add to that experience for sure, but they're not required to provide the solution that we provided. I think the refuel is even at least as interesting in that that now spans the entire company. So, obviously, the refuel effort was one that was started in the lighting business. But quickly you realize that the two most important things for the convenience store are to get people into the store, and then from a management perspective inside the store to manage the refrigeration inside the store. So this tech can provide that, I am super pleased by how our teams have worked together to provide those solutions. So we there are other things in the, in that store, for example, that we don't provide, like digital signage, but, basically, they're coming together. Timothy Wojs: Organic and inorganic opportunities to add to the portfolio of AIS over the, you know, the next, you know, two years or so. So, we're pretty enthusiastic about what those opportunities are. Okay. Okay. Super. Thank you. And then I guess just a modeling question. Karen, I guess, in both of the segments, talked about kind of executing on an elevated backlog over the last two quarters. I guess, is the insinuation that, that is kind of behind you and maybe there's a little bit of slower over the next couple of quarters as you kind of the market the company kind of grows closer to the market versus the market plus backlog? Karen Holcom: Yes, Tim, I think that's right. Historically, seasonality is going to be a little bit skewed as we look ahead to Q2 based on those accelerated orders and coming into the first quarter with a little bit of a higher backlog. So as we said in the prepared remarks, both ABL and AIS were favorably impacted from that higher backlog. And so the first half, I would say, is going to be more representative of normal seasonality, but Q2 could be down a little bit more than normal. Timothy Wojs: Okay. Okay. Sounds good. Thank you, guys. Operator: Our next question comes from Christopher Glynn with Oppenheimer. Your line is now open. Christopher Glynn: Just wanted to talk about some of the divergence with ISN and DSN. They kind of diverged a little more than normal in the quarter. I know you called out the backlog strength really impacting the ISN space. But, maybe some other factors beyond that. It was pretty wide divergence. Neil Ashe: Yeah, Chris. I think that that's a good call out, and thanks for the opportunity to talk about them. When I look at the business, I tend to combine them. So if you look at them on a combined basis, that basically exactly where we expect it to be. Accounts move between the two of them, so that's a little bit of the noise that exists there. But, if you take them together, we're kind of exactly where we expected to be. Christopher Glynn: Okay. I'll think about that and follow-up later. But appreciate that. And then, you know, a lot of talk about the gas station under Canopy. Being in-store opportunity there today and combining Q SYS. You also acknowledged some things you don't have, like the signage. And you know, there's a player there that's pretty established with that broad channel strategy. So is it interesting you called out, you know, some of the differentiating factors and some of the lack. Where are you in terms of, you know, meeting your penetration goals there? Is this, you know, a bit of a dog site, or are you availing some clear runway? Neil Ashe: I would say that we're really pleased with our entrance into the market. And taking a step back, this is what I wanted our company to demonstrate. Demonstrate to itself first and to everyone else second is that we can identify an organic opportunity that has some size, and we can develop product portfolio, the go-to-market strategy, and the entrepreneurial spirit to go attack a new vertical like that. So, by all metrics, we're succeeding in that effort. So, we're not the only player in that market, and that market is a comparatively small part of our company. It's decidedly not our whole company. So, but this is a muscle that we want to build so that we can apply it here where we're doing really, really well. And in other areas like healthcare where we're doing well, like sport lighting where we're starting to come in, and others as we go along. So I think the real read here is our ability to attack an area that was not initially in our purview or not historically in our purview and to build both the business model, the product portfolio, the go-to-market that's necessary to be successful there. And that's kind of what's happening. Christopher Glynn: Great color. Thanks, Neil. Neil Ashe: Thanks, Chris. Operator: Our next question comes from Michael Francis with William Blair. Your line is now open. Michael Francis: Hey. Hi, everyone. This is Mike on for Ryan. Wanted to start with just a cleanup. I saw there wasn't the guidance in the PowerPoint. Is there anything that's changed in the outlook? Karen Holcom: Yeah. In the Michael, in the presentation that Charlotte will post after the call, you will see just the same slide with the sales and EPS guidance that we provided in the fourth quarter. So no, nothing changed there. Michael Francis: Okay. Understood. And then one of the talk about gross margins on the AI side. 60% be considered a ceiling, and you think there's more you could do there? Neil Ashe: I think we're good, Mike. We're I think we feel good about 60%. So as we continue to grow, we will focus on two things. One is that the level of margin in that business demonstrates the strategic value of the controls that we provide. So, that's a recognition, I think, of the strategic importance of the business there. As we add products to that portfolio, we may choose to add some additional business models that maybe are slightly lower margin, which will balance it out a little bit. But net net, we feel really good about kind of where that is. Michael Francis: Okay. And then wanted to hear seems like end markets haven't changed at all. Wanted to hear if anything has changed in the quoting environment with that backlog or that backdrop, and any color from the channel would be helpful. Neil Ashe: Yeah. On first, on the lighting side, I would say that as we've said for, what, the last Karen three quarters, it's kind of a tepid lighting environment. We would like the lighting market to be a little bit stronger. All indications we have are that we are at least holding, if not accelerating, our position in the market. So it is where it is. And as I'll point out, I like to point out, you can't build a space or touch a space without touching the lighting. So kind of lighting is all spaces at this point, and we are obviously the best performing player in those spaces. So, yeah, would we like the lighting market to be a little bit stronger? We would. And at some point, it will, and we'll benefit from that. On the AIS side, we've got, you know, disruptive businesses there that are effectively growing through market environments because of their ability to take share from others. So they continue to perform, despite the environment. And it doesn't mean they're gonna be up as much as they are this quarter, every quarter, but we feel good about kind of the trajectory that we're on in AIS. Michael Francis: Thank you. Pass it on. Operator: Our next question comes from Jeffrey Sprague with Vertical Research. Your line is now open. Jeffrey Sprague: Hello. Good morning, everyone. Hope everyone's feeling well. You know, I wanted to get your thought on tariffs. We have the Supreme Court ruling coming up on Friday. Who knows what we get? But, if tariffs would somehow ruled illegal, you know, do you think you'd have to roll back price as tariffs came back? How do you think the channel would respond to that? Or is there, you know, a possibility to sort of pocket some spread there if we have a dramatic change in tariff regime? Neil Ashe: Yeah. Good question, Jeff. So let's take a step back, and I'll tell you what our working hypothesis is and then what I think the practical implications of that are. Our working hypothesis is that things will stay mostly the same. So, however it plays out, I'm not a legal expert, so I can't predict what the ruling will be or how they will rule. But it just feels like if there were a completely adverse ruling that there would be some counterbalance that would keep things roughly the same. The administration would have an alternative or that would be written in some way that things are mostly the same. But let's go down the path of their rules they are disavowed in some way, and then we're there. The question then becomes, okay. So we as the practical matter, we sell our product to a distributor. The distributor sells that product to the contractor. The contractor effectively sells that to the owner of the project. That is that's not the sales process, but that is the flow of revenue. So, if we were to somehow kind of realize the benefit from a tariff, like, you know, refund, who would we give it to? So as you push that down the slide, then the distributor we would have to assume that if we did the distributor would give it to the contractor and that the contractor would give it to the building owner. I just don't think that seems reasonable. So now if you look forward, then our second the second half of our expectation is that there would be a new market that everyone was adapting to, and we would need to adapt to that market from that point forward, just like everybody else was. And we feel good about the dexterity we've demonstrated in our ability to respond to that versus the rest of the industry. Jeffrey Sprague: Mhmm. Yeah. No. Could be quite interesting if that happens. And then just the sort of a quick one back on sort of the backlog normalization. Obviously, a big backlog business in the grand scheme of things. But our backlog is sort of in a normal spot now relative to what your top line guide is? Are we below normal around kind of tepid outlook that you're talking about? Neil Ashe: Yeah. I think we're Jeff now, like, you and I have been having this conversation for now five years. And when I five years ago, I wasn't, you know, what was normal was not normal. And then we've changed through that. I would say that we the industry and we got accustomed to higher backlog levels through the post-COVID period, through kind of tariffs, price increases, and whatnot. So we're now at backlog levels which are more consistent with what they were before all of those things happened, and therefore, our order rate is more consistent with our quarterly performance. And that's what Karen was indicating. So there's still some noise from the price markets in the third quarter and the fourth quarter, which affected this. Is why she said we probably will see more seasonality in the second quarter, especially in the lighting business than we have historically. We're comfortable operating in both environments. But we would like the lighting market to be a little bit stronger. Jeffrey Sprague: Yeah. Understood. No. Thanks for all that color. Thank you. Operator: And I'm showing no further questions in queue at this time. I'd like to turn the call back to Neil Ashe for any closing remarks. Neil Ashe: So I think we had a really good first quarter. So both of our businesses continue to perform. ABL is clearly the best performing lighting business in the world. We've demonstrated through our growth algorithm that we can separate ourselves from the market. And we feel good about kind of the long-term opportunity there to a, continue to grow and, b, continue to improve margins. With AIS at both Atrius, Distech, and QSC, we have disruptive technologies which are taking share in their marketplaces. Over the long term, we have great organic and inorganic opportunities there. So, we are excited about those. So, thank you for spending time with us this morning, and we'll look forward to talking to you again in another quarter. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp's Fiscal Third Quarter 2026 Financial Results Conference Call. Please note that today's call is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Saratoga Investment Corp's Chief Financial and Chief Compliance Officer, Mr. Henri Steenkamp. Please go ahead, sir. Henri Steenkamp: Thank you. I would like to welcome everyone to Saratoga Investment Corp's Fiscal Third Quarter 2026 Earnings Conference Call. Today's conference call includes forward-looking statements and projections. We ask you to refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these forward-looking statements and projections. We do not undertake to update our forward-looking statements unless required to do so by law. Today, we will be referencing a presentation during our call. You can find our fiscal third quarter 2026 shareholder presentation in the Events and Presentations section of our Investor Relations website. A link to our IR page is in the earnings press release distributed last night. For everyone new to our story, please note that our fiscal year-end is February 28. So any reference to Q3 results reflects our November 30 quarter end period. A replay of this conference call will also be available. Please refer to our earnings press release for details. I would now like to turn the call over to our Chairman and Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks. Christian Oberbeck: Thank you, Henri, and welcome, everyone. Saratoga Investment Corp highlights this quarter include continued NAV growth from the previous quarter and year with stable NAV per share, an increase in NII of $0.03 per share from the previous quarter, a strong 13.5% return on equity, beating the industry, net originations of $17.2 million, including 3 new portfolio companies, and importantly, continued solid performance from the core BDC portfolio in a volatile macro environment. Continuing our historical strong dividend distribution history, we announced a monthly base dividend of $0.25 per share or $0.75 per share in aggregate for the fourth quarter of fiscal 2026, which when annualized, represents a 12.9% yield based on the stock price of $23.19 as of January 6, 2026, offering strong current income from an investment value standpoint. Though we did see an increase in adjusted NII of $0.03 per share from the previous quarter, our third quarter NII of $0.61 per share continues to reflect the impact of the last 12 months trend in decreasing levels of short-term interest rates and spreads on Saratoga investments largely floating rate assets as well as continued high levels of repayments. Strong originations outpaced repayments during the third quarter, which when coupled with the repayment of a $12 million baby bond resulted in our cash position at quarter end decreasing to $169.6 million, though we still have significant cash available to be deployed accretively in investments or to repay existing debt. During the quarter, we began to see an increase in M&A activity despite continued competitive market dynamics. While our portfolio again saw multiple debt repayments in Q3, we had strong new originations, resulting in net originations of $17.2 million for the quarter. Specifically, we originated $72.1 million in 3 new investments and 9 follow-ons as well as closing on new investments in multiple BB and BBB structured credit securities. Our strong reputation and differentiated market positioning, combined with our ongoing development of sponsor relationships, continues to create an attractive investment opportunities from high-quality sponsors, which is continuing post quarter end with 4 new portfolio company investments, either closed or closing in Q4 so far, which further improves our run rate earnings. We continue to remain prudent and discerning in terms of new commitments in the current volatile environment. We believe Saratoga continues to be favorably situated for potential future economic opportunities as well as challenges. At the foundation of our strong operating performance is the high-quality nature and resilience of our 1.016 billion portfolio with all 4 historically challenged portfolio company situations resolved. Our current noncore CLO portfolio was marked up, including realized gains by $2.9 million this quarter, more than offsetting the CLO and JV markdown of $0.4 million, resulting in the fair value of the portfolio increasing by $2.5 million during the quarter. As of quarter end, our total portfolio fair value was 1.7% above cost, while our core non-CLO portfolio remains 2.1% above cost. The overall financial performance and solid earnings power of our current portfolio reflect strong underwriting in our growing portfolio companies and sponsors in well-selected industry segments. During the third quarter, our net interest margin increased from $13.1 million last quarter to $13.5 million driven primarily by a $0.5 million decrease in interest expense, reflecting the recent $12 million baby bond repayments. This quarter's interest income remained relatively unchanged, benefiting from first average non-CLO assets increasing by approximately 0.9% to $962 million. And second, this quarter's repayments resulting in various accelerated OID recognitions. This was largely offset by 2 factors: First, the absolute yields of the core non-CLO BDC portfolio reducing from 11.3% to 10.6% due to SOFR rates resetting from earlier reductions, combined with the impact of lower yielding new originations during the quarter. And second, the timing of new originations and repayments in Q3. In addition, the full period impact of the 0.5 million shares issued through the ATM program in Q2 and the partial impact of the additional 0.1 million shares issued in Q3, resulted in a $0.01 per share dilution to NII per share. Our overall credit quality for this quarter continued to improve to 99.8% of credits rated in our highest category. There's just one investment remaining on nonaccrual status, Pepper Palace, which has been successfully restructured, representing only 0.2% of fair value and 0.4% of cost. With 83.9% of our investments at quarter-end in first lien debt and generally supported by strong enterprise values and balance sheets in industries that have historically performed well in stress situations, we believe our portfolio and company leverage is well structured for future economic conditions and uncertainty. As we continue to navigate the challenges posed by the current geopolitical tensions and volatility in the broader underwriting, M&A and macro environment, we remain confident in our experienced management team, robust pipeline, strong leverage structure and disciplined underwriting standards to continue steadily increase the size, quality and investment performance of our portfolio over the long term and deliver compelling risk-adjusted returns to shareholders. As always, and particularly in the current uncertain environment, balance sheet strength, liquidity and NAV preservation remain paramount for us. At quarter end, we maintained a substantial $396 million of investment capacity to support our portfolio companies, with $136 million available through our existing SBIC III license, $90 million from our 2 revolving credit facilities and $169.6 million in cash. This level of cash improves our current regulatory leverage of 168.4% to 183.7% net leverage, netting available cash against outstanding debt. Moving on to Saratoga Investments fiscal 2026 third quarter, key performance indicators as compared to the quarters ended November 30, 2024, and August 31, 2025. Our quarter end NAV was $413 million, up 10.2% from $375 million last year and up 0.7% from $410.5 million last quarter. Our NAV per share was $25.59, down from $26.95 last year and $25.61 last quarter. Our adjusted NII was $9.8 million this quarter, down 21.3% from last year and up 7.8% from last quarter. Our adjusted NII per share was $0.61 this quarter, down 32.2% from last year and up 5.2% from last quarter. Adjusted NII yield was 9.5% this quarter, down from 13.3% last year and up from 9% last quarter. And latest 12 months return on equity was 9.7%, up from 9.2% last year and 9.1% last quarter and above the industry average of 6.6%. While last year, saw markdowns to a small number of credits in our core BDC -- our core BDC, Slide 3 illustrates how our recent results have delivered an ROE of 9.7% for the last 12 months above the industry average of 6.6%. Additionally, our long-term average return on equity over the past 12 years of 10.1% is well above the BDC industry average of 6.9%. Our long-term return on equity has remained strong over the past decade plus, beating the industry 9 in the past 12 years and consistently positive every year. As you can see on Slide 4, our assets under management have steadily and consistently risen since we took over the BDC 15 years ago, despite a slight pullback recently, reflecting significant repayments. This quarter saw originations again outpacing repayments, resulting in an increase in AUM as compared to the previous quarter, and we continue to expect long-term AUM growth. The quality of our credits remains strong with just 1 recently restructured investment remaining on nonaccrual Pepper Palace. Our management team is working diligently to continue this positive long-term trend as we deploy our significant levels of available capital into our pipeline while at the same time being appropriately cautious in this evolving and volatile credit and economic environment. With that, I would like to now turn the call over to Henri to review our financial results as well as the composition and performance of our portfolio. Henri Steenkamp: Thank you, Chris. Slide 5 highlights our key performance metrics for the fiscal third quarter ended November 30, 2025, most of which Chris already highlighted. Of note, the weighted average common shares outstanding in Q3 was 16.1 million, increasing from 15.8 million and 13.8 million shares for last quarter and last year's third quarter, respectively. Adjusted NII was $9.8 million this quarter, down 21.3% from last year and up 7.8% from last quarter. This quarter's increase in adjusted NII as compared to the prior quarter was largely due to the net interest margin changes that Chris mentioned earlier. The decrease from the prior year reflects lower AUM and base interest rates, along with the recent repayment of certain well-performing investments. The weighted average interest rate on the core BDC portfolio of 10.6% this quarter, compares to 11.8% as of last year and 11.3% as of last quarter. The yield reduction from last year primarily reflects the SOFR base rate decreases over the past year, but is also indicative of recent tighter spreads experienced on new originations versus historically higher spreads on repaid assets. Total expenses for Q3, excluding interest and debt financing expenses, base management and incentive fees and income and excise taxes increased by $0.5 million to $3.3 million as compared to $2.8 million last year, and increased by $0.8 million from $2.5 million last quarter. This represented 0.8% of average total assets on an annualized basis, unchanged from last quarter and down from 0.9% last year. Also, for investors interested in digging deeper into the income statement and balance sheet metrics for the past 2 years, we have again added the KPI Slides 26 through 29 in the appendix at the end of the presentation. Slide 50 is a new slide that we recently added comparing our nonaccruals to the BDC industry. You will see that our nonaccrual rate of 0.4% of cost is 8x lower than the industry average of 3.2%. This highlights the current strength and credit quality of our core BDC portfolio. Moving on to Slide 6. NAV was $413.2 million as of fiscal quarter end, a $2.7 million increase from last quarter and a $38.3 million increase from the same quarter last year. In Q3, $1.5 million of new equity was raised at or above net asset value through our ATM program. This chart also includes our historical NAV per share, which highlights how this important metric has increased 23 of the past 53 quarters. Over the long term, this metric has increased since 2011 and grown by $3.62 per share or 16.5% over the past 8.5 years. On Slide 7, you will see a simple reconciliation of the major changes in adjusted NII and NAV per share on a sequential quarterly basis. Starting at the top, adjusted NII per share was up $0.03 in Q3. This is due to an increase in non-CLO net interest income during the quarter of $0.02, primarily driven by accelerated OID on repayments. The increase in BB investments interest income of $0.02 from higher assets and the increase in other income of $0.03 from both higher advisory fees on originations and prepayment penalties on redemptions. This was partially offset by an increase in operating expenses of $0.03, reflecting expenses related to the recent annual meeting and increased deal expenses and dilution from the increased DRIP and ATM program share count of $0.01. On the lower half of the slide, NAV per share decreased by $0.02 with the $0.14 under earning of the dividend, fully offset by net realized gains and unrealized depreciation of $0.14, including deferred tax benefit. This leaves a $0.02 net dilution from the ATM and DRIP programs. Slide 8 outlines the dry powder available to us as of quarter end, which totaled $395.6 million. This was spread between our available cash, undrawn SBA debentures and undrawn secured credit facilities. This quarter end level of available liquidity allows us to grow our assets by an additional 39% without the need for external financing, with $170 million of quarter end cash available, and that's fully accretive to NII when deployed, and $136 million of available SBA debentures with its low-cost pricing, also very accretive. In addition, all $269 million of our baby bonds, effectively all of our 6% plus debt is callable now, providing us the option to refinance them, creating a natural protection against potential continuing future decreasing interest rates, which should allow us to protect our net interest margin, if needed. These calls are also available to be used prospectively to reduce current debt. This quarter, we also repaid our $65 million in senior credit facility, refinancing it with the issuance of an upside $85 million credit facility with a group of banks led by Valley Bank. The terms of this facility are substantially the same while cutting the spread cost by approximately 150 basis points and extending the maturity to 3 years. We do have our $175 million, 4.375% 2026 notes maturing at the end of February 2026. We are currently assessing our existing liquidity and cash in addition to various capital markets options in determining the most optimal source to use to repay this. We remain pleased with our available liquidity and leverage position, including our access to diverse sources of both public and private liquidity and especially taking into account the overall conservative nature of our balance sheet and that most of our debt is long term in nature. Also, our debt is structured in such a way that we have no BDC covenants that can be stressed during volatile times, especially important in the current economic environment. Now I would like to move on to Slides 9 through 12 and review the composition and yield of our investment portfolio. Slide 9 highlights that we have $1.016 billion of AUM at fair value and this is invested in 46 portfolio companies, 1 CLO fund, 1 joint venture and numerous new BB and BBB CLO debt investments. Our first lien percentage is 83.9% of our total investments, of which 29.7% is in first lien last-out positions. On Slide 10, you can see how the yield on our core BDC assets, excluding our CLO investments has changed over time, especially this past year, reflecting the recent decreases to interest rates. This quarter, our core BDC yield decreased to 10.6% from last quarter's 11.3%, with 3/5 of the decrease, reflecting further core base rate reductions and the rest due to recent tight spreads experienced on new originations versus historically higher spreads on repaid assets. The CLO yield decreased to 10.0% from 11.8% last quarter, reflecting the inclusion of the new BB and BBB CLO debt investments to this category that have a yield of approximately 8% to 10%. Slide 11 shows how our investments are diversified through primarily the United States. And on Slide 12, you can see the industry breadth and diversity that our portfolio represents, spread over 41 distinct industries in addition to our investments in the CLO, JV and BB and BBB CLO debt securities, which are included as structured finance securities. And finally, moving on to Slide 13. 8.3% of our investment portfolio consists of equity interest, which remain an important part of our overall investment strategy. This slide shows that for the past 13-plus fiscal years, we had a combined $45.6 million of net realized gains from the sale of equity interests. This year alone, we have generated $6 million in net realized gains. This long-term realized gain performance highlights our portfolio credit quality, has helped grow our NAV and is reflected in our healthy long-term ROE. That concludes my financial and portfolio review. Our Chief Investment Officer, Michael Grisius, will now provide an overview of the investment market. Michael Grisius: Thank you, Henri. I'll give an update on the market since we last spoke in October and then comment on our current portfolio performance and investment strategy. We are starting to see a pickup in M&A activity in the market we participate in. But the biggest driver of our increased production is the success we are seeing in our own business development efforts. As seen by the fact that 5 of the 7 most recent new platform companies we have closed or are in process of closing are with new relationships. The combination of historically low M&A volume in the lower middle market for an extended time and an abundant supply of capital has kept spreads tight and leverage full as lenders compete to win deals, especially premium ones. Market dynamics remain at their most competitive level since the pandemic. We've also experienced repayment activity from some of our lower leveraged loans being refinanced on more favorable terms. Although we are seeing some signs of a pickup in M&A volume, historically low deal volumes have made it more difficult to find quality new platform investments than in prior periods. Since we can't control M&A activity, we focus on the things that we can control. In summary, to first stay disciplined on asset selection; second, invest in and generally expand our business development efforts in a market that is still largely underpenetrated by us; and third, continue to support our existing healthy portfolio companies as they pursue growth. The relationships and overall presence we've built in the marketplace, combined with our ramped up business development initiatives, give us confidence in our ability to achieve healthy portfolio growth in a manner that we expect to be accretive to our shareholders in the long run. Now before leaving this topic, I'd like to reiterate that we continue to believe that the lower middle market is the best place to be in terms of capital deployment. As compared to the larger end of the middle market, the due diligence we're able to perform when evaluating an investment is much more robust. The capital structures are generally more conservative with less leverage and more equity, the legal protections and covenant features in our documents are considerably stronger and our ability to actively manage our portfolio through ongoing interaction with management and ownership is greater. As a result, we continue to believe that the lower middle market offers the best risk-adjusted returns, and our track record of realized returns reflects this. Our underwriting bar remains high as usual, in a very tough market, yet we continue to find opportunities to deploy capital. As seen on Slide 14, providing additional capital to existing portfolio companies continues to be an asset deployment means for us with 25 follow-ons in calendar year 2025. Notably, we have also invested in 7 new platform investments this calendar year, reversing the decline we experienced in the prior calendar year. Overall, our deal flow is increasing as our business development efforts continue to ramp up. Our consistent ability to generate new investments over the long term despite ever-changing and increasingly competitive market dynamics is a strength of ours. Portfolio management is critically important, and we remain actively engaged with our portfolio companies and in close contact with our management teams. We ended the quarter with just 1 investment still on nonaccrual status, Pepper Palace and now only 0.2% of the portfolio at fair value and 0.4% at cost are on nonaccrual status. In general, our portfolio companies are healthy and the fair value of our core BDC portfolio is 2.1% above its cost. 84% of our portfolio is in first lien debt and generally supported by strong enterprise values in industries that have historically performed well in stressed situations. We have no direct energy or commodities exposure. In addition, the majority of our portfolio is comprised of businesses that produce a high degree of recurring revenue and have historically demonstrated strong revenue retention. Now looking at leverage on the same slide, you can see that industry debt multiples move closer to 6x with unitranche in the mid-5s. Total leverage for our overall portfolio is down to 5.05x, excluding Pepper Palace. Slide 15 provides more data on our deal flow. As you can see, the top of our deal pipeline is significantly up from the end of calendar year 2024. This recent increase of deal sourced is as a result of our recent business development initiatives, with 25 of the 79 term sheets issued over the last 12 months being for deals that came from new relationships. Overall, the significant progress we've made in building broader and deeper relationships in the marketplace is noteworthy because it strengthens the dependability of our deal flow and reinforces our ability to remain highly selective as we rigorously screen opportunities to execute on the best investments. Our originations this fiscal quarter totaled $72.1 million, consisting of 3 new investments totaling $40.5 million, 9 follow-ons totaling $25.6 million, and BB and BBB CLO debt investments of $6 million. Two of the 3 new portfolio companies closed in the quarter are with new relationships. Subsequent to quarter end, we closed or currently have been closing in our core BDC portfolio, approximately $89.3 million of new originations in 4 new portfolio companies and 6 follow-ons, including delayed draws, offset by $30.5 million of repayments. Three of these 4 new portfolio companies are with new relationships. As you can see on Slide 16, our overall portfolio credit quality and returns remain solid. As demonstrated by the actions taken and outcomes achieved on the nonaccrual and watch list credits we had over the past year, our team remains focused on deploying capital and strong business models where we are confident that under all reasonable scenarios, the enterprise values of the businesses will sustainably exceed the last dollar of our investment. Our approach and underwriting strategy has always been focused on being thorough and cautious. Since our management team began working together 15 years ago, we've invested $2.4 billion in 125 portfolio companies and have had just 3 realized economic losses on these investments. Over that same time frame, we've successfully exited 85 of those investments, achieving gross unlevered realized returns of 14.9% on $1.34 billion of realizations. The weighted average returns on our exits this quarter were consistent or even slightly higher than our overall track record at around 15.6%. Even taking into account the recent write-downs of a few discrete credits, our combined realized and unrealized returns on all capital invested equal 13.5%. Total realized gains within the quarter were $3.1 million across 2 portfolio companies and year-to-date were $6 million. We think this performance profile is particularly attractive for a portfolio predominantly constructed with first lien senior debt. As mentioned, we now have only 1 investment on nonaccrual, although Pepper Palace has been restructured, we are still classifying it as red with a fair value of $2 million. Pepper Palace continues to be managed actively with several initiatives underway. In addition, during the quarter, our overall core non-CLO portfolio was marked up by $2.9 million, including realized gains, reflecting the strength of our overall portfolio. Our overall investment approach has yielded exceptional realized returns and recovery of our invested capital and our long-term performance remains strong as seen by our track record on this slide. Moving on to Slide 17, you can see our second SBIC license is fully funded and deployed, although there is cash available there to invest in follow-ons, and we are currently ramping up our new SBIC III license with $136 million of lower cost, undrawn debentures available, allowing us to continue to support U.S. small businesses, both new and existing. This concludes my review of the market, and I'd like to turn the call back over to our CEO. Chris? Christian Oberbeck: Thank you, Mike. As outlined on Slide 18, our latest dividend of $0.75 per share in aggregate for the quarter ended November 30, 2025 was paid in 3 monthly increments of $0.25. Recently, we declared that same level of $0.75 for the quarter ended February 28, 2025, marking the fourth quarter of our new dividend payment structure. We also distributed a $0.25 per share special dividend, which was paid in December. Board of Directors will continue to evaluate the dividend level on at least a quarterly basis, considering both the company and general economic factors, including the current interest rate and macro environment's impact on our earnings. Moving to Slide 19. Our total return for the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 11%, vastly beating out the BDC indexes negative 4%. This places us in the top 6 of all BDCs for calendar 2025. Our longer-term performance is outlined on the next slide, Slide 20, which shows that our 5-year total return places us above the BDC index, and our 3-year return is in line with the industry. Additionally, since Saratoga took over management of the BDC in 2010, our total return of 851%, has been almost 3x the industry's 283%. On Slide 21, you can further see our last 12 months performance placed in the context of the broader industry and specific to certain key performance metrics. We continue to focus on our long-term metrics such as return on equity, NAV per share, NII yield and dividend growth and coverage, all of which reflect the value our shareholders are receiving. While NAV per share growth has lagged this past year, this is largely due to last year's 2 discrete nonaccrual investments previously discussed. With regards to NII yield and dividend coverage, the recent repayments of successful investments have reduced this fiscal year's NII, leaving a healthy level of cash available for future deployments. In this volatile macro environment, we will be prudent in deploying our significant available capital into strong credit opportunities that meet our high underwriting standards. Our focus remains long term. We also continue to be 1 of the few BDCs to have grown NAV accretively over the long term and have a consistent, healthy return on equity with our long-term return on equity at roughly 1.5x the industry average, and latest 12 months return on equity also beating the industry by 310 basis points. Moving on to Slide 22. All of our initiatives discussed on this call are designed to make Saratoga investment a leading BDC that is attractive to the capital markets community. We believe that our differentiated performance characteristics outlined on this slide will help drive the size and quality of our investor base, including adding more institutions. These differentiating characteristics, many previously discussed, include maintaining 1 of the highest levels of management ownership in the industry at 10.8%, ensuring that we are strongly aligned with our shareholders. Looking ahead on Slide 23, while geopolitical tensions and macroeconomic uncertainty remain ongoing factors, we began seeing renewed momentum in the M&A activity across the market, and we continue to focus on expanding deal sourcing relationships. At the same time, our portfolio continues to perform, and we remain encouraged by the resilience and strength of our pipeline. While broader sentiment towards private credit market has become increasingly cautious due to a few high-profile bankruptcies, we believe these issues are largely idiosyncratic and not indicative of the broader credit market fundamentals. In addition to these companies not being representative of the lower end of the middle market that we participate in. Supported by our experienced management team, disciplined underwriting and strong balance sheet, we believe we are well positioned to responsibly grow the size and quality of our portfolio, generate consistent investment performance and deliver compelling risk-adjusted returns for our shareholders over the long term. In closing, I would again like to thank all of our shareholders for their ongoing support. I would like to now open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Erik Zwick with Lucid Capital Markets. Erik Zwick: I wanted to start first, Chris, in your prepared comments, you mentioned that you saw an increase in M&A activity in the most recent quarter. And I'm curious if maybe you could just provide a little more color there in terms of whether that was fairly broad-based or has it been concentrated in a few industries. And do you expect that to continue into '26 here? Christian Oberbeck: Well, I guess we're not really equipped to talk about the entire M&A marketplace. But I think, clearly, just take the large end of some mega, mega deals done last year, and that are fairly new to the market recently. So large M&A has picked up substantially. And then in the world that we're focused on, we're just seeing more deals, more -- more people are getting ready to transact on both sides, sellers and buyers. And I think as Mike mentioned in his remarks, and I'll turn it over to Mike to talk more -- more specifically, I think we're also seeing, even though the M&A is up, we're seeing a lot more competition. So there's just a lot of interest in all these M&A transactions. So we are hopeful that this is the beginning of a -- sort of back to more of a normalization of the level of M&A that we've seen in general that has been missing over the last couple of years. Mike? Michael Grisius: Yes. Let me expound on that. So when we look at the deal flow that we're getting from our relationships that we've had for years, we view that as kind of more of an indicator of the M&A market moving because we're already seeing deal flow from that group. And if their deal flow is picking up, we view that as a good sign and probably reflective of M&A activity growing. It's a little too early to say with certainty, but certainly, we do see a pickup there, and we're seeing more change of control transactions there and getting involved in more processes, which is great. One of the things that we like so much about being at our end of the market is that, we're not just beholden to the M&A market and having to just kind of wait for the tide to come in, if you will. At the lower end of the middle market, there's just thousands upon thousands of companies. And so if you put effort into getting deep into the various markets throughout the country and getting to know the different deal dealers and investors in these small end of the market, you can drive a lot more deal flow. And that deal flow doesn't necessarily move 1 to 1 with the larger M&A activity. Some of these businesses get -- involved in a change of control transaction because there's somebody is retiring and moving on and deciding to sell their business. It might be baby boomer activity, things of that nature. And so we're in a position where certainly we're affected by M&A activity, and we are seeing a pickup there. But we also feel like our destinies in our own hands, which you see in the origination activity that we've been successful with. Recently, a lot of that's just based on us, doubling down on our outreach in the marketplace. Erik Zwick: That's great color. And then moving to Slide 13, where you've outlaid kind of the historical trends for realized gains. It's nice to see over the past 3 quarters, you've returned to your longer-term trend of positive gains there. And I know it's hard to have too much of a forward-looking view there. But anything expected in the near term, either in the current quarter or maybe a quarter out where you might see some more realizations there? Christian Oberbeck: As you can appreciate, we're not in control of that. And so it's hard for us to make a prediction. I mean there are some processes underway in some of our portfolio companies, but how they wind up is not something we're in a position to predict at this moment. Henri Steenkamp: Yes, Erik, I would say just timing is hard to say, but what we are really happy about is that on the noncore -- sorry, our core non-CLO BDC business, our fair value is about 2% above our costs. So that's just from an overall perspective, which obviously we're happy to see. Erik Zwick: Got it. And last one for me. Just thinking about the impact of lower short-term interest rates. You noted that several times during your comments, you've got a slide addressing that. I think that November cut probably has not been fully realized in the portfolio and not the December cut as well, and the futures market is looking at another 50 as well as spreads remaining tight. Henri, you mentioned the opportunity on the liability side to maybe bring out some cost savings there. So just trying to think about the earnings power from kind of the current level that you just reported, is holding the line there, would you consider that success kind of given the headwinds there? Or is the opportunity to put some of that liquidity to work that you've mentioned provides you the opportunity to potentially grow NII dollars over the next few quarters? Christian Oberbeck: Well, I think you laid out pretty much a number of our considerations. One thing to add perhaps is capital deployment. I mean we've got a lot of capital that hasn't been deployed yet. We have a growing pipeline. And so I think the mix of all those things you've described, including incremental deployment, those are all the factors that we're looking at and working on them. I think our quarterly progression this year, we think this is very positive and sort of on all fronts. And so we're hopeful that, that will continue. We obviously can't predict it. We do have those headwinds, but we've had those headwinds all year and we're still to continue to make progress. And we hope to -- again, I think that capital deployment is probably the place to look for. And I think also as the M&A market expands, we're hopeful that maybe the spread compression will go in other direction. I mean there's lots of -- there's AI, there's mega deals. There's all sorts of things happening in the M&A marketplace that hopefully are going to result in. And then maybe the private credit, the bloom is off the rose a little bit. There's a bad press out there. So maybe the flow of money into it that isn't quite the magnitude that was before. So hopefully, the whole thing settles out to a much more normalized place. I mean we personally -- I think in our opinion, we think spreads are tighter than they should be relative to all the factors out there. And we think that's more of a temporary thing. And so -- as interest rates go down, spreads may widen as they have generally historically. So I think putting all that mix together, we feel are well equipped and well positioned to make the best of the opportunities ahead. Operator: Our next question comes from the line of Casey Alexander with Compass Point Research & Trading. Casey Alexander: Mike, this is for you. I probably heard 5 or 6 times during the prepared remarks about tighter spreads on new investments. And I'm interested, what's the trade-off to make sure that you're receiving an adequate risk-adjusted rate of return, right? Are you -- is the spreads allowing you to still capture the covenants? Is that a competitive aspect? Is it being the spread allowing you to capture a new relationship? Or is the spread allowing you to capture a little additional equity on the deal? How do we get comfortable with that you're still earning an adequate risk-adjusted rate of return when spreads get tight like this as they have been? Michael Grisius: Well, I think the way I'd answer that question is that we don't necessarily look at it as a trade-off. The spreads are tightening. And the way we look at every deal is do we feel like the fundamental risks of the investment that we're making are level set. That is, are we getting a return where we feel like it's appropriate from a risk-adjusted standpoint. Do we feel like under almost all reasonable circumstances, we're going to get our capital back and we're going to earn a good return over time. And is that going to be accretive to our shareholders relative to our cost of capital. So we enjoy the benefit of the SBIC license, which gives us very favorable cost of capital. We certainly evaluate which deals fit in the SBIC and price those accordingly. But all the deals that we're doing, we're looking at as being from a standpoint of being accretive to our shareholders, for sure. I would also point out one of the things that's really nice about being in our end of the market, which you don't see in the middle market so much is we referenced the 7 deals that we closed or have in closing right now, 6 of the 7 of those deals, we have an equity co-investment. And you also heard us reference the return that we've got on some of the exits this quarter, which were about 15%. Most of that delta between the current rate and that ultimate IRR are achieved through the equity co-investments, which is pretty core to our strategy and not something that the middle market or upper middle market enjoys. Casey Alexander: Okay. My last question is, it seems like over the last 2 or 3 years that the majority of the new portfolio companies have come from new relationships. And while I understand that you want to broaden the platform, at the same point in time, there's value to the deals that you have from the existing relationships because you tend to know how they act when things get sideways. And so I just want to hear how you're balancing that risk because new relationships sometimes can surprise you when things go wrong, and so I want to get a feel for how you feel about that effort? Michael Grisius: Yes. And that's a very fair question and something that we spend a lot of time thinking about as well. I would remind you that for us, what's so neat about our business model and our investment approach is that most quarters our follow-on activity exceeds our new origination new platform activity. So most of the investments that we're making, we're sort of coming in with a relatively small bite-size, and then we're watching the performance of the asset and then we're supporting their growth over time, and it gives us sort of option value, if you will. And most of that historically has really been candidly with existing relationships. This progress that we've been making with new relationships is relatively new thing, and it's been a result of a lot of the business development efforts that the whole team has embarked upon, I'll call it, in the last year to 18 months. That -- the gestation period of getting a deal done with a new relationship is quite long. In a lot of ways, we wish it were shorter. But ultimately, it's quite long, and it's one of the reasons you have some pretty healthy barriers to entry in developing new relationships. But typically, when we're cultivating a new relationship, we have a really good sense of the sponsorship's reputation in the marketplace. We have a really good sense of the portfolio that they've constructed, how it's performed. We have a really good sense of the key team members. We generally have been in the market for a long time. We do a lot of work trying to get comfortable that the ownership group is the right one for the asset that they're investing in and that we're supporting. So it is something that we take a lot of take into account. And I would tell you, the bar is a bit higher as you correctly pointed out, when you know a group and you know exactly how they behave and what -- where they're really good, and maybe where they don't have as strong an investment perspective, it can make it easier to make investment decisions. When you don't have that history, you've got to do a lot more work, which is something that we have done and we'll continue to do. Christian Oberbeck: The other thing I would add, Casey, is that is the opportunity side of this, which is these are -- these are new relationships for doing a deal. We've been courting these people for a long time. And so in many instances, we've been tracking them. So it's not like they're brand new parties. And if you look at how we grow and our market opportunity across the smaller middle market, each one of these new relationships can all of a sudden lead to, as Mike was describing, a series of investments with follow-ons and sort of a compounding growth effect in terms of the opportunity flow. And relatively, I'm not going to say proprietary because that might be too strong a word, but certainly preferred flow in our direction with us having a lot more control over our participation in the follow-ons and the new deals. Operator: Our next question comes from the line of Heli Sheth with Raymond James. Heli Sheth: So obviously, in the same tune as Erik and Casey, originations and repayments were elevated this quarter, and there seems to be a pickup in the M&A market. Any sort of shift in the mix of the kind of deals you're seeing in the pipeline in terms of sponsor versus nonsponsor, incumbent versus new borrowers or LTVs? Michael Grisius: Really, really good question. Not a significant difference in that respect. We have developed a really strong expertise in SaaS lending. We continue to see, therefore, a lot of deals in that space and think that it's still a rich market for us to lend to and invest in. But I would say that we've also grown our relationships outside of that space, and we are seeing probably more deals outside of the software space than we have historically. So the majority of the deals that we've done or have been closing are non-software deals that are kind of core lower middle-market businesses generally. Outside of that, I think the flavor is what it typically is, a mix of mostly sponsored deals, but also some deals where they're an independent sponsor or we're backing a management team directly. And that's been a core part of our business as well and has been an area where we've invested very successfully. Heli Sheth: Alright. That's helpful. And you mentioned kind of also investing outside SaaS and tech. I know AI has been a concern when it comes to lending. So any ideas of what industries you would say are vulnerable to AI outside of tech? Michael Grisius: That could be a much, much longer answer than I could give on this call. But I would say when we're looking at any business, we're always evaluating it from a perspective of what is it that AI brings to the table. And could AI change the business in a very significant way where it could get disrupted. And if the conclusion is that it's hard to say how the impact is going to be, we're going to steer away from those deals. So it's -- I think the AI development is relatively new, but it's something that we're highly attuned to and evaluating for every single deal that we look at. I would say there's also some portfolio companies that we have, where they're incorporating AI and they're using it to improve their business in a way that is improving the credit profile of some of our portfolio companies as well. So it's -- it's a double-edged sword, but it's something that we're very much focused on. Christian Oberbeck: And we're definitely staying away from taxi medallions. Heli Sheth: Perfect. And then 1 last quick one. Could I get the spillover balance as of the end of the quarter? Henri Steenkamp: Yes. And per share, Heli, it's probably around approximately $2 per share at the moment. Operator: And I'm showing no further questions at this time, and I would like to hand the conference back over to Christian Oberbeck for closing remarks. Christian Oberbeck: Well, I would like to thank everyone for their time and interest and support of our Saratoga Investment Corp., and we look forward to speaking with you next quarter. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.
Operator: Greetings, and welcome to Oxford Industries Third Quarter Fiscal 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Brian Smith from Oxford. Thank you, and you may begin. Brian Smith: Thank you, and good afternoon. Before we begin, I would like to remind participants that certain statements made on today's call and in the Q&A session may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not guarantees, and actual results may differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results of operations or our financial condition to differ are discussed in our press release issued earlier today and in documents filed by us with the SEC including the risk factors contained in our Form 10-K. We undertake no duty to update any forward-looking statements. During this call, we'll be discussing certain non-GAAP financial measures. You can find a reconciliation of non-GAAP to GAAP financial measures in our press release issued earlier today, which is posted under the Investor Relations tab of our website at oxfordinc.com. And now I'd like to introduce today's call participants. With me today are Tom Chubb, Chairman and CEO; and Scott Grassmyer, CFO and COO. Thank you for your attention. And now I'd like to turn the call over to Tom Chubb. Thomas Chubb: Good afternoon, and thank you for joining us today. As is typical for our third quarter, I'll keep my comments on Q3 relatively brief before turning to what we're seeing in the early weeks of the fourth quarter and how we are approaching the holiday season and the rest of the year. We are pleased with what we were able to accomplish during the third quarter with our financial results broadly in line with the expectations we set earlier in the year. The environment remained highly competitive and promotional, and the consumer continued to be selective with their discretionary spending, often requiring new and innovative product to catch our attention. Against that backdrop, our team stayed focused on our long-term priorities and executed well on the fundamentals of our strategy. Strong sales growth in both the Emerging Brands Group and Lilly Pulitzer offset declines at Tommy Bahama and Johnny Was. Total company comp sales were slightly positive. And while gross margins continue to reflect the pressures we've discussed in prior quarters related to tariffs, our underlying adjusted gross margin, absent that pressure, improved over last year's even in a highly promotional environment. In addition to the financial results, we made important progress on a number of key initiatives across the enterprise, starting with people, we were pleased to have realigned and strengthened our teams in Johnny Was and the Emerging Brands Group through a combination of internal promotions and hiring key executive talent from outside the company. Also at Johnny Was, we made significant progress with the business improvement plan we discussed last quarter. In Tommy Bahama, our bars and restaurants are a distinct competitive advantage, and we were pleased to have added 2 important restaurant openings during the quarter. In Lilly Pulitzer, we anniversaried last year's very successful Palm Beach Fashion show with a fashion show in Key West. Last year's event has helped fuel creative content and commercial success throughout 2025, and we expect this year's event to do the same for 2026. We also completed the renovation of our Worth Avenue Lilly Pulitzer flagship location in Palm Beach. Finally, we are in the final stages of construction of the new state-of-the-art fulfillment center that will be such an important asset to our direct-to-consumer businesses. None of these items will have immediate impact on our financial results, but are critical parts of the foundation of future success. As I previously mentioned, across the portfolio, performance varied by brand as it has for much of this year. The bright spot continued to be Lilly Pulitzer, where the brand again demonstrated a deep connection with its core consumer and delivered healthy growth in the quarter. Our Emerging Brands business also posted strong year-over-year sales gains, reflecting growing recognition, relevance, customer engagement and growth potential. Moving to Tommy Bahama. While our third quarter results did not meet our goals for the brand, we did see encouraging progress. Comps improved sequentially to down low single digits from down high single digits earlier in the year. We believe we've made meaningful headway in addressing key areas that contributed to softness early in the year, particularly around color assortment and completeness of the line, which led to disparate regional performance and softness in Florida, our most important market. There is still work to do, but we feel good about the adjustments made so far. At the same time, we continue to invest in the long-term health of the brand through thoughtful expansion of our retail and hospitality footprint. During the quarter, we reentered the important St. Armands Circle outside of Sarasota with a beautiful new full-service restaurant and retail store, which replaced our previous restaurant that was damaged and closed in 2024 due to a hurricane. This new location reinforces the strength of our hospitality model in one of our most important markets. We also opened a new Marlin Bar in the Big Island of Hawaii, further deepening our connection to a region that has been central to the Tommy Bahama brand for decades. Both locations are off to encouraging starts, and we believe they will be long-term assets for the brand. Turning to Johnny Was. We made several important changes during the quarter to strengthen the foundation of the brand and position it for long-term success. As we discussed last quarter, Johnny Was is an incredible brand with beautiful product, a loyal and engaged customer base and a hard-working, deeply dedicated team. To ensure the brand can fully capitalize on that potential, we have refreshed key leadership roles, including the promotion of Lisa Caser, our formal Chief Commercial Officer at Johnny Was, to lead the brand as President of Johnny Was. Lisa is an experienced business leader with over 25 years of leadership roles at Neiman Marcus, including 10 years as SVP, General Merchandising Manager of Women's ready-to-wear. We also made changes to the lead designer and Head of retail positions to bring sharper creative focus, strong merchandising discipline and more consistent execution across the business. Earlier in the year, we also engaged an outside specialist to help us assess the Johnny Was business and identify the actions needed to meaningfully improve profitability. That comprehensive project has now been largely completed, and we have begun executing against its recommendations with clear priorities around creative direction, merchandising and planning, marketing efficiency and retail performance. While we are still early in the process, we're encouraged by the focus, energy and alignment we are seeing across the team. We believe that the combination of refreshed leadership with a very capable incumbent team and a clear actionable plan will allow us to reinforce the fundamentals of the brand and unlock the substantial long-term opportunity we continue to see in Johnny Was. With that backdrop, let me turn to the fourth quarter and our early read on the holiday. As a reminder, our comps in the fourth quarter last year were flat and benefited from a post-election bounce. When evaluating the early results of the fourth quarter this year, it is clear that the softer start to the holiday season reflects a combination of tariff-related product limitations and a holiday period that has been more promotional across the industry compared with last year that made for a difficult environment, along with the more challenging comps than earlier in the year. Most significantly, our brands have experienced challenges in our product assortments that trace back to the tariff-related sourcing decisions made earlier in the year. When our brands were building their holiday and resort lines last spring, the tariff landscape was highly uncertain with the potential for substantial increases on certain China origin categories. As a result, we made difficult but prudent choices to reduce our exposure in categories heavily reliant on China, for example, sweaters and other cold weather product that are important at this time of year. Those decisions were appropriate given the information available at the time. However, they left us with assortments that were not as complete or as comprehensive as we would like for the holiday season. Sweaters in particular have historically been strong drivers of fourth quarter demand across our portfolio and our reduced presence in this category has been a meaningful headwind. At the same time, the holiday selling period has been more promotional than last year with consumers showing heightened sensitivity to value and a willingness to wait for deeper discounts. While our promotional cadence and depth were consistent with our brand-appropriate approach, many competitors entered the season earlier and more aggressively. That dynamic contributed to a slower start for us in the opening weeks of the quarter. At Lilly Pulitzer, our holiday promotions included curated gift with purchase events and a broader seasonal sale, both of which resonated well with our core consumer, and we saw strong engagement with many of our most giftable styles and capsules. Unfortunately, our successful gift with purchase events were somewhat limited due to high Chinese tariffs and the difficulty of shifting the production of these items elsewhere. Similarly, we identified that there were gaps in our assortments related to the tariff environment, particularly in novelty items and certain other seasonal products that could not be quickly moved out of China, which limited our ability to fully serve demand. We also leaned into our core programs to mitigate tariff exposure, which reduced the level of newness we might have otherwise offered. At Tommy Bahama, we built on themes introduced earlier in the year, offering a compelling mix of gift-ready items and cold weather seasonal product. But as with Lilly, many of the categories that historically carry momentum for us during holiday, especially sweaters and other cold weather essentials that are heavily China reliant were reduced as a result of the tariff uncertainty earlier in the year. Those gaps, coupled with a promotional marketplace that moved earlier and deeper than usual, created incremental pressure. Despite these challenges, we have seen continued encouraging response in our Tommy Bahama Boracay pants that we discussed last quarter. While the price point increased from $138 to $158, new product innovation has led to significant sell-throughs and the Boracay pant has played meaningfully into the holiday gifting mindset. This success also highlights some of the trends we have seen in the market where consumers are gravitating to versatile products that can be worn to work and casual events and are less discretionary than some other categories. At Johnny Was, the customer continues to connect most strongly with the unique artful product that defines the brand. Elevated embellished pieces, rich textures and vibrant color stories, again resonated with loyalists. But similar to our other brands, limitations in certain seasonal categories due to tariff-driven sourcing adjustments, along with heightened promotional intensity across the marketplace created a more challenging backdrop for converting that interest at the levels we had anticipated early in the season. While still small in absolute terms, our emerging brand group continues to be a meaningful source of energy and growth within the portfolio. Southern Tide, The Beaufort Bonnet Company and Duck Head have each built strong momentum this year, and we are seeing that momentum carry into the holiday season with a stronger start than what we have seen in our 3 larger brands. These brands benefit from exceptionally loyal customer bases, focused product stories and highly engaged teams and their performance is a testament to the opportunity we believe exists in each of them. As we continue to invest in their capabilities, particularly in product, marketing and retail expansion, we remain very encouraged by the role of the Emerging Brands Group can play in our long-term growth algorithm. Taken together, these early holiday trends reinforce what we observed throughout the year when we deliver fresh, differentiated product that aligns with our brand heritage, the customer responds. However, given today's promotional climate, achieving that response requires a more competitive value proposition. As a result. And as Scott will detail in a few minutes, we now expect our fourth quarter performance to land below our previous guidance, and we are revising our outlook for the remainder of the year. And that is our focus across the portfolio, concentrating on what makes each brand special and ensuring that what we put in front of the consumer inspires confidence, joy and a sense of possibility. That same focus has guided our product development and marketing plans throughout the year. It's why we have leaned into newness and innovation across our brands, and it's why we continue refining our offerings to match the customers' mindset heading into resort in the early spring period. While the environment remains dynamic, we are approaching the remainder of the year with clear-eyed realism. We recognize that the consumer continues to navigate uncertainty and that promotional intensity remains high, but our teams are executing with discipline, and we believe we are well positioned to meet the consumer where she is today while investing in the long-term strength and potential of our business through initiatives such as those I outlined at the beginning of the call. As we look ahead to fiscal 2026, we are approaching the year with a clear focus on improving profitability and with confidence in the levers we have already begun to put in place. We expect to begin realizing the benefit of cost reduction initiatives that we started during fiscal 2025, including efforts around indirect spend and other SG&A-related efficiencies across the enterprise. At Johnny Was, the significant merchandising and marketing work we undertook this year should begin to bear fruit, and we also expect to extend the merchandising efficiency project we piloted at Johnny Was to the other brands in our portfolio. In addition, we will continue to focus on input cost reductions and tariff mitigation as we refine our sourcing strategies. Capital expenditures will decline significantly as we complete our new fulfillment center in Lyon, Georgia, which will allow us to meaningfully reduce our debt levels. All of these actions position us well to make tangible progress on profitability while continuing to invest with discipline in the long-term strength of our brands. As always, I want to express my deep appreciation for our people across the enterprise. Their resilience, creativity and focus on our customer continue to be the foundation of everything we do. With that, I'll turn the call over to Scott for more detailed commentary on our updated financial outlook. K. Grassmyer: Thank you, Tom. As Tom mentioned, our teams have shown great discipline and resilience in executing our plan against the backdrop of a challenging consumer and macro environment. In the third quarter, our teams were able to deliver top and bottom line results within our previously issued guidance range. In the third quarter of fiscal 2025, consolidated net sales were $307 million compared to sales of $308 million in the third quarter of fiscal 2024 and within our guidance range of $295 million to $310 million. Our direct-to-consumer channels were up in total with a total company comp increase of 2%, which was in line with our guidance for the quarter. The direct-to-consumer increase was led by increased e-commerce sales of 5% and increased sales in our food and beverage and full-price brick-and-mortar locations of 3% and 1%, respectively. The increases in full-price brick-and-mortar were driven primarily by the addition of noncomp locations, with comps in our restaurant and full-price brick-and-mortar locations down slightly at 2% and 1%, respectively. Sales in our outlet locations were comparable to the prior year. Our increased direct-to-consumer sales were offset by decreased sales in the wholesale channel of 11%, driven primarily by decreases in off-price business. By brand, Lilly Pulitzer delivered another strong quarter with total sales increasing year-over-year, driven by double-digit growth in retail and high single-digit growth in e-commerce, partially offset by a decline in the wholesale channel. The positive comp sales at Lilly Pulitzer, along with positive comp sales and overall sales growth in our emerging brands businesses helped to offset the low single-digit negative comp at Tommy Bahama and high single-digit negative comp at Johnny Was that led to sales decreases in both businesses. Adjusted gross margin contracted 200 basis points to 61%, driven by approximately $8 million or 260 basis points of increased cost of goods sold from additional tariffs implemented in fiscal 2025, net of mitigation efforts and a change in sales mix with a higher proportion of net sales occurring during promotional and clearance events at Tommy Bahama and Lilly Pulitzer. These decreases were partially offset by lower freight cost to consumers due to improved carrier rates from contract renegotiations, a change in sales mix with wholesale sales representing a lower proportion of net sales and decreased freight rates associated with shipping our products from our vendors. Adjusted SG&A expenses increased 4% to $209 million compared to $201 million last year, with approximately 5% or approximately 70% of the increase due to increases in employment costs, occupancy costs and depreciation expenses due to the opening of 16 net new brick-and-mortar locations since the third quarter of fiscal 2024. This includes the 13 net new stores, including 3 Tommy Bahama Marlin Bars and 1 full-service restaurant opened in the first 9 months of 2025. We also incurred preopening expenses related to some planned new stores scheduled to open in the fourth quarter. The result of this yielded an $18 million adjusted operating loss or negative 5.8% operating margin compared to a 3% operating loss or negative 1.1% in the prior year. The decrease in adjusted operating income reflects the impact of our investments in a challenging consumer and macro environment. Moving beyond operating income. Our adjusted effective tax rate was 30.3% was higher than we anticipated due to certain discrete items that were amplified by our operating loss. Interest expense was $1 million higher compared to the third quarter of fiscal 2024, resulting from higher average debt levels. With all this, we ended with $0.92 of adjusted net loss per share. As a result of interim impairment assessments performed in the third quarter of fiscal 2025, the company recognized noncash impairment charges totaling $61 million, primarily related to the Johnny Was trademark. The impairment charges for Johnny Was reflect the impact of organizational realignment activities in the third quarter of 2025, including changes to the Johnny Was executive team that Tom discussed. Revised future projections based on Johnny Was recent negative trends in net sales and operating results and challenges in mitigating elevated tariffs. I'll now move on to our balance sheet, beginning with inventory. During the third quarter of fiscal 2025, inventory increased $1 million or 1% on a LIFO basis and $6 million or 3% on a FIFO basis compared to the third quarter of 2024, with inventory increasing primarily as a result of $4 million of additional costs capitalized into inventory related to the U.S. tariff implemented in 2025. We ended the quarter with long-term debt of $140 million compared to $81 million at the end of the second quarter and $31 million at the end of fiscal 2024. Our debt historically increases during the third quarter, primarily due to seasonal fluctuations in cash flow with lower earnings during the third quarter, resulting in increased cash needs. Cash flow from operations provided $70 million in the first 9 months of fiscal 2025 compared to $104 million in the first 9 months of fiscal 2024, driven primarily by lower net earnings and changes in working capital needs. We also had $55 million of share repurchases, capital expenditures of $93 million, primarily related to Lyons, Georgia distribution center project, which remains on track for completion and go live in early 2026 and the addition of new brick-and-mortar locations and $32 million of dividends that led to an increase in our long-term debt balance since the beginning of the year. I'll now spend some time on our updated outlook for 2025. Comp sales figures in the fourth quarter to date are negative in the mid-single-digit range, which is lower than our previous expectations of flat to low single-digit positive comps. While our average order value has increased nicely, traffic has been mixed, but mostly down, and conversion has been very challenging across our portfolio. Due to the slow start to the holiday season, we are revising our guidance for the remainder of the year with the expectation that the mid-single-digit comp will continue for the remainder of the year. For the full year, net sales are expected to be between $1.47 billion and $1.49 billion, reflecting a decline of 2% to 3% compared to sales of $1.52 billion in fiscal 2024. Our revised sales plan for the full year of '25 includes decreases in our Tommy Bahama and Johnny West segments, driven primarily by negative comps, partially offset by growth in our Lilly Pulitzer and Emerging Brands segments, driven by positive comps and new store locations. By distribution channel, the sales plan consists of a low single-digit decrease in most channels, including wholesale, full-price retail, e-commerce and outlets, partially offset by a low to mid-single-digit increase in our food and beverage channel that is benefiting from the addition of 3 new Marlin Bar locations and 1 new full-service restaurant opened during the year. For fiscal 2025, our current annual guidance reflects a net tariff impact of approximately $25 million to $30 million or approximately $1.25 to $1.50 per share. While tariffs represent the primary driver of margin contraction this year, we also expect continued promotional activity across our brands to weigh on margins as consumers remain highly responsive to value and deal-oriented shopping in the current macroeconomic environment. We expect our gross margins for the year to contract by approximately 200 basis points. In addition to lower sales and gross margins, we expect SG&A to grow in the mid-single-digit range, primarily due to the impact of our recent continued investments in our businesses, including the annualization of incremental SG&A from the 30 net new locations added during fiscal 2024, incremental SG&A related to the addition of approximately 15 net new locations this year, including 3 new Tommy Bahama Marlin bars and a new full-service restaurant. Also within operating income, we expect lower royalties and other income of approximately $3 million in fiscal 2025. Additionally, our fiscal 2025 guidance includes the unfavorable impact of nonoperating items, including $7 million of interest expense compared to $2 million in 2024 or an approximate $0.20 to $0.25 incremental EPS impact. Increased debt levels in fiscal 2025 are due to our continued capital expenditures on the Lyons, Georgia distribution center, technology investments and return of capital to shareholders exceeding cash flow from operations. We also expect a higher adjusted effective tax rate of approximately 25% compared to 20.9% in 2024. The higher tax rate is primarily a result of a significant change in the impact that our annual stock vesting had on income tax expense in 2025 compared to 2024. We anticipate the higher tax rate will result in an approximate $0.15 to $0.20 per share impact. Considering all these items, including the $1.25 to $1.50 per share impact from tariffs, higher interest expense and a higher tax rate, we have revised our guidance and expect 2025 adjusted EPS to be between $2.20 and $2.40 versus adjusted EPS of $6.68 last year. The biggest drivers of the decrease in EPS guidance includes a reduction of our fourth quarter comp assumption from low single-digit positive comps to a mid-single-digit negative comp. A decrease in royalty and other income from lower order expectations from key licensing partners who customers have elevated inventory levels that will lead to a shift in orders from Q4 to Q1 of next year; an increase in SG&A, primarily resulting from increased consulting costs related to our ongoing projects to improve operating results and some additional costs related to our new Lyons, Georgia distribution center. In the fourth quarter of 2025, we expect sales of $365 million to $385 million compared to sales of $391 million in the fourth quarter of 2024. This primarily reflects our mid-single-digit negative comp assumption and decreased wholesale sales in the low single-digit range, partially offset by the impact from noncomp stores. We also expect gross margin to contract approximately 300 basis points, primarily driven by increased tariffs and a higher proportion of net sales occurring during promotional and clearance events. SG&A to grow in the low to mid-single-digit range, primarily related to the new store locations, increased interest expense of $1 million, decreased royalty and other income of $1 million and an effective tax rate of approximately 26%. We expect this to result in fourth quarter adjusted EPS between $0 and $0.20 compared to $1.37 last year. I will now discuss our CapEx outlook for the remainder of the year. Consistent with our prior guidance, we expect capital expenditures for the year to be approximately $120 million compared to a total of $134 million in fiscal 2024. The remaining capital expenditures relate to completing the new distribution center and the execution of our current pipeline of new stores at Tommy Bahama and Lilly Pulitzer. We expect this elevated capital expenditure level to moderate significantly in 2026 and beyond after the completion of the Lions Georgia project. Consistent with the seasonal nature of our business, we expect a modest decrease in outstanding borrowings in the fourth quarter. Thank you for your time today, and we will now turn the call over for questions. Bond? Operator: [Operator Instructions] Our first question comes from Ashley Owens with KeyBanc Capital Markets. Ashley Owens: So just first and foremost, I appreciate all the color on what was exactly a gap within each of the banners in terms of assortment for the holiday. But just moving forward as we navigate the quarter, just how meaningful would you expect this to be for the upcoming season? Is it something that's been corrected? Or are you observing some disruption still? Just want to understand how much of holiday is now fully aligned versus where you originally planned? And then maybe on that, I know China is complex right now and that it might be ironing out a little bit, but would ask if this gap -- is this shifting your viewpoint or sourcing strategy moving forward? Would you try to diversify further, place orders further in advance? Just any color there. Thomas Chubb: Yes. I think the big thing and while we did give a lot of detail, one thing that we didn't really call out specifically was that it's really what's on the floor right now that most impacted some of our sourcing decisions. And the reason is at the time that we were placing the buys for what's on the floor right now corresponded with that brief period of time where the duty or the tariff on China was going to be 145%. When it's been 20% or 27% or whatever, that's something that we could make a conscious decision to just stay in China with a particular product if we needed to and just try to take various routes to mitigate that tariff. When we were looking at 145%, which that's off the table at this point, but that was right when we were placing the buys for what's on the floor now. lots of stuff we were able to move out of China. Tommy and Lilly are mostly out of China, if not completely. But sweaters are the one category, and there are a couple of other ones. Sweater is the big one, but there are just not a lot of -- haven't historically been great resources that we could go to outside of China. So what we decided to do, Ashley, and at the time, I think it was the right call. We knew we couldn't bear that much tariff. So we really cut back the sweater assortment and tried to fill it in with other products. You look at our assortment right now, and you wish you had the sweaters. And that's really what we were talking about. So by the time you get to spring, that had settled down a lot. The tariff stuff is still a little bit up in the air, but it settled down a lot, and we were able to either move the stuff or know that it was going to come in at a tariff rate that we could deal with otherwise. So for spring, I don't think we have the same kind of impacts. We still have tariff issues that we have to deal with, but they're not going to impact the assortment the way that they have for this season. Does that help? Ashley Owens: Yes, that's super helpful. Just a couple of other questions really quickly. So I think you mentioned earlier that competitors were more aggressive with promotions for holiday and also earlier, which created that tougher backdrop. Any insight as to what you're seeing in the marketplace now in terms of that and if the intensity has moderated, but also how that's helping to inform your promo strategy for the balance of the year? And then additionally, just following your leadership refresh and then the external assessment on Johnny Was. Would be curious as to what emerged as the key priorities you're now focused on? And then also as you look out to 2026, key objectives for the brand? And should we be thinking of this as another period of stabilization? Or any color you could provide us on some of the road map or some of the key building blocks for stabilizing Johnny? Thomas Chubb: Okay. So with respect to the promotional sort of intensity out there, I would say right now, it still feels quite high, but we're a little bit in that in between time between the Black Friday, Cyber Monday weekend and the final stretch, and those are usually the most promotional times. I don't think it's really retracted, but I'm not sure it's taken another step up yet but wouldn't be surprised to see that happen. And we're going to try to be responsive to that in brand-appropriate ways. I think the catchword in all the brands is to stay nimble. We do want to make sure that we're not totally selling out our brands, but we're also thinking about things that we can do to respond to the marketplace. The one other thing I'll point out, and this is this calendar that we have this year where there are 27 days between Thanksgiving and Christmas and Christmas falls on a Thursday. The last time we had that calendar was in 2014. And that year, the business sort of came very late. If you looked at the sales build through the Thanksgiving to Christmas selling period, it really came on late. Last year, if you remember, you had Christmas on Wednesday. So this year, they got an additional weekday to shop, which could be meaningful. And also, it allows us to cut off e-com shipments probably on Saturday or in some cases, even Sunday and still have people feeling good that they're going to get them by Christmas, while last year, that was mostly on Friday that we were cutting off. So there are some things there that we kind of built the current trajectory into our forecast, but I think there's some reason to hope that it could -- the season could rally a bit. I don't think it's going to be a great one, but there are some differences there that are worth noting. And then on the Johnny Was plan, the -- I will say a couple of things that the game plan was developed by the team at Johnny Was with some outside assistance, but it's very much the team's plan. Lisa Kaiser, who's now the President of Johnny Was, was part of that team. She's relatively new to Johnny Was, but she's been with us for several months. She was the Chief Commercial Officer before, and she was very, very much central to the development of that plan. So the refreshment of the leadership does not entail, I would say, any change in the direction of the plan that we've been working on. And as we talked about last quarter, the keys to that are merchandising effectiveness, which is about having better assortments that hit -- have the right level of investment in the right price points, the right product categories, getting that to the stores at the right time and in the right store level assortments. And all of that will drive, we believe, some incremental sales versus what we would have otherwise had and also improve the margins, improve full price sell-through and ultimately gross margin. And then the other -- 2 other big areas of focus by the team, and again, it's the team's plan, really the same team. We've just added a few more people and elevated a few people, including Lisa, who we're very excited about. But the second element is about marketing efficiency. And that's really just more effectively spending the dollars that we spend to drive better results. And some of that, we've already started to kick in. And I will say what we're seeing to date is encouraging in that we're actually getting, I would call it, better efficiency out of the spend that we've done in the last month or so, maybe a little longer than that. And then the last thing is about improving the go-to-market process and calendar, and that's something that the whole team led by Lisa is they're very bought into that. Lisa is a big believer in that kind of discipline. So I think this -- the refreshment of the leadership team and the elevation doesn't change the plan because they all developed the plan, but it enhances our ability to execute it well. Ashley Owens: Great. Appreciate all the information, and I'll pass it along, but best of luck. Operator: Our next question comes from Janine Stichter with BTIG. Janine Hoffman Stichter: I wanted to dig into wholesale a little bit. I know it's a relatively smaller piece of the business, but just curious if you can share what's going on there. It sounds like your wholesale partners are being a bit more cautious with orders, but there's maybe a little bit more inventory in the channel. And then I think you mentioned that off-price was going to be down. Is that a strategic plan? And maybe just elaborate on what's going on there. Thomas Chubb: I think on the -- overall on the wholesale, I think it is a level of concern and caution by the retailers. And I would say most, especially the specialty retailers that are a big part of our wholesale base. And during uncertain times, they tend to pull back a bit, and I think we're seeing that now. And Scott, I don't know if you want to elaborate on the off-price situation a bit. K. Grassmyer: Yes. Yes, we did have less inventory that needed to be liquidated through those channels. So we are trying to keep our owner inventory and hopefully, we'll continue to have less that we have to put through those channels. Janine Hoffman Stichter: Got it. And then just thinking through the tariffs, as you're just now seeing the impact of the products that you were planning, I guess, in April or May when the China tariffs were 145%, is the Q4 what we should think of as a peak headwind from tariffs? Or how much should we think about continuing into the first quarter of next year? Thomas Chubb: Well, I think in terms of it -- the impact it had on our product assortment, I think it is peak. I think as we get into spring, we were able to make the product that we wanted to make it somewhere that was a manageable level of tariff. In terms of the impact, the financial impact of tariffs, remember, we didn't have them during the first quarter of last year. really, they didn't really kick in until later in the year. So first quarter, you're not going apples-to-apples. And then as you get later in the year, you start to lap the tariffs. I don't know if you want to add. K. Grassmyer: Yes, yes. We accelerated a lot of products early in the year, knowing that tariffs were going to be coming or fearful they are going to be coming. So we were able to most of the first quarter had very, very minimal. Now we go into first quarter of next year, everything will have some tariff on it, but we will have some price increases to at least help mitigate that impact. As we get later in the year, we'll be going apples-to-apples with tariffs and hopefully have a little bit more mitigation price-wise as the year moves on. Operator: Our next question comes from Joseph Civello with Truist Securities. Joseph Civello: Following up on wholesale a bit, I understand the general cautious tone from retail partners. But can you give any incremental color on your sort of competitive positioning within the channel and maybe as we get past the tariff pressures on inventory and stuff like that, that you're facing right now? Thomas Chubb: Well, I think through third quarter, our relative performance to the extent we know, and we don't always have perfect information, but I think we performed well, and I don't think we -- for the -- overall, I would say, well, there were small pockets where maybe that was not the case. But I would say, overall, our performance was quite good on the retail floor. For the fourth quarter and the holiday, I think it's too early to know for sure. We don't have enough data, but my hunch is that we're going to continue to perform well relative to the rest of the floor, and it's more about the general caution. Joseph Civello: Got it. Makes sense. And then if we could also just get a little bit more color on thoughts around price increases as we go through the spring, which I believe is like the original trajectory you're looking at? K. Grassmyer: Yes. We do have some price increases in for the fall holiday. period, but there will be more in the spring. But again, we'll have the full tariff load coming in that inventory. And then we're looking at next fall pricing on are there any adjustments we -- additional adjustments we need to make. So I think there will be -- once we get out the early part of next year, the pricing should -- the goal is to have it mitigate the tariff dollars. I don't think we'll get the percentage quite mitigated, but the dollars once we get out of the early part of the year. The goal is to have the pricing mitigate the tariff dollars. Operator: Our next question comes from Paul Lejuez with Citigroup. Tracy Kogan: It's Tracy Kogan filling in for Paul. I had a question about what you're seeing quarter-to-date. And outside of the key sweater category, can you talk about the trends there in some of those other categories and also talk about trends by brand quarter-to-date. Is it pretty broad-based weakness you're seeing across the brands? Or is there a big deviation of one brand or the other? Thomas Chubb: Sure. Thank you, Tracy. Well, I would say that -- and we talked about this in the prepared remarks, but the big 3 brands are all relatively weak at the moment. And the smaller brands are still sort of humming along. They were plus 17% in the third quarter, and they're continuing to have a strong fourth quarter, while the big brands are where we're really seeing the softness. And then in terms of product, we also talked about that a little bit. And I think in Lilly, we're -- because of the China tariff situation and the threat of 145%, China is where we make a lot of our more embellished kind of novelty type stuff, things with sparkles and [indiscernible] and bows and that kind of stuff. And so we've just got less of that stuff. And so the consumer is almost being forced into some things that -- I mean, Lilly is never basic product that within the Lilly spectrum are a little more tame. And then in Tommy Bahama, we've actually seen very good performance in things like the Boracay pant which is basically a Chino. It's a really great one, really nice one, but it's a chino pant. And that, as we talked about third quarter and again this quarter, we introduced a new one or I say third quarter, second quarter. We introduced it earlier in the year. It's at 158 versus 138. It does have some new features and benefits, but it's sold just incredibly well. And actually, we're selling a lot more of them than we sold the old one last year. And then also things like long sweet sleeve wovens are performing well, some of the second layer knits. And I think the kind of theme to a lot of those things is versatility, things that can be worn on a lot of different use occasions. But we'll see more as the season develops, Tracy. Operator: Our next question comes from Mauricio Serna with UBS. Mauricio Serna Vega: I guess I understand now in this fourth quarter, you're experiencing some assortment issues that's related to the sweaters and the move out of China for that -- for this particular season. But as you think about the spring 2026 season, how are you thinking about your assortment, how ready you are in terms of different -- the 3 big brands, I guess, and the potential for maybe after getting through this bit of a hiccup in Q4, maybe having stronger results in the first half of next year? Thomas Chubb: I think the challenges to the assortment were really mostly for what's on the floor right now. I think as we get into spring, by the time we were placing those buys the 145% tariff was off the table and/or we had found other places to make things. So I don't think we'll have that challenge so much in the spring. As Scott mentioned a minute ago, the tariff issue for the spring will just be that this year we will have tariffs, whereas in spring of last year, we didn't really have them yet because that been implemented and/or we were pulled in inventory ahead of them. Mauricio Serna Vega: Got it. And just a reminder, what kind of price increase are you planning for Spring '26 to offset the tariffs? K. Grassmyer: Yes. It's kind of varying, but it's ranging from 4 to say 8%, but some of it, the ones that are more in the 8% or more of the -- it's more a little more elevated in mix. So I think for the tariff piece of it around 4 which kind of offsets the dollar impact. Yes. Yes, not quite the margin impact, but the dollar impact. Operator: This now concludes our question-and-answer session. I would like to turn the call back over to Tom Chubb for closing comments. Thomas Chubb: Thanks to all of you very much for your interest. We look forward to talking to you again in March. And until then, I hope you have a happy holiday season. Operator: Ladies and gentlemen, thank you for your participation. This concludes today's conference. Please disconnect your lines, and have a wonderful day.
Operator: Good day, and welcome to the RPM International Fiscal Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Matt Schlarb, Vice President of Investor Relations and Sustainability. Please go ahead. Matthew Schlarb: Thank you, Betsy, and welcome to RPM International's conference call for the fiscal 2026 second quarter. Today's call is being recorded. Joining today's call are Frank Sullivan, RPM's Chair and CEO; Rusty Gordon, Vice President and Chief Financial Officer; and Michael Laroche, Vice President, Controller and Chief Accounting Officer. The call is also being webcast and can be accessed live or replayed on the RPM website at www.rpminc.com. Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties, which could cause actual results to be materially different. For more information on these risks and uncertainties, please review RPM's reports filed with the SEC. During this conference call, references may be made to non-GAAP financial measures. To assist you in understanding these non-GAAP terms, RPM has posted reconciliations to the most directly comparable GAAP financial measures on the RPM website. Also, please note that our comments are on an as-adjusted basis and all comparisons are made to the second quarter of fiscal 2025, unless otherwise indicated. We have provided a supplemental slide presentation to support our comments on this call. It can be accessed in the Presentations & Webcasts section of the RPM website at www.rpminc.com. As a reminder, certain businesses that were previously part of the Specialty Products Group have been reallocated to other segments effective June 1, 2025. As a result, all references today reflect the updated structure and prior year figures have been recast accordingly. There's no impact on consolidated results. Now I will turn the call over to Frank. Frank Sullivan: Thank you, Matt. Today, I'll begin with an overview of our results and cover some recent actions we've taken, followed by Michael Laroche, who will cover the financials in more detail. Matt will then provide an update on cash flow, the balance sheet and our recent acquisition. And then Rusty Gordon will conclude our prepared remarks with our outlook. As always, we'll be happy to answer your questions after our prepared remarks. Beginning on Slide 3, we achieved record sales during the second quarter, aided by our targeted growth investments. However, momentum slowed as the quarter progressed. We began the quarter with a solid September, actually better on the top line and bottom line than our first quarter results. Then the trend of longer construction project lead times became more pronounced, the DIY demand softened, particularly in late October and through November, resulting in sales declines for those months. The government shutdown contributed to this slowdown as we saw activity in certain construction sectors tied to government funding come to a near standstill and consumer confidence decline. All segments generated positive sales growth for the quarter. However, this was not enough to offset higher expenses, including growth investments and costs from temporary inefficiencies as we continue to consolidate plant and warehouse facilities, resulting in a decline in margins in the quarter. To better align our SG&A structure with current market demand, we are acting quickly to execute optimization actions across the organization. In many ways, this is an acceleration of the SG&A structural realignment we have been preparing as part of a new MAP 3.0 program. Importantly, we also continue to have focused investment in our highest growth opportunities. And on the following slide are some details about what we're doing. Turning to Slide 4, we estimate that once fully implemented, our optimization actions will yield an annual benefit of approximately $100 million. We have realized $5 million of the benefits in the third quarter with an incremental $20 million in the fourth quarter with the remaining $75 million in fiscal 2027. As we are currently in the process of implementing these changes, we will have an estimate of the implementation cost by the time of our next earnings call in April. We're also continuing our focused investments in areas where we have seen good returns and have opportunities for continuing growth. These include high-performance buildings, business intelligence and innovation. For high-performance buildings, we are expanding our technical sales force in areas like turnkey roofing and enhancing our system offering through acquisitions. As an example, we purchased an expansion floor joints company, HCJ in fiscal 2025, which along with our other complementary RPM products enables us to meet the demanding requirements of high-performance floors. We expect additional acquisitions to expand our system offering similar to the recently announced agreement to acquire Kalzip, which Matt will speak to in a few minutes. We're also investing in improved business intelligence. This includes capitalizing on The Pink Stuff's expertise in leveraging data to develop targeted marketing campaigns across multiple RPM businesses. Additionally, following several years of ERP integrations, we have been investing in business intelligence to better utilize data company-wide. It is helping to guide decisions and actions in areas such as marketing, pricing and operations. Finally, innovation has been a core element of RPM's historical growth and through investments in people and facilities like our Innovation Center of Excellence, we have enhanced our product offering across our segments. One example is AlphaGuard PUMA, which is leading waterproofing technology and can be installed at temperatures as low as minus 20 degrees Fahrenheit. Another example is EucoTilt WB. It is a newly introduced water-based bond breaker that provides a clean separation of panels along with other benefits in the growing tilt up construction market. In summary, we are accelerating actions to optimize SG&A levels in response to soft market conditions while remaining focused on supporting our best growth opportunities. With our growth investments and the quality of our people, we remain well positioned to continue outpacing our markets, particularly as markets rebound. Lastly, in addition to the actions we announced today, we're in the process of developing our MAP 3.0 program and expect to provide details at our Investor Day event after the conclusion of our 2026 fiscal year. I'll now turn the call over to Michael Laroche to cover the financials. Michael Laroche: Thank you, Frank. On Slide 5, consolidated sales increased 3.5% to a record driven by acquisitions and engineered solutions for high-performance buildings, partially offset by continued DIY softness and longer construction project lead times, partially due to the government shutdown. Adjusted EBIT declined as top line growth and MAP 2025 benefits were more than offset by higher SG&A expenses from growth initiatives, M&A deal costs, health care and temporary inefficiencies from plant and warehouse facility consolidations. Adjusted EPS declined driven by lower adjusted EBIT and higher interest expense resulting from higher debt levels to finance M&A activity. Geographic results are on Slide 6, with Europe the fastest-growing region, driven by M&A and FX. North America grew approximately 2% as an increase in high-performance building solutions, partially offset by soft demand in DIY and in Canada. In emerging markets, growth was led by Africa and the Middle East as they continue to have success serving high-performance building and infrastructure projects. Moving to Slide 7. Construction Products Group sales grew to a record led by solutions for high-performance buildings. Project lead times lengthened as the quarter progressed, driven by the extended government shutdown. Additionally, weak sales in the disaster restoration business due to lower storm activity this year was a drag on growth. SG&A growth investments, temporary inefficiencies from plant consolidations and lower fixed cost absorption at businesses with volume declines more than offset MAP 2025 benefits and led to a decline in adjusted EBIT. Next, on Slide 8. Performance Coatings Group achieved record sales with broad-based growth across its businesses. Acquisitions also contributed to the growth. Adjusted EBIT was approximately flat as higher sales and MAP 2025 benefits were offset by growth investments and unfavorable mix. Consumer Group results are on Slide 9. M&A and pricing to recover inflation drove the sales growth as volumes declined due to soft DIY demand, particularly in November. Additionally, some sales were delayed as a result of software system implementations and the transition to a shared distribution center in Europe. Continued product rationalization also negatively impacted sales. Adjusted EBIT declined due to lower volumes, temporary inefficiencies from footprint consolidation and start-up of the shared distribution center in Europe. Additionally, lower demand at the Color Group also weighed on margins. In our cleaners business, the integration of the Star Brands Group, the parent of The Pink Stuff remains on track. However, we reversed a $12.7 million liability associated with an earn-out for this acquisition. This earn-out liability was originally calculated based on a probability weighted sales forecast, and much of the value was driven by more aggressive sales scenarios. Current forecasts are more in line with our base case assumptions and the aggressive targets needed to achieve the earn-out are unlikely to be met, which is driving a reversal. This $12.7 million gain has been excluded from our adjusted EBIT. Now I'll turn the call over to Matt, who will cover the balance sheet and cash flow. Matthew Schlarb: Thank you, Mike. Starting with cash flow from operations on Slide 10. It was up $66.3 million in the second quarter compared to the prior year with the increase attributable to improved working capital efficiency. This is the second highest second quarter in the company's history and helped us pay down $127 million in debt in the first half of the year, and that's in addition to returning $169 million to shareholders through dividends and share repurchases and spending $162 million on acquisitions. We are proud that in October, we increased our dividend for the 52nd consecutive year. This is a testament to our steady cash flow and our strategically balanced business model and focus on maintenance and repair. Liquidity remains strong at $1.1 billion, and combined with the strong balance sheet, we have a high level of flexibility in capital allocation decisions. As an example, yesterday, we announced an agreement to acquire a company that will strengthen our systems offering for high-performance buildings that Frank discussed earlier. Turning to Slide 11, you'll see more information on the agreement to acquire Kalzip. They are a German-based leader in metal-based roofing and facades, which is a fast-growing part of the construction market because of their durability, lower maintenance and high performance. The incorporation of Kalzip products into our existing offerings will strengthen CPG's ability to provide building envelope systems that enhance efficiency, durability and aesthetics, while also meeting or exceeding demanding specifications. The company had calendar year 2024 sales of approximately EUR 75 million, and the acquisition is expected to close in the fourth -- fiscal fourth quarter of 2026. Now I'd like to turn the call over to Rusty to cover the outlook. Russell Gordon: Thank you, Matt. Our outlook for the third quarter can be found on Slide 12. Market conditions are expected to remain sluggish with soft DIY demand and continued longer lead times for construction projects. We are encouraged to see that construction pipelines remain solid, although visibility of when this pipeline converts to actual construction activity remains unclear. Despite these macro challenges, we expect to outgrow our underlying markets. Thanks to the targeted growth investments we have been making. We will also benefit from the implementation of SG&A focused optimization actions, as Frank mentioned, although in the third quarter, that will be offset by continued health care inflation and an M&A deal expenses. Overall, we expect consolidated sales to increase by mid-single digits in the quarter. By segment, Consumer is expected to grow sales moderately more than PCG and CPG due to acquisitions. We anticipate adjusted EBIT will grow mid- to high single digits during the quarter. Moving to our fourth quarter outlook on Slide 13. We expect sales to grow in the mid-single-digit range. With our solid construction project pipeline, we expect some of the projects that were recently delayed to convert into activity by the end of the year. Also, if weather delays some projects from the third quarter, as we saw last year, we expect most of these to be realized in the fourth quarter. We will continue to benefit from acquisitions and the targeted growth investments we have been making, along with our resilient repair and maintenance focus and ability to sell engineered systems and solutions to high-performance buildings. In the fourth quarter, we'll also see more of the incremental benefit from the SG&A focused actions that we are currently implementing and should more than offset higher health care and M&A deal expenses. Taking all of this into account, we anticipate adjusted EBIT in the fourth quarter will be up low to high single digits with volume growth being the key variable. This concludes our prepared remarks, and we are now happy to answer your questions. Operator: [Operator Instructions] The first question today comes from Ghansham Panjabi with Baird. Ghansham Panjabi: So I guess starting off with maybe Slide 3 where you have the organic sales breakdown during the quarter. I know it can vary quite a bit on a monthly basis depending on comps, et cetera. But could you give us a bit more color as to how the business has specifically performed? The 3 operating segments was -- just trying to get a sense as to whether the deterioration was specific to Construction and then also Consumer or the Performance also get impacted? Frank Sullivan: Sure. So if you look at -- this is kind of unique, and I don't expect us to do this very often in the future. But when we provided guidance on our last investor call, the latest information we had was in September. And the unique element is talking about months, which we are in this call. Actually, in September, we saw margin improvement and solid growth at the Construction Products Group and the Performance Coatings Group and some continued weakness, which has been pretty prevalent across the whole peer group in Consumer. Pretty much across the board as we got into the back half of October and into November, we saw a deterioration across all 3 of our segments. Ghansham Panjabi: Got you. And then in terms of the $100 million SG&A initiative that you outlined, how much of that should we assume is temporary versus permanent? And is that just a reappropriation of spending relative to the previous growth investments? I'm just trying to get a sense as to whether you've curtailed some of those growth investments as well, just given the change in the operating conditions. Frank Sullivan: Sure. As you know, we've been working on a new MAP 3.0, not sure what we're going to call it yet. And like a lot of folks have kind of put off longer-term forecasts in the midst of all the tariff disruptions and other elements. It's our expectation, regardless of where the markets are that we would provide details this summer, whether it's on our July call or perhaps an Investor Day. So we have been preparing for that with our leadership team and our Board. So to a certain extent, the disappointing kind of market downturn, which is hopefully temporary, accelerated some of our thinking there. The $100 million is roughly $70 million in personnel-related RIFs across the globe and about $30 million in discretionary expense reductions. Operator: The next question comes from Matthew DeYoe with Bank of America. Matthew DeYoe: The fiscal 3Q and 4Q guidance seems to imply much better incremental margins, maybe not great, but certainly better than where we were. Can you help provide a little bit more confidence as to the rate of change of the fixed cost absorption as we move through fiscal 3Q and into 4Q? Frank Sullivan: Sure. So a couple of things. Number one, we're rounding easier comps, and so that will certainly help us. Secondly, the structural SG&A actions that we announced today and that we are implementing as we speak, will add to that leverage in ways that we weren't seeing in the first half of the year. And then I think secondly, with some improvement in unit volume growth, which we anticipate, you'll see a reversal in absorption, which hurt us mightily in Q2 as unit volumes declined in October and November. And to the extent they improve in the third and fourth quarter, that will be a nice swing both versus Q2 and also last year. Matthew DeYoe: All right. And as I think about some of the acquisitions that are starting to layer in at a decent clip here. I mean, how should we think about EBIT accretion from this? Is this -- are these deals kind of like non-EBIT accretive given D&A write-up? Or is it at margin, above margin? How should we think about the layering in there? Frank Sullivan: Sure. It takes some time for these to get integrated into -- particularly in our Construction Products Group, where most of these have happened. One of the areas for real possible strength for us in the second half, for instance, is Pure Air. It was an HVA (sic) [ HVAC ] reconditioning and rehabilitation project or product system that we acquired a couple of years ago. It took us longer than we thought to get properly certified in every state, and we are starting to get traction there. And so I think an 18-month to 2-year cycle is the right way to think about, for instance, at Kalzip, high-margin, unique metal roofing business in Germany, both some basic core stuff that we're in, in terms of metal roofing and some high-profile projects, principally a European business. So back to that 18 to 24 months, I think that's the right time frame to think about how we can integrate that into a Tremco CPG distribution and sales effort more globally. Matthew DeYoe: I guess I appreciate that from an operating integration perspective, but would that also kind of align with earnings accretion as well? Frank Sullivan: Absolutely. So in the early years of a Pure Air, not really accretive. And I believe as we get into calendar '26, and certainly, the back half of fiscal '26, what's a relatively small acquisition will be nicely accretive. Operator: The next question comes from Arun Viswanathan with RBC Capital Markets. Arun Viswanathan: I guess I just wanted to ask about maybe some of the transitory costs you guys incurred this quarter. How much would you attribute maybe to the government shutdown and as well as SG&A -- increased SG&A spending? And how do you see that trending as you go forward? Russell Gordon: Sure, Arun. This is Rusty here. In terms of some of the transitory costs, we did get hit hard on absorption and higher conversion costs. Part of that is due to the plant shutdowns going on and transition of facilities. We also opened up a shared distribution center in Europe with some inefficiencies at the outset, which will be resolved as we get up to speed there. So in total, we lost almost 1 percentage point in margin just on higher conversion costs. Some of that was volume driven, maybe $4 million, $5 million of that was due to transition of facilities, whether it's shutdowns or changes in distribution. So hopefully, that gives you some color. Arun Viswanathan: Great. And as you look out maybe into the second half of fiscal '26 and into '27, what would be the run rate on some of the savings? I know that you will capture a portion, as you said, maybe $5 million here in the third quarter. But when do you expect to see the full amount of that savings kind of flowing through the P&L? Frank Sullivan: Sure. I think the full amount will start to flow through in Q1 of '27. We are executing as we speak, what will be about a $25 million per quarter run rate. And we would expect most of that activity to be completed and announced internally by the end of Q3. Operator: The next question comes from John McNulty with BMO Capital Markets. John McNulty: Maybe a question on the 4Q outlook because 3Q is so seasonally light, it probably doesn't matter all that much. You've got a pretty wide range, low single-digit to high single-digit growth in EBIT. And I know in some prepared remarks, you commented that it's largely contingent on volumes. Is the high end of the range assuming the world starts to feel better again? Or is that just the recapturing of maybe some lost business around the government shutdowns? I guess maybe you can peel back the onion a little bit in terms of what gets you to the low end of that range and what gets you to the high end? Frank Sullivan: Sure. As for the lost business relative to government shutdown to the extent that's real, I would expect us to see that pick up in Q3. Q4 really is about volume. We will be rounding 2 years of challenging consumer takeaway unit volume growth in Consumer. So we'll be seeing easier comps there. Part of the changes we've made with this SG&A structural realignment in our consumer business with what we hope will be a positive effect to margin and the bottom line. And we have a really strong backlog in our industrial business in both CPG and PCG. If that becomes to be realized, again, you'll see us have a pretty good fourth quarter. But given the volatility that we're experiencing just in this quarter, a really solid by any measure September and then a really disappointing by any measure November, makes us a little hesitant to be more specific about coming months because that volatility seems to be continuing. John McNulty: Okay. Fair enough. And then I guess, just given the general weak environment that continues, if anything, maybe it got a little bit worse overall. I guess, can you speak to what you're seeing from a raw material perspective? Are you starting to see any signs of relief? I know tariffs kind of made that a little more difficult over the last few quarters. I guess, what is your outlook as you're looking forward? Frank Sullivan: Sure. I'll let Matt provide some specifics. But generally, the trends that we're seeing both in the marketplace and geopolitically suggest that, that should be a tailwind for us in the second half of the year. Matthew Schlarb: Yes. So absent tariffs, yes, we are seeing raw material inflation coming down and even turning into deflation, but you have these pockets of inflation in some of the categories we've talked about in the past, that continues. So these are really tariff-driven. So looking at metal packaging, that's up low teens. Epoxy resins are actually up high single digits. And then we have some specific categories that really can only be sourced from Asia. These are more niche products, not a huge dollar spend, but when you're facing tariffs of 20%, 30%, 50%, it can add up. And so all in all, taking all into account, we expect a little bit of inflation in the third and fourth quarter, but that's all tariff-driven. Frank Sullivan: And again, I think geopolitically, where underlying base chemicals are going, we would expect that to be a tailwind. And as we get into Q4 and certainly into fiscal '27, we will be annualizing the impact of tariffs, for instance, on steel packaging. John McNulty: Okay. Got it. Fair enough. And maybe if I could slip in one last one. Just on The Pink Stuff earn-out, I know there were kind of a wide range of outcomes in terms of how much you kind of felt like you could really drive that business. I guess what now are the base expectations since you took down that earn-out a bit? I guess, how should we be thinking about where that business can go over the next few years? Frank Sullivan: Sure. The Pink Stuff acquisition is on track for our base case as Mike alluded to. The earn-out was a relatively short 2-year earn-out, and it was based on double-digit unit volume growth. And in this environment, we are not hitting double-digit unit volume growth, and we don't expect to in calendar '26. And so that was the basis for the reversal of the earn-out. Operator: The next question comes from Patrick Cunningham with Citi. Patrick Cunningham: Just on the weakness in Consumer Group, how much would you attribute to underlying market softness versus some of the other things you called out like sales delays or targeted product rationalization? Frank Sullivan: I think most of it has been underlying consumer takeaway. And again, it got weaker. It picked up a little bit in September. We had solid results across all our businesses in that month. And then it got weaker in the quarter as it progressed, Understanding how much of that is government shutdown and other issues, it's hard to know. We're also approaching year-end for a lot of the major retailers. So there continues to be working capital inventory management levels there. As I said earlier, we will be rounding as we get into calendar '26, 2 years of easier comps. And so I think we will see better results in the second half of fiscal '26 and better results in fiscal '27 for Consumer. We don't need a roaring comeback to start seeing unit volume going in the right direction, which will accrete to our bottom line nicely. Patrick Cunningham: Understood. And then just on price realization, where did price shake out in fiscal 2Q? And has there been any tension on getting full realization in the Consumer Group given the weak demand environment and some disinflation on the raw side? Frank Sullivan: Price was less than 1% in Q2. And I would anticipate about the same in Q3, unless, of course, we see any material spikes. And we have not had a real challenge over the last couple of years in terms of getting price where needed. In Consumer, in particular, we did bump into some price elasticity issues relative to price points at retail, and we have adjusted accordingly. That was really a spring of '26 -- I'm sorry, spring of '25 phenomenon, not Q2. Operator: The next question comes from Mike Harrison with Seaport Research Partners. Michael Harrison: Was hoping that we could just dig in a little bit more on this impact from the software system implementation in Consumer sales, and it sounds like maybe EBIT, too. Is that implementation now complete? Or should we still expect maybe some delays or impacts in Q3? And I guess to the extent that sales were delayed, are you realizing those sales then in Q3? Or is it going to take longer for those sales to materialize? Russell Gordon: Yes, Mike, this is Rusty here. Yes, that was temporary. We have resolved that. It was a simple matter of new systems as well as a new warehouse in Europe. The new system was implemented in a couple of places in Consumer. But we are up and fully running. So yes, that was a temporary situation. Michael Harrison: All right. And then within the Performance Coatings business, you noted broad-based growth really across that business. I was hoping you could give a little more color on what portions of the business are particularly encouraging to you as you look out over the next few quarters. Frank Sullivan: Sure. Our Stonhard flooring business is continuing to grow nicely, really industrial capital spending and onshoring. Fiber grade is benefiting from a lot of the data center build-out. A lot of their functional systems are used in multiple areas there. And so those are 2 probably the strongest areas. And we're also picking up some market share, a little bit of expensive margin in our Carboline business. Operator: The next question comes from Frank Mitsch with Fermium Research. Frank Mitsch: I must say I am a fan of the granularity that you provided in Slide 3. Obviously, it shows a -- how the quarter started out pretty good, therefore, leading to some optimism in terms of the quarter, fiscal second quarter, but then deteriorated in October and November. That trend does not look like to be your friend. Here we are on January 8. How did December turn out? Frank Sullivan: Sure. Well, as I said earlier, it's not been our habit, and I'd like very quickly in the next earnings call to get off this habit of talking about monthly results, but December is over. And herein lies the conundrum of volatility, our December sales were up 12.1%, unit volume was up 7%. And so how much of that is a pickup of Q2 government shutdown related recovery? And how much of that is underlying strength in the areas that we're continuing to invest in, was actually across the board. So we did see a little pickup in consumer, but a significant pickup in construction products in our roofing business. So we're off to a great start in December. The challenge we have is understanding what that number means. And how much of that is really a pickup of what was a temporarily weaker Q2, how much of that indicates that things are moving in the right direction. It's anybody's guess as to whether January and February will look like December or whether they'll look like November. And so I think that's why we have the wider range that we have in our Q3 and Q4 forecast. Frank Mitsch: Wow, that's -- I did not expect that answer. And let me drill down just a little bit. I know you're not in the habit of giving monthly sales, but I'm just curious, it begs the question, is there anything with the year ago result? Was there an artificially depressed December of '24? Was there a super November of '24. Is there anything in the year ago comps or -- that would have led to the negative [ 6 ] November, positive [ 12 ] December? Or this is really the kind of underlying business as you see it right now? Frank Sullivan: You'll recall, we had a weak third quarter last year. A lot of that was winter weather related. So certainly, we're rounding some easier comps. And I think that's a part of why we're confident in the second half, albeit within a range of generating solid sales and earnings growth in Q3 and Q4. And so that's part of the answer. Operator: The next question comes from John Roberts with Mizuho. John Ezekiel Roberts: Aside from disaster restoration, would you say that weather was not a factor in either the quarter or December so far? Frank Sullivan: No. I think weather was a factor. We got hit pretty hard across the country in the Thanksgiving, kind of late November period with heavy snow and that continued into December. We're certainly seeing a relief in that right now. And so I don't expect year-over-year for that to be a big issue in Q3 because we got clobbered last year. And so year-over-year, I think the trends are moving in the right direction, both versus easier comps, how we're starting the quarter and the impact of the acceleration of our SG&A realignment, which will not necessarily impact Q3 much. It will impact Q3 in the last month but will start to be realized more fully in Q4. John Ezekiel Roberts: And do you compete at all against BASF's industrial coatings business or any of the areas of overlap between Axalta and Akzo's industrial coatings businesses. I don't perceive there's a lot of opportunities for share gain as there's maybe some disruption across those businesses. But is there -- are there any key areas of overlap? Frank Sullivan: We have a $400 million high-performance industrial coatings business that's part of our Performance Coatings Group. They're really focused on wood stains and finishes. We have a real nice market share in what's left of that business, cabinetry, doors, windows in North America. And that business is actually growing. We're picking up share in a couple of places. It incorporates our TCI Powder Coatings business as well as a small but growing OEM liquid metal business. And so that's an area where I would expect us to continue to grow. We reorganized that into a comprehensive business from about 4 or 5 different separate pieces. And that reorganization, what we're doing at the R&D center in Greensboro, which is primarily owned by our RPM OEM coatings business is actually a bright spot for us right now despite economic problems. Operator: The next question comes from Kevin McCarthy with Vertical Research Partners. Kevin McCarthy: A question on M&A. Can you talk through why you decided to pursue Kalzip? And then more broadly, if I look at the recent acquisitions, many of them are domiciled in Europe. And I was wondering if you could speak to that. Is that strategic on your part or just simply a function of where you're seeing the best value or opportunities now? Frank Sullivan: So the simple answer is yes to both, very strategic, but in M&A, it's also what's available for sale at a value that makes sense for us. We sell tens of millions of dollars of purchase for resale, metal roofing in the U.S. And we have been looking for opportunities to enhance that purchase for resale with stuff that we own and control. Kalzip is a unique asset, German-based. Their specialty is actually a lot of high-profile projects, which we're not in. And so we're pretty excited about the ability to take some of their patented technology, bring it to the U.S. and accelerate the metal roofing elements of what some of our Tremco Roofing salesmen are already selling as well as helping to expand that metal roofing capability globally. Kalzip has had projects in Europe, Middle East and Asia, areas where our Tremco Roofing business is not really present. So we're pretty excited about it. As I commented earlier, it's a real strategic play. It's going to take us some time to take that technology and bring it into the U.S. But when we do, the opportunities for us to add tens of millions of dollars or more in the U.S. market where we have an awesome sales force on top of what's about a EUR 75 million revenue business is something we're pretty excited about. Kevin McCarthy: Very good. And then secondly, if I may, I wanted to revisit the subject of pricing. I think you said in response to a prior question that the price contribution was less than 1% in the quarter. And I was somewhat surprised to hear that. My recollection was that you were targeting higher contributions and acceleration into the fiscal second quarter. So just wondering if you could just unpack that and talk a little bit about where you're seeing the most and least traction and maybe segment contributions and whether or not you might anticipate any acceleration on price in the back half of the year? Frank Sullivan: Sure. Again, it will be circumstantial. We're past the period of heavy inflation that drove price increases meaningfully across all of our businesses. And so in the quarter, less than 1%, but we got more price in Consumer because that's the place where we're having the biggest challenge. Again, it's the place where metal packaging has got the biggest impact across RPM. And then selectively, for instance, around epoxy resins and a few other places, we're getting price in selected product categories but not across the board like we were a few years ago. Operator: The next question comes from Mike Sison with Wells Fargo. Michael Sison: I guess, with your outlook for the third and fourth quarter for sales growth, how much are you expecting that to be organic sales growth and acquisitions? And I know you have a lot of acquisitions in there. So just curious if you had sort of a feel for how much organic growth is embedded in the third and fourth quarter sales outlook? Frank Sullivan: [Technical Difficulty] Okay. I think we're back on, a temporary drop there. In response to Mike Sison's question -- can you hear me? Michael Sison: Yes, I can hear you, Frank. Frank Sullivan: Okay. Thank you. So I'll just point back to the monthly information we provided. You saw what we talked about in Q1. We talked about on Slide 3, the unit volume growth month by month, September, October, November. I just provided it for December. And it's our expectation that the focused growth investments that we are talking about drive organic growth. That's how we're going to leverage to the bottom line. And we provide quarter-by-quarter, the breakout between organic growth, FX and acquisitions. But it's our expectation that we will be seeing better organic growth in the second half as a result of the comments we've made earlier, easier comps, focused growth investments and hopefully, some improvement in market dynamics. But given the volatility we're seeing, again, it's anybody's guess as to whether January and February and subsequent months, look like November or December that were starkly different and perhaps a little bit of an average given the impact of the government shutdown. It's hard for us to know what that is. But I can tell you for us in every business, the negative impact of the shutdown was greater than 0. Michael Sison: Got it. And then I guess for the third quarter, with the outlook being mid-single digits and December doing pretty strong. I mean does that imply that January and February has tough comps and might be negative? Or do you think we'll just be positive for the rest of the way? Frank Sullivan: I think we'll be positive, but I don't know. And we will learn in January, for instance, how much of the real strength in December was picking up lost business in Q2 because of the government shutdown or how much of it is a release, for instance, of some of the good backlog that we continue to build in our Construction Products Group and our Performance Coatings Group. And so if we had higher confidence, we'd be putting out maybe a better forecast. But given the volatility we're experiencing, it's hard to know as we sit here today. Operator: The next question comes from Josh Spector with UBS. Joshua Spector: I just have 2 quick follow-ups here. First, just going back to the transitory costs. I think last quarter, you guys framed it at about $30 million, and you had roughly equal buckets between health care, some of the plant consolidation and then SG&A growth. Is that the right number that was in the August quarter? And can you help us think about what that looks like over the next couple of quarters? Russell Gordon: Sure. Yes. Josh, looking at second quarter, health care was still an issue. We had probably in the $6 million, $7 million range of higher health care costs. In terms of the impact -- unfavorable impact on conversion costs, like I mentioned, that was about 1% of sales hitting our margins. So that's close to $20 million. And what was the third category you talked about? Joshua Spector: I believe you had the plant consolidation, the SG&A investment, I think, is the third one. Russell Gordon: Yes. The SG&A investment is continuing, of course, on a more selective basis given the risk activity we're talking about. Joshua Spector: Okay. I guess then just on that last point with the SG&A. I mean, someone asked earlier about your saving cost, your investing, are you then investing less in some of the savings? Is that you're moving people around there? Or are you cutting people around that? And I think just one other follow-up to sneak in there is that you said the cash costs, we won't know until April, I believe, but you think those costs are going to be ramping up over the next couple of months. So would there be like a $60 million, $70 million charge for that coming up shortly? Frank Sullivan: Yes. The details we'll provide in April, but 2/3 of that will be realized here in the next few weeks and 1/3 will play out into the spring, particularly related to notice provisions and things like that in certain countries outside of the U.S. In terms of your earlier question, some of our expense reduction activities on a gross basis will be higher than the numbers we provided. And then we are reallocating some of those dollars into our best opportunities for growth. And so certain of this is expense reduction and a structural realignment that we have been working on for some time. Given the challenging performance in October and November, we saw that as an opportunity to accelerate that. And others of it is a reallocation of growth capital in our P&L from certain areas that aren't growing to areas that are growing nicely, and we continue -- we intend to continue to support that. Operator: The next question comes from David Begleiter with Deutsche Bank. David Begleiter: Frank, staying on the cost issue. Of the MAP 3.0 savings, how much is being pulled into this program? Is it the majority? Is it a minority? Or is it a large amount? Frank Sullivan: As we've laid out, the plans that we're executing today on a net basis will have about $100 million impact, $75 million of that will be a net additional to fiscal '27, and then we will provide more detail, as I said, either in our July call or in a separate Investor Day about the details of MAP 3.0 that will incorporate manufacturing efficiency, procurement as well as a more methodical approach to SG&A. And so it will be at least $75 million, but likely higher. But again, the details will be provided this summer. David Begleiter: And of these costs you laid out today, how much are manufacturing versus SG&A? And are you closing plants? Obviously, you're firing people, but what functions are those people doing today? And how are they being replaced? Frank Sullivan: So in some instances, it's a reallocation of certain spending from one place to another. Of the $100 million, probably $10 million or $15 million will impact cost of goods sold, but the balance of it will be in SG&A. And again, in terms of more specifics, we'll provide it in April as we are in the midst of executing right now. Operator: The next question comes from Vincent Andrews with Morgan Stanley. Vincent Andrews: If I could ask on the government -- on the government shutdown, can you just talk a little bit about how much of your sales are sold directly to government contractors in the different segments versus sales to traditional customers that are working on projects might be funded by the government? Are we talking 5% plus or minus? Is that the order of magnitude? And so when that goes to 0, it's meaningful. Maybe we could start there. Frank Sullivan: Sure. We don't sell a lot direct to the federal government. A lot of it has to do with state and local spending that's tied to some government subsidies. So for instance, in schools, there are a number of state and federal programs, education, particularly impacting our Construction Products Group. Probably 20% of their revenues is tied to the education market. And so you saw both government shutdown-wise and, let's call it, Washington dysfunction-wise, some dynamics that froze the different funding elements of public education. We're starting to see that unfreeze, which is a good thing. And so it's more the follow-on effect of education funding and some infrastructure as opposed to any specific direct business. We don't do much, if any, direct GSA business, for instance. Vincent Andrews: Okay. That's helpful. And then on the $100 million, if you could just help us think about how that's going to be spread across the 3 segments, that would be helpful. Frank Sullivan: Sure. We'll provide that detail in April. We are in the midst of executing and people deserve to understand what's happening within RPM before people hear it publicly. It's pretty much that simple. Operator: The next question comes from Jeff Zekauskas with JPMorgan. Jeffrey Zekauskas: In fiscal 2025, your SG&A growth was pretty flat. And for the first 2 quarters of the year, it's up about 10%, which is about $50 million a quarter. Can you speak in general to what exactly has happened? And when you talk about a $100 million reduction in SG&A, what are you trying to accomplish with this? What's happening to the overall rate of your SG&A growth? Frank Sullivan: Sure. I would tell you, broadly speaking, in terms of expenses, I think of it as in 3 categories. One is some higher corporate expenses related to health care, insurance, and in particular, which is extraordinary M&A. We've done a lot of M&A transactions overseas, and they have a higher complete -- cost rate versus what we do in the U.S. And so that's part of it. The second one is some of the follow-on to the MAP initiatives in terms of finalizing plant consolidations and/or consolidating distribution and warehousing. I'll give you one example of what that is practically. The largest North American plant -- actually, the largest plant globally for Tremco was in Canada. We sold that plant 2 years ago and have had a window to move all that production to mostly United States. It has nothing to do with geopolitics. It was a plant that was in the sticks 30 years ago and suburban Toronto has been surrounding that plant. And so we had an opportunity to sell that for a nice price, recognizing we were getting regulatorily moved out of that space. We are incurring duplicate inventory. We are incurring duplicate production costs as we move that mostly from Toronto to Georgia and Texas and that should be completed by the end of March. So that is the type of duplicate conversion costs that we're seeing there. We're also seeing it in Europe and in parts of the U.S. as we consolidate distribution, all of which should make us more efficient in the future, but which right now is hurting us. And then the third category, Jeff, is what we've talked about, growth investments. We had a deliberate belief that we could invest in certain areas after frustrating 1.5 years of low growth, no growth or 2 years of low growth, no growth environment. And that was proving true through 5 months. We had better growth rates in most categories than our peers. September reinforced that because sales, organic growth and leverage to the bottom line was actually better than Q1. And for some reasons, we understand and some reasons, we're just guessing at that fell apart in October and November. Last comment I'll make is that the structural SG&A changes are things that we've been working on for some time. And as I commented, we made the decision to put off communications on a new long-term strategic plan until this summer. So a lot of this is work in progress as opposed to a quick reaction to a short -- hopefully, a short-term temporary downturn. Jeffrey Zekauskas: And then quickly, for your acquisition effects in fiscal '26, are they accretive to your margins? Or do they trim your margins? Frank Sullivan: So in fiscal '26 -- end of fiscal '25 and fiscal '26, they have hurt our margins. Most of that is transaction costs. We have significant transaction costs, for instance, on The Pink Stuff and Ready Seal that was at the end of last fiscal year and into the first quarter. Most of these small transactions that I've talked about have been overseas in our Construction Products Group. We're very excited about them, but they carry a relatively higher transaction cost in terms of legal fees and due diligence fees relative to the size of the revenues. Excluding transaction costs, which, of course, flow through our P&L, they're modestly accretive, and we expect them to be very nicely accretive in the coming years. But for the first half of fiscal '26, they have hurt us and been dilutive principally because of the high cost, and we referenced that as part of the higher corporate expense. Operator: [Operator Instructions] The next question comes from Aleksey Yefremov with KeyBanc Capital Markets. Aleksey Yefremov: I think you mentioned earlier, backlogs remain healthy. So should we take it as your backlogs today are same or higher than 3 months ago? Or have your backlogs declined? Frank Sullivan: So our backlogs are stable in our Performance Coatings Group and our backlogs continue to grow in the Construction Products Group. Aleksey Yefremov: Got it. And in terms of facilities consolidations, I mean you talked about first half of this fiscal year, could you give us any sense of what to expect in terms of future actions in the second half of '26 and perhaps in '27, even directionally, are facilities consolidations going to continue at about the same pace or higher or lower pace of costs related to these actions? Frank Sullivan: So we're developing that. And again, details on a broader longer-term approach are something we expect to communicate publicly this summer. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Frank Sullivan, Chairman and CEO, for any closing remarks. Frank Sullivan: Thank you, and thank you for participating on today's call. We're executing an SG&A structural realignment that we see as a down payment on our new long-term strategic plan. We look forward to providing details on a new MAP 3.0 later this year. In the meantime, we are focused on outgrowing our underlying markets and controlling what we can. This strategy will help us navigate the current economic challenges and volatility and position us for outperformance as markets recover. Thank you again for your participation on our call today, and we wish everybody a happy new year. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, and welcome to BJ's Wholesale Holdings, Inc. Third Quarter Fiscal 2024-'25 Earnings Conference Call. [Operator Instructions]. I now pass the call over to our host, Anj Singh, VP of FP&A. Please go ahead. Anjaneya Singh: Good morning, and welcome to BJ's Third Quarter Fiscal 2025 Earnings Call. Joining me today are Bob Eddy, Chairman and Chief Executive Officer; Laura Felice, Chief Financial Officer; and Bill Werner, Executive Vice President, Strategy and Development. Please remember that we may make forward-looking statements on this call that are based on our current expectations. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from what we say on this call. Please see the Risk Factors sections of our most recent SEC filings for a description of these risks and uncertainties. Please also refer to today's press release and latest investor presentation posted in our Investor Relations website for a cautionary statement regarding forward-looking statements and non-GAAP reconciliations. And now I'll turn the call over to Bob. Robert Eddy: Good morning. Thank you for joining us to discuss our third quarter results. Our business delivered strong results in Q3 and performed well in an incredibly dynamic environment. Once again, we gained share and grew traffic, marking the 12th consecutive quarter of market share growth and the 15th consecutive quarter of traffic growth. These consistent results are a testament to the value that we provide to our members each day as we are guided by our purpose of taking care of the families who depend on us. This purpose has never been more relevant as many of our members are dealing with a considerable level of unpredictability in their everyday lives. This has impacted consumer confidence, which has been at low levels for much of this year. And we are taking these conditions as a call to action to lean even further into value for our members' everyday needs. Some of our actions include incremental offers to those members that may need a little bit more help in the current environment. In addition, we're rolling out reduced delivery fees to make our most convenient shopping channel even more accessible. The combination of value and convenience is a powerful unlock for us, and this will help our members realize even more value from their BJ's membership. We've also launched a 10% discount for our team members as a way of thanking those who are on the frontlines living our purpose every day. For the quarter, we delivered merchandise comparable comp sales growth of 1.8% and adjusted earnings per share of $1.16. It's helpful to evaluate the performance on a 2-year stack basis to normalize for the impact of last year's port strike and hurricane activity. Our 2-year stack comp was 5.5%, an acceleration of nearly 1 point versus the first half. Our Q3 comp performance was evenly balanced across our 2 reportable divisions. Our perishables, grocery and sundries division grew comp sales by 1.8% with a 2-year stack that accelerated sequentially of 6%. The investments we've made in both Fresh 2.0 and our category management process have driven continued share gains across our consumables franchise. We saw the most strength in perishable categories such as fresh meat, dairy and produce, aided by our Fresh 2.0 investments. We also saw strength in nonalcoholic beverages and candy and snacking, driven by enhanced assortment and more prominent placement in our clubs. Our general merchandise and services business also grew by 1.8% on a comp basis in the quarter. Consumer electronics comped in the high single digits on success in computer equipment and tablets. Apparel, which we've highlighted on several recent calls, continues to grow, comping in the low single digits. The offsets we saw this quarter were in home and seasonal, which continued to be impacted by lower discretionary demand and consumer confidence, as well as some of the decisions we made earlier this year to tighten our inventories in light of the anticipated impact of tariffs. Our services business also contributed to the improved performance in this division during the quarter. Looking at the behavior of our membership base this quarter, we continue to see members across all income levels remain cautious, which tracks with what we broadly see in the consumer confidence data. We saw members exhibiting value-seeking behavior, including higher sensitivity to promotions, increasing purchasing of private label items and some trade down. For example, given the high price of beef, we saw higher purchasing of ground beef versus more expensive cuts. Despite this type of behavior, member trends exhibited stability quarter-over-quarter across all cohorts when adjusting for the noise from the port strike. While value-sensitive members remain more exposed to the macro backdrop, we did not see any incremental pullback from them. That resilience reinforces BJ's position as a trusted destination for strong value and convenience when it matters most. The environment continues to move quickly, but our teams haven't lost sight of the fundamentals. By zeroing in on our controllables, they're advancing our strategic agenda, increasing member stickiness, making our clubs better places to shop, expanding convenience and growing our physical footprint. These elements are central to creating value over time, and we built further momentum in each this quarter. I'll now provide an update on how those pieces are evolving. Our membership results continue to be robust, and we grew membership fee income by nearly 10% this quarter, driven by strong member counts, mix benefits and the effects of our recent fee increase. We expect the growth rate to show further improvement into the fourth quarter and to once again deliver a 90% tenured renewal rate for the full year. The core of our membership health is driven by growing the number of members as well as improving the mix of those members. In the third quarter, our higher tier membership penetration reached another new record, improving by 50 basis points sequentially. And we continue to see more opportunity to push here. We would not be able to deliver sustainable membership growth without parallel improvements in our merchandise. We are launching many new owned brands products, which are aimed at improving the member experience by offering excellent quality at an unbeatable price. Some of the products we are excited about include Wellsley Farms branded tortilla and potato chips, protein shakes, frozen poultry and coffee pods. This is just a small list of many new high-quality products that we plan to launch at amazing price points. Owned brands products have a multitude of benefits as they are typically priced at about 30% below national brands while offering comparable quality of national branded items. This gives our members even more compelling value for their hard-earned dollars, which in turn drives loyalty and higher lifetime value. Owned brands products also deliver higher penny profit for us, which we can use to invest back into the member experience, further propelling the flywheel that drives our business. We're excited to see how our customers respond to our improved offerings. Our efforts to continue to improve the convenience of shopping our clubs can be seen in the digital growth of 30% this quarter and 61% on a 2-year stack basis, driven by strength in BOPIC, same-day delivery and ExpressPay. We're looking to further drive innovation by utilizing AI to deliver enhanced content highlights and attributes, making shopping even easier for our members. We also recently beta launched an AI shopping assistant and personalized member shopping lists, and we're looking forward to taking these live to our members soon. Last but not least, our new club footprint expansion. We opened our club in Warner Robins, Georgia during Q3. And just last week, we opened our fifth Tennessee club in Sevierville. I'm pleased to report that both clubs are off to a great start, joining the class of 2025 clubs that have outperformed expectations, with membership counts 25% ahead of plan. The community reaction at all of our recent openings has been nothing short of phenomenal, and we are proud to serve these communities. Our expansion strategy has been a sustained and accelerating success, with clubs opened over the last 5 years delivering comp performance about 3x the chain average. On deck for new club openings, our Springfield, Massachusetts; Sumter, South Carolina; Casselberry, Florida; Chattanooga, Tennessee; Soma, North Carolina and Delray, Florida. That will make 14 new clubs for the year, the most we've had in many years. We remain on track to add 25 to 30 new clubs in 2 years, and our pipeline of new clubs is as large as it has ever been. Speaking of our pipeline, we are excited to announce 2 more 2026 openings in Foley, Alabama and Mesquite, Texas as well as a relocation of our club in Rotterdam, New York. Mesquite will be our fifth Dallas-Fort Worth Club opening in 2026. We've been impressed with the warm welcome we've received as we've introduced the BJ's brand to the market over the past few months, including our Friday night life sponsorships, which was capped off with South Grand Prairie taking home the trophy and the [ Prairie Bowl ] sponsored by BJ's Wholesale Club. The enthusiasm we've seen in these new markets has been awesome, and we can't wait to bring the value of BJ's Wholesale Club to Texas families early next year. As I look at our business, I see improving momentum. Our membership is growing in size and quality. We are making improvements in merchandising and continue to capitalize on the convenience of our digital offerings. And as I just said, our footprint expansion is accelerating and successful. While the short term may be somewhat unpredictable, I'm confident that our company is in an excellent position to deliver value to our members and make good on our commitments to shareholders. We will continue to act with purpose in building our structurally advantaged business for the long term, and you should continue to expect that we will run the business with lifetime value at the core of our actions. Before I turn it over to Laura, I want to thank our team members. Your dedication to serving the families who depend on us and your commitment to supporting one another make BJ's a great place to shop and a truly special place to work. I'm proud of all that we are accomplishing together. Laura Felice: Thank you, Bob. I'd like to start by recognizing the outstanding efforts of our team members in our clubs, at our club support center and throughout our distribution network. Your hard work and commitment to serving our members and communities are instrumental in delivering a solid quarter and advancing our long-term growth agenda. Let's look at our third quarter results. Net sales for the quarter were approximately $5.2 billion, growing 4.8% over the prior year. Total comparable club sales in the third quarter, including gas sales, increased 1.1% year-over-year as the average price of gas declined mid-single digits year-over-year. Merchandise comp sales, which exclude gas sales, increased by 1.8% year-over-year and by 5.5% on a 2-year stack. We are pleased to grow traffic and units in the quarter. This quarter, we lapped the surge of business brought by last year's port strike. At this time last year, we estimated it to have contributed about 1 point of comp in September. Moving to this year, September was by far the weakest month as we comped the strike, with August and October generally performing in line with our expectations. We believe it may be helpful to evaluate trends on a 2-year stack basis to assess the business, and I'll reference this metric in my overview. Our third quarter comp in our grocery, perishables and sundries division grew 1.8% year-over-year with a 2-year stack of 6%, showing slight acceleration versus the first half. Our general merchandise and services division comp also increased by 1.8% in the third quarter with a 2-year stack of about 2%, an improvement versus the declines seen in the first half. As Bob noted earlier, traffic and market share grew again in this quarter, and we experienced approximately 1 point of inflation. Digitally enabled comp sales for the third quarter grew 30% year-over-year and 61% on a 2-year stack. Our digital businesses performance is an affirmation of the values our members find in the improved and dramatically more convenient shopping experience. We find that the members that engage with us the most digitally and utilize all of our offerings, end up being the most valuable members with the highest lifetime value. We will continue to invest in our digital capabilities to gain even more wallet share of our members. Membership fee income, or MFI, grew 9.8% to approximately $126.3 million in the third quarter on strong membership acquisition and retention across the chain. We also continued to benefit from the fee increase that went into effect at the beginning of the year. Our underlying member growth remains healthy, and we continue to improve the member mix. Moving on to gross margins, excluding the gasoline business, our merchandise gross margin rate was flat on a year-over-year basis as we continue to invest in our business and in our members, along with execution towards our longer-term objectives. We expect to continue to invest in Q4 and beyond as we lean into our purpose and do the right thing for our members, which will be the right thing for us in the long term. SG&A expenses for the quarter were approximately $788.2 million and deleveraged slightly as a percentage of net sales year-over-year. Adjusting for the legal settlement benefit that we realized last year, SG&A as a percentage of net sales was about flat year-over-year. We continue to grow comp gallons and gain share in our gas business. Our comp gallons in the quarter grew 2% year-over-year, a nice improvement versus Q2's flat performance and again significantly outpaced the industry, which declined low single digits on a comp basis over the same time frame. We have been in a much less volatile gas margin environment this year with profitability just modestly ahead of our expectations in Q3. Our third quarter adjusted EBITDA was down about 2% year-over-year to $301.4 million, owing largely to lapping the benefit of a legal sentiment last year. Adjusting for the settlement, adjusted EBITDA grew approximately 5% year-over-year on higher top line and strong cost discipline. Our third quarter effective tax rate was 26.9%, slightly lower than our statutory rate of approximately 28%. All in, our third quarter adjusted earnings per share of $1.16 decreased approximately 2% year-over-year due to the legal settlement. Adjusted earnings per share grew approximately 8% year-over-year, normalizing for the settlement benefit last year. Moving to our balance sheet, we ended the third quarter with total and per club inventory levels down 1.5% and 5% year-over-year, respectively, while our in-stock levels increased by 90 basis points. Note that we are operating 9 more clubs in our chain compared to a year ago. The favorability in our inventory investment continues to be related to reduced inventory buys. I am proud of our team's hard work to stock even more of our merchandise our members want while improving the operating efficiency of our business. This is yet another driver of the flywheel, with which we can pass along even more savings to our loyal members. Our capital allocation strategy remains consistent. We believe profitably growing the business is our best use of cash and investments to support membership, merchandising, digital and real estate initiatives will continue to be funded by our cash flows. We ended the third quarter with net leverage of 0.5x. Share buybacks are a key component of our capital allocation framework. And in Q3, we took advantage of the lower share price and repurchased approximately 905,000 shares for $87.3 million. As of quarter end, we have approximately $866 million remaining under our recently renewed repurchase authorization. We will continue to take a disciplined and balanced approach to deploying our capital to maximize shareholder value. Looking ahead to the remainder of the year, we are confident in the momentum of our business and our ability to deliver sustained growth, especially in an uncertain economic backdrop. Our teams are focused on controlling the controllables while executing towards our long-term objectives. With regards to guidance and as we have been speaking to on this call, the macro environment is challenging. We have made decisions to be prudent with inventories in the face of this environment, challenging our ability to grow general merchandise sales. We made that choice in order to allow continued investment in member value in the rest of the business. While it will hamper sales in the short term, we remain confident that this was the right decision. With that in mind, we are narrowing our guidance for the full year merchandise comp sales to a range of 2% to 3% for the full year. We are also increasing our range of expected adjusted earnings per share to be $4.30 to $4.40. The actions we've taken to support stronger, more sustainable growth are working, and our long-term roadmap is solid. With a resilient business model and clear strategic direction, we're well equipped to keep building on our success and deliver substantial value to our shareholders in the years ahead. Bob, back over to you. Robert Eddy: Thanks, Laura. As I noted earlier, we are making progress in building momentum. We're elevating the quality of our membership base while it grows. We're curating a stronger, more relevant assortment at prices that reinforce our value promise. Our digital tools are improving member experience, and our expansion strategy is bringing the BJ's model to new high-potential markets. Looking forward, our commitment doesn't change. We will keep living our purpose and focusing on the people and communities who rely on us every day while executing on the long-term priorities that drive our growth. Thanks again for joining us today and for your support of BJ's Wholesale Club. We will now take your questions. Operator: [Operator Instructions] Our first question comes from Peter Benedict of Baird. Peter Benedict: I wanted to ask about some of the income demographics and the behavior. It sounded like it was relatively stable. And I think we're hearing a lot this week about kind of that lower and facing some struggles. Can you remind us maybe your exposure to maybe the SNAP program, talk about the renewal rates you're seeing maybe across these income demographics, just anything further below the surface in terms of behavior across income demographics, both in the third quarter and then as you're kind of entering here into the holiday season? Robert Eddy: Pete, maybe I'll kick this one off, and Laura can add to it if she sees fit. Our prepared remarks tried to tackle this question because we knew it would be out there. Certainly, everybody is concerned about the low-income consumer. The continued inflation provides clear pressure on that segment of all consumers and certainly that segment of our members. With that said, removing the noise from the port strike and the hurricanes and stuff last year, we saw their performance in Q3 as being pretty resilient. The purchasing habits were very stable, and we're pleased to see that. There certainly was a lot of noise at the end of the quarter and the beginning of the fourth quarter around the SNAP program and the government shutdown. I guess, I would say there was a slight disruption in the end of Q3, a more meaningful disruption in the opening days of Q4. But now that, that program is back on track, we're recovering. Those participants as they get access to their benefits are choosing to come to see us and -- as they have more opportunity to spend. So we're encouraged by that showing from those members and from the members in the medium- and high-income cohorts that we saw during the quarter as well. And maybe one final point. We're also encouraged, going forward, by the administration's help recently on the tariff front and reducing the cost of things that are not made or grown in the United States. And so that should be helpful to all consumers, but most pressingly, the low-end consumers that you referenced. Laura Felice: Yes, I think I'd just add on top of it from a membership perspective, we're really proud of our member -- our continued membership results throughout the year. We are acquiring members in our existing clubs, so comp clubs in our new markets and our new clubs that we've opened at the beginning of this year. And there isn't anything, when we look at the details of membership to your question about kind of cohorts, that looks different. We're acquiring members across all the cohorts. And so we're really happy with our continued strength from a membership perspective. Operator: Next question comes from Kate McShane from Goldman Sachs. Katharine McShane: We wanted to ask if you believe that the right long-term same-store sales growth for this business is in the 3% to 4% range. If so, why? And what do you think is holding you back from achieving this comp over the last several quarters? Robert Eddy: Kate, as you know, we've been transforming our business over the last several years with the idea of really four things: one, growing and maintaining a stickier membership; two, improving our merchandising; three, improving our convenience through digital; and then finally, increasing our footprint through real estate expansion. And as we talked about in the prepared remarks, all those things are heading in the right direction. Certainly, the things that we're doing sometimes conflict with what happens in the outside world. We certainly have the luxury of competing against great competition, and it's certainly been a choppy economic backdrop out there. So we have tremendous confidence in our long-term ability to grow this business from a top line perspective. We're showing signs of that in all four of those pillars. And we'll continue to work on each of those to get to that point. The thing that we try hardest to do, obviously, is put the right products on the shelf at the right value. And we made tremendous strides, I think, during Q3 to do that. Our merchandising team has put a lot of effort this year into that idea of greater products, greater values. And we made considerable investments in Q3 with that in mind. We'll continue to do that because that's what we believe wins. Value and convenience are really what we're after for our members. And we'll keep plugging. We're very optimistic in our long-term aspirations. Katharine McShane: And if I could just follow up with one question, you just mentioned the competitive environment. We were curious about what the competitive response has been when you open in some of these new markets, particularly Dallas, which has a really strong grocery offering and other club offering already. It sounds like things are going well there, but I wondered if you had any more details with the fifth store opening? Robert Eddy: Sure. The real estate growth story, and I'll let Bill talk about it since he is the architect of it, is a great one. It's certainly a continuing, sustained success and getting even faster with 14 clubs this year in lots of great markets. Those clubs are doing really well. And so we're very enthusiastic about this ability to grow our company. And we've been received well in the markets that we've entered. So why don't I let Bill talk a little bit more about it? William Werner: Kate, I think as Bob mentioned, we're really proud and excited about the success of the new clubs this year thus far and what's left to come for this year. And then as we look forward into Dallas next year, the prospect of going in and winning in that market is really important to the team. We've talked about it a couple of times on these calls that the culture that we've built around new clubs is really important. And the team is actually at a high level. As we look back at this year so far, I think 2025 will go down as the best class of new clubs. As far back as I can remember, with the success we've had with our 8 openings to date now and 6 more to go for the rest of the year, what we're seeing so far in those new clubs that haven't opened yet with preopening membership and the engagement of the community, we know that they're going to be outperformers as well. And so as we take that momentum from this best class of openings into next year into Dallas, combined with the work that we've done in the market of raising awareness for our brand and engaging with the community, we have a ton of confidence that not only will we compete, but we'll be in a position to have great success there. Operator: Our next question comes from Robby Ohmes from Bank of America. Robert Ohmes: I wanted to follow up on the inventory positioning that Laura talked about. I just wanted to understand how you're thinking about that for the fourth quarter. Is it the positioning that sort of limits sales upside, but supports margins? Just how -- what's the pluses and minuses of the tight inventory and semi-related Fresh 2.0 was like a great tailwind in comp driver, the benefit, the tailwind has slowed here. Is there anything that can reaccelerate? Is there a Fresh 3.0 or something like that, that's in the work here to kind of get that to reaccelerate? Robert Eddy: Robby, maybe I'll take a shot at starting off, and Laura can fill in. I think what you're referencing is Laura's comments around proactively managing our general merchandise inventory. When we were in the beginning part of the year, I'm trying to understand where prices would go and costs would go as a result of tariffs, we made some proactive decisions to manage potential markdowns to allow us to fund greater investment in overall value for our members. And I think that was the right decision. I think you want us to do that every day. That is really why we're here. We've taken those dollars and in fact, invested them across the rest of the business. In Q3, significantly reduced pricing on own brands water, on several other beverages, on some paper products across our produce assortment. So we are really trying to balance those two things. And so we do have a more conservative inventory position from a general merchandise perspective, that was true in Q3. It remains true for the fourth quarter. And I do think it will limit the upside of the general merchandise business, but again, allow us to continue investing for the overall value for our members. I think the other story within inventory is really an absolutely terrific performance in managing the overall inventory levels of the company. The team has done a really masterful job in the whole business to have our in-stock rates go up 90 basis points into inventories that are down. We are doing a much better job allocating inventory throughout our chain, making sure that things are where they need to be, when they need to be there and to be in stock for our members every day. We need to keep turning that handle and get better and better every day, but I couldn't be more proud of the team to make a performance like that happen. Anything else, Laura, on inventory? No? Fresh 2.0, I think it was another terrific program, continues to yield benefits. You know that started out in our produce business. We had terrific produce results during the quarter again. And what you're seeing from the perishables business overall is some of the reduced benefits from egg inflation and things that are offsetting some of that great performance. So with that said, we've talked about the next iteration of Fresh 2.0 and call it what you want, 2.1 or 3.0. We have made another set of considerable improvements in meat and seafood. And we're looking to doing the same in bakery and other categories as we go forward. The mission there is the same, right? Our best members interact with us in these categories. If we can show them the greatest product, the freshest product at compelling value, is displayed in a way that is compelling, freeing our team members so that they are experts in all these disciplines; we can provide a better experience for our members, get more people into those categories and grow the overall traffic of the business. That is certainly the result that we saw from Fresh 2.0 in the produce segment. The early returns on meat and seafood are good as well. And so we're very optimistic about that program and its ability to drive sales within those categories, but also to get to that further bigger goal of driving traffic in the whole business, which obviously drives lifetime value. So some of these investments are expensive, but they're very much worth it in terms of driving the top line and the overall value of membership to BJ's. Operator: [Operator Instructions] Our next question comes from Steven Zaccone from Citi. Steven Zaccone: I wanted to ask about the implied fourth quarter same-store sales because you referenced in the release that you've also seen some holiday momentum -- or excuse me, momentum to start the holiday season. Can you just talk through your category assumptions in the fourth quarter? And then, how you think about low end versus high end of the range? Robert Eddy: Sure. Again, maybe I'll start, and Laura can fill in, Steve. We certainly, I think, had a good performance in the third quarter. I keep using that word resilient. But into the face of the port strike and the hurricane activity and all that stuff, our sales were a bit higher than we thought they might be in the range of outcomes. And the team's preparation for the holiday season, I think, has been fantastic. We've been investing in value, we've got incremental promotions out there, we're continuing our really successful Free Turkey promotion, where if you spend $150 in 1 basket, you can get a free turkey for your family for Christmas. We're doing a lot of these things to really build on the momentum we saw in Q3 and get our members in our clubs and make them happy. With that said, it's a choppy economic backdrop out there, right? We talked about the low-end consumer at this point. And we certainly have a little bit of a harder hill to climb from a comparative perspective, we had a good Q4 last year. But net-net, while it's a wide range of outcomes that can happen in any quarter, most notably the fourth quarter, we are cautiously optimistic about our ability to put up some good numbers in the fourth quarter. Laura Felice: Steve, the only thing I might add to all the commentary Bob just said is I'd remind you about our inventory positioning that would be already talked about for general merchandise. So we've factored that into the range of outcomes. That doesn't mean that we will be out of stock in general merchandise. It just means that we've tightened up the buys and we've picked the best of the best assortment. So we're ready for Thanksgiving, like Bob talked about. And we're ready for our members for holiday kind of as we roll into December. Steven Zaccone: Okay. The follow-up I have then is on that general merchandise. So when we think about the inventory planning assumptions and maybe just talk about the buying environment, how does that look for the first half of next year, right? Because you made changes to the second half, presumably based on tariff uncertainty. But how does that apply to general merchandise plan as we kind of glance into 2026? Robert Eddy: Yes. Look, it's -- I don't want to get too far over skis and talk about next year. But obviously, the fourth quarter seasonal merchandise was bought in the spring when there was considerably more uncertainty around what the tariff exposures might be and what the consumer's response might be to any increase in prices. Every quarter we go through, we get more and more clarity and we get more information from our members as well. And so we obviously alter our buys accordingly. I guess the other thing I would say is Q4 typically is a higher general merchandise penetration and obviously lower in the first quarter. And so this question becomes a little bit less important as we get into the beginning of the year. Operator: Our next question comes from Mike Baker from D.A. Davidson. Michael Baker: I hate to focus on the short term so myopically. But the guidance, your fourth quarter implied guidance, to me, I'm calculating around 2, 2.5 or something in that range. Correct me if I'm wrong on that, at least at the midpoint of the outlook. But if you are in that range, that's a pretty big pickup on a 2-year basis against the 4.6% last year. So given all the caution you're talking about, can you square that? Or is it more reasonable to think about maybe the low end of the implied fourth quarter guidance, in other words, consistent on a 2-year basis? Robert Eddy: Mike. Look, let's just focus on the fact that we're cautiously optimistic, as I said earlier. We've done a lot of planning, a lot of action around providing our members the right products at the right value. We talked about incremental promotion and building into that. We're certainly where we need to be from a digital perspective. People are loving interacting with our digital properties to get what they need from a convenience perspective. And we just -- we are trying to act within our purpose and take care of the families that depend on us. And that is all those things, right, getting those -- getting the products on the shelf. We're doing a fantastic job doing that in an improved way, putting sharper prices on things, which we, again, had considerable improvements in during the quarter. And really trying to take care of all the different communities within our membership. And we talked a little bit in our prepared remarks about our team members, maybe I'd take one minute to thank those team members out there every day, taking care of our members. They have the hardest job in our company. And guys, I'd really like to thank you for all your efforts. We initiated for the first time in our company's history, a 10% discount for our team members to really say thank you, to acknowledge that it's tough out there for everybody and to help our team members through their holiday season purchasing as well. So I think we have a lot to be proud of. I think we have some momentum coming out of the quarter. The early days of Q4 have been reflective of that momentum. But we understand that there's a lot of road to go throughout the quarter. We're only a couple of weeks in. Next week -- this weekend and next week are huge for the quarter as are the remaining weeks in December. So we feel like we're in a good spot, but it's very, very early. And so that thought process really is what drove us to have the guidance that we put out there. Operator: Our next question comes from Ed Kelly from Wells Fargo. John Park: This is John Park on for Ed. It sounds like the messaging is that you've been investing in price, but I guess merchant margins were flat. So I guess, what are some of the offsets in gross margin that helps you get there? And then anything on Q4 merch margins and how we should think about that? Robert Eddy: John, we certainly have invested -- we widened our price gaps in Q3 considerably with those investments versus competition. So I'd like to say thanks to our merchandising team for making those moves. It's important to our company, important to our members, for sure. And we have many different levers to offset that throughout the business, not just within the margin construct. We will try and be as efficient as possible throughout the business to fund investments in member value. Certainly, some of the offsets that you might think about within the merchandising world would be being more efficient in the distribution centers, trying to be more efficient from a trends perspective, growing our retail media program, which has been growing very, very nicely, the team is doing a great job there. There are many different things that we've tried to do so we can pass more value back to our members, and we'll continue to do that. Operator: [Operator Instructions] Our next question comes from Simeon Gutman from Morgan Stanley. Pedro Gil: This is Pedro Gil on for Simeon. Nice job continuing to grow your digital business, really impressive. Could you comment on the work you're doing in retail media there? And also more broadly, we've heard some of your peers recently announcing partnerships in agentic commerce. Could you give us an update how you're thinking about the AI opportunity in e-commerce? Robert Eddy: Sure. As we've talked about, our digital business is an important part of our strategy. It has been growing by leaps and bounds for years now. So 30% during the quarter, over 60% on a 2-year stack. It is approaching 17% of our sales at this point. We are at a point that, frankly, a few of us didn't think we'd ever get to. And so we have a lot to be proud of there. It all comes on the back of convenience. We have an incredibly talented digital team that builds these capabilities for our members to help them get access to tremendous value in a more convenient way than they otherwise might. Most of our business, as you know, is in what we call BOPIC, Buy Online, Pickup In Club; as well as same-day delivery, as well as ExpressPay, where you check out in the club using your phone. Well over 90% of our total digital sales are fulfilled by our clubs. So we are efficiently building this business. It is certainly a moneymaking opportunity for us. We are really pleased with the way that it's growing. Included in there is our retail media program that you referenced, and I talked a bit about it a few seconds ago. While still small, our team has been growing that quite nicely as well as we improve our website, as we improve the way that we partner out there with our advertisers, the way that we really coordinate between our different properties, whether it's our website or our app. We are coming up with more ways to engage our members and allow our advertising partners to reach our members with compelling values that first and foremost, to help our members but also help us and our advertising partners. So we will continue to invest in that business in the future. Again, it's still small, but is growing quite nicely and allows us to make other investments in member value as we go forward. Everyone talks about AI, we are no different. AI is a big part of our future. It is most notably used in our digital group at this point. And the use cases would not surprise you. They were on the vanguard of using it to make coding more efficient, making testing code more efficient. And they will continue to use AI in consumer-facing avenues as well. And so I'll give you a couple of examples. As we talked about in the prepared remarks, we've got beta-launched AI shopping assistants and are using AI to do predictive shopping lists for folks. Probably the thing that's most well along, however, is partnering AI with the robotics that we have in our stores. We have a robot that roams our stores named Tally. And initially, Tally was just helping us with inventory accuracy and price line accuracy. And now we have taken that much farther where Tally's imagery creates a digital twin of each of our buildings, something that we've never had before because our buildings don't have warehouse management systems. And that has enabled really cool things from an operational perspective where not only are we getting better inventories and better pricing accuracy, but we are efficiently spotting problems for our team members to take care of, we are efficiently generating to-do list for our team members in the clubs find inventory and what needs more inventory, what should they be doing first within the building. We are using it to make help us spot quality issues in our Fresh businesses as well, so we can make sure that our standards there are tiptop every day. We're finding new ways to use Tally and the data that provides every day. I think the thing that's been most effective so far has been using those digital twins to predict the most efficient pick path for our team members to pick orders for BOPIC or curbside or same day, where they are about 40% more efficient today than they were before. So we'll continue to build on the use of AI. We'll continue to focus on long-term investments that really will allow us to continue our mission, which is to offer our folks the best products at the best prices. Probably the next thing up from a robotics and AI perspective will be our automated distribution center in Ohio that will go live next year. That will be when it gets going far more efficient than a traditional distribution center and will operate almost entirely in a robotic fashion. So it will be fun to see that. I've been out there to see it recently, and I can't wait to see it with all the machinery going in there to see how it works. But it's all in the same spirit of providing even greater value for our members. Laura Felice: Pedro, I'd just add all that commentary that Bob just said about Tally and the robotics we have in our club, there is a closed tie to that with the work that our planning and allocation teams are doing that we already spoke about in our prepared remarks. And that is producing our in-stock levels that have improved kind of year-over-year. So there is a tie beyond some of the digital efforts into how we're putting product on our shelves and how our teams internally are using the data from Tally as well. Pedro Gil: Awesome. Fantastic. And as a follow-up, if I could ask you, if you could comment on the competitive environment. You had a nice improvement in merch margin in the first half, a little more even this quarter. To the extent that you can comment, and I totally get it, it's still early; how should we think about the level of investments next year? Are there any particular areas within grocery or gen merch that you're looking to prioritize? Robert Eddy: Look, I don't want to talk too much about next year, but I would just echo the comments that I've already made around the fact that our job is to provide our members great value every day. We've made considerable investments all year in doing so and have been pretty creative to find ways to fund it, having the merch margin results that we had in Q3, while making the investments that we made was a good result. I would anticipate further investment going forward. As the competitive environment out there is, I think, consistent, but it's consistently competitive, and we need to continue to do our jobs to reward our members for their faith in us and the membership fees that they pay. So we will continue to try and ride that balance between margin and value, but we will always err on the side of value to try and operate the business for the long term. Operator: [Operator Instructions] Our next question comes from Chuck Grom from Gordon Haskett. Charles Grom: On the margin front, just to move down the P&L a little bit, your SG&A per square foot levels have been really tight, which is good. But your peers are up a lot, suggesting maybe some investment in technology and other areas. So I guess my question is, how sustainable do you think maintaining that SG&A per square foot at that level over the next couple of years, particularly as you move into Texas? Robert Eddy: Yes, it's a good question, Chuck. Our teams have done a good job over time being very efficient with our buildings, making sure that, that they're in good shape. They're in far better shape today than they were 5 years ago. With that said, we need to continue to do that and maybe even accelerate it. I think one of the things that we're seeing out there is our competitors getting sharper with their boxes. And so we will have to continue to do that, not just because of the competitive environment, but we want to show our members the best box we can every day. And so I would imagine we'll spend some capital going forward, remodeling our boxes. We will obviously continue to spend into our new club pipeline as well. And we'll do that as efficiently as we can, but obviously, with an eye for the long term. William Werner: Chuck, it's Bill. I'll just tack on to that as well. In addition to our existing clubs for the first time ever, we've really started to build a relocation program for some of our older clubs as well. So we had great success with our recent relocation in Mechanicsburg, PA. We announced this morning that we're going to relocate Rotterdam next year. And so it's not just an eye to our existing clubs, but also to the long-term future of these strong markets where we may have buildings out a little bit on the older side. We're taking the opportunity to invest into the future there as well. Charles Grom: Got you. Great. And then on general merchandise, right, like up 1.8% on the stacks much better than front half of the year, even with limiting inventory. You talked a little bit about the category improvement. I guess what do you think it's going to take to get home and seasonal to catch up to CE and apparel and other areas? And then I guess anything that you guys are excited about as we walk stores over the next couple of months into the holidays? Robert Eddy: Yes, sure. Maybe I'll start, and you guys can pick up. Look, I think we've -- we've done some great things from a general merchandise perspective. As we talked about, we had a strong showing in Q3 from a consumer electronics perspective and from an apparel perspective. Consumer electronics has been a hallmark of GM for a while. It's always been a pretty good business for us, and it gets better. We have very talented merchants in that group. Our apparel team has done a great job over the past few years really making sure that we simplify our assortment and bring in better brands, put great value out in front of our members every day. We need to continue to do those things, right? We might need to simplify our assortment a bit more. We need to continue to put great brands out there and put fantastic values on there as well. We need to apply those same lessons to the rest of the business. And we are actively at work on those things. We've seen some green shoots in previous quarters, we've talked about those with you like toys and some of our gifting in previous quarters. I like our toy assortment this year as well. And I'm excited about the way our gifting looks in the front of our clubs as well. But we need to have more sustained transformation in home and then seasonal going forward. These are probably the toughest categories, particularly the seasonal categories, maybe in the building. But certainly, among the GM categories, these are really tough categories. You need to be right on trend, you need to be right on style and color, on price point, all sorts of different things. And while we've made strides, we're not done. We're not satisfied with where we are. We need to continue to turn the crank and get better going forward. So we were under no illusions that renovating general merchandise would be easy or short in tenure. We've had nice success in the past, and we need to keep investing in that business because it is such an important part of the wholesale club model, where provides that treasure hunt, that emotional connection, those cool wow items that are so important to driving incremental trips. And quite honestly, that question around membership renewal is not only tightly linked with the grocery business, but it's really tightly linked with our general merchandise business when you can have more opportunity to save your entire membership fee in one purchase rather than stacking up just good values on smaller ring items. You can save a couple of hundred bucks on a television or a mattress or a great seasonal item. That becomes a really important part of our overall long-term growth of our company. So let me see if the guys want to file on, no? All right? So we're happy with our GM so far. We've got to get better and we'll continue to work at it. Operator: Our next question comes from Rupesh Parikh from Oppenheimer. Rupesh Parikh: Just going back to your commentary about 2025 clubs, the membership count is 25% ahead of plan. What do you think is contributing to that significant outperformance? William Werner: Rupesh, it's Bill. I always come back to the success with the new club program comes back to the culture that the team has built. I think I've mentioned this a couple of times on previous calls that everyone that has evolved within new club program internally is fully engaged and fully bought in and want to see us be successful. So we started this program way back in 2016 and the reps that we've built along the way. We talked about the goal of making the next opening, the best opening in the history of the company. Opening a new club where you have to build up, especially in the new market, membership base entirely from scratch is not easy to do, and it takes a lot of practice and a lot of learnings to do it right. And we're executing at a higher level than we've ever executed. And as we think about going into the Dallas-Fort Worth market next year as well as all the other markets, a market like Foley, Alabama that we announced this morning is a really cool, unique market, and we're going to be really excited to be there. And we wouldn't be able to do that, we wouldn't have the confidence to do that without all the success that we've built up to this point. So like I said, we're really pleased with what we've done here in 2025. It really has been probably the best class that we've ever opened in at least as far as I've been here. And it gives us a lot of confidence going forward. So more to come, but excited about what we've accomplished. Operator: Thank you very much. This marks the end of the Q&A session. I'd like to hand back to Bob Eddy for any closing remarks. Robert Eddy: Thanks, Carl. Thanks, everybody, for your attention this morning, for your thoughtful questions, for your interaction, your support of our company. I wish you all a happy Thanksgiving, and we'll talk to you at the end of the fourth quarter. Thanks so much. Operator: As we conclude today's call, we'd like to thank everyone for joining. You may now disconnect your lines.
Operator: Hello, everyone, and welcome to Burlington Stores, Inc. Third Quarter 2025 Earnings Webcast. Please note that this call is being recorded. [Operator Instructions] I'd now like to hand the call over to Mr. David Glick, Group Senior Vice President, Investor Relations. Please go ahead. David Glick: Thank you, operator, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's fiscal 2025 third quarter operating results. Our presenters today are Michael O'Sullivan, our Chief Executive Officer; and Kristin Wolfe, our EVP and Chief Financial Officer. Before I turn the call over to Michael, I would like to inform listeners that this call may not be transcribed, recorded or broadcast without our expressed permission. A replay of the call will be available until December 2, 2025. We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties. Our remarks and the Q&A that follows are copyrighted today by Burlington Stores. Remarks made on this call concerning future expectations, events, strategies, objectives, trends or projected financial results are subject to certain risks and uncertainties. Actual results may differ materially from those that are projected in such forward-looking statements. Such risks and uncertainties include those that are described in the company's 10-K and in our other filings with the SEC, all of which are expressly incorporated herein by reference. Please note that the financial results and expectations we discuss today are on a continuing operations basis. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today's press release. As a reminder, as indicated in this morning's press release, all profitability metrics discussed on this call exclude costs associated with bankruptcy acquired leases. These pretax costs amounted to $11 million and $0 million, respectively, during the fiscal third quarters of 2025 and 2024 and $28 million and $9 million, respectively, for the first 9 months of 2025 and 2024. Now here's Michael. Michael O'Sullivan: Thank you, David. Good morning, everyone, and thank you for joining us. I would like to cover 4 topics this morning. Firstly, I will discuss our third quarter results. Secondly, I will review our updated fourth quarter and full year guidance. Thirdly, I will provide some early thinking on the outlook for 2026. And lastly, I will comment on the progress we are making towards our longer-range financial goals. Then I will turn the call over to Kristin to provide additional details. Okay. Let's start with our Q3 results. Total sales increased 7% in the third quarter at the high end of our guidance. This was on top of 11% sales growth last year. This means that year-to-date, total sales have increased 8% on top of 11% year-to-date growth last year. Comp store sales for the third quarter increased 1%. We started the quarter well with a strong back-to-school trend, but in September, we saw a significant drop-off in traffic to our stores, driven by warmer-than-usual weather. As we have discussed previously, we have very strong brand equity in outerwear. Many shoppers still think of us as Burlington Coat Factory. Outerwear is a great business and a source of competitive strength. But this means that in Q3, our comp trend is very sensitive to weather, much more so than competitors. In some years, the impact is positive. In some years, it is negative. This year, it was negative. That said, in mid-October, once the weather turned cooler, our comp trend picked up to the mid-single digits. And that momentum of mid-single-digit comp growth continued through the first 3 weeks of November. Finishing up on Q3, I would like to comment on earnings. Despite the weather-driven slowdown in our sales trend in Q3, we still delivered margin expansion that was well ahead of last year and earnings growth that significantly beat our guidance. It's worth calling out that this was despite the considerable headwind that we faced from tariffs. Moving on to the fourth quarter. We are maintaining our previously issued comp store sales guidance of 0% to 2%. We feel good about our recent trend, but it is still early in the quarter. And in the coming weeks, we'll be up against very strong comparisons from last year. So it makes sense to remain cautious. That said, given the strong margin and expense trends that we are seeing, we are increasing our Q4 margin and EPS guidance. To be clear, we are adjusting our full year 2025 earnings guidance, passing along all of our beat to earnings in Q3 and factoring in our higher Q4 earnings outlook. I would like to call out that we started this fiscal year with EBIT margin guidance of flat to up 30 basis points. Our updated full year 2025 guidance now calls for expansion of 60 to 70 basis points. This is despite pressure from tariffs, and it is on top of 100 basis points of margin improvement in 2024. We are excited about the progress we are making on margin expansion. I will return to this topic in a few moments when I talk about our longer-range financial goals. But first, I would like to share our initial thoughts on the outlook for 2026. We are early in the budget process, but as a starting point, we are planning for total sales growth in the high single digits. We now expect to open 110 net new stores in 2026. This is higher than previously discussed, and it reflects the strength of our new store pipeline and the performance we are seeing from new stores. We are excited for these new store openings. For comp sales, we are assuming growth of flat to 2% in 2026. This should sound familiar. It is our typical off-price playbook. There is significant economic uncertainty, and we do not know how this might affect our business in 2026. So we will plan our business conservatively at 0% to 2% comp sales growth and then be ready to chase if the trend is stronger. In terms of operating margin expansion, for budgeting purposes, we are assuming that at 2% comp growth, our operating margin would be flat versus this year, then 10 to 15 basis points higher for each point of comp above 2%. Before I turn the call over to Kristin, there is one more topic that I would like to talk about. I would like to provide an update on our longer-range financial goals. As a reminder, 2 years ago, we shared our objective of getting to approximately $1.6 billion in operating income in 2028. The headline is that we feel good about the progress that we are making toward this goal. We are tracking in line with where we thought we would be at this point. We are especially pleased with the progress we have made in driving operating margin. This means that at the high end of our updated 2025 margin guidance, we will have achieved 170 basis points of the 400 basis points of opportunity that we identified 2 years ago. And of course, we will have achieved this despite the negative headwind from tariffs. Apart from margin expansion, the other drivers of our long-range financial model are new store sales and comp store sales growth. On new store sales, we are even more bullish now about our new store opening program than we were 2 years ago. Originally, we had assumed that we would open 100 net new stores a year in the period 2024 to 2028. In fact, this year, we will open 104. And in 2026, we are now planning to open 110 net new stores. Based on our new store pipeline, there is a possibility that we could sustain or even exceed this stronger pace of new store openings. The other major driver of our long-range model is comp sales growth. As I discussed in the context of our Q3 results, leaving weather aside, we feel good about the underlying comp trends that we are seeing. We believe that we can achieve average annual comp sales growth in the range of 4% to 5% over the remaining years of the long-range plan, in other words, between now and 2028. Of course, we recognize there are a lot of external variables that can affect comp growth. So in the nearer term, as we always do, we will plan our business conservatively and then chase. Now I would like to turn the call over to Kristin to review our Q3 results, updated 2025 guidance and high-level outlook for 2026 in more detail. Kristin? Kristin Wolfe: Thank you, Michael, and good morning, everyone. I will start with some additional color on Q3, then I will talk about our updated guidance. Lastly, I will comment on our initial outlook for 2026. Starting with the third quarter, total sales grew 7%, while comp store sales increased 1%, both within our guidance range. As Michael described, our comp trend in the third quarter fell off significantly after the back-to-school period, driven by warmer weather, but then picked up to mid-single digits in mid-October. The gross margin rate for the third quarter was 44.2%, an increase of 30 basis points versus last year. This was driven by a 10 basis point increase in merchandise margin and a 20 basis point decrease in freight expenses. Moving down the P&L. Our Q3 product sourcing costs were $214 million versus $209 million in the third quarter of last year. Product sourcing costs decreased 40 basis points compared to last year. This was primarily driven by leverage in supply chain through continued cost savings and efficiency initiatives. Adjusted SG&A costs in Q3 levered 20 basis points versus last year. This leverage was primarily achieved in store-related costs. Our store teams drove significant leverage in store payroll through numerous efficiency and productivity initiatives. Q3 adjusted EBIT margin was 6.2%, 60 basis points higher than last year. This was well above our guidance range of down 20 basis points to flat. Our Q3 adjusted earnings per share was $1.80, which came in well above our guidance range. This represents a 16% increase versus the prior year. At the end of the quarter, comparable store inventories were down 2% versus the end of the third quarter of 2024. Let me provide a little more context here. In Q3, we saw a significant slowdown in our comp trends, a weather-driven slowdown. But using our merchandising 2.0 tools, our planners and merchants were able to react very quickly to adjust receipts, especially in cold weather categories. So despite the slowdown, our store inventories are well balanced, current and very clean going into the fourth quarter. Moving on to our reserve inventory. Reserve inventory was 35% of our total inventory versus 32% of our inventory last year. In dollar terms, reserve inventory was up 26% compared to last year. We are pleased with the quality of the merchandise and the values and brands that we have in reserve. And as a reminder, we use reserve inventory as ammunition to chase the sales trend. For example, our reserve includes great outerwear buys that we made earlier this year that we've been pulling out over the last few weeks to fuel the trend since the weather turned cold in mid-October. We ended the third quarter with approximately $1.5 billion in liquidity. This consisted of $584 million in cash and $948 million in availability on our ABL. We had no outstanding borrowings on the ABL at the end of the quarter. During the third quarter, we repurchased $61 million in stock. And at the end of the quarter, we had $444 million remaining on our repurchase authorization. In Q3, we opened 73 net new stores, bringing our store count at the end of the quarter to 1,211 stores. This included 85 new store openings, 10 relocations and 2 closings. We now expect to open 104 net new stores in fiscal 2025, up from our original estimate of 100 net new stores. Now I will turn to our outlook for the fourth quarter and full year for fiscal 2025. We are maintaining our fourth quarter fiscal 2025 guidance for comp sales and total sales. We are guiding comparable store sales to be flat to up 2%, with total sales to increase 7% to 9% for the fourth quarter. We are raising our adjusted EBIT margin and adjusted earnings per share guidance for the fourth quarter. We now expect our adjusted EBIT margin to increase by 30 to 50 basis points. This margin outlook now translates to an adjusted earnings per share range of $4.50 to $4.70, an increase of 9% to 14% versus the fourth quarter of last year. For full year fiscal 2025, after factoring in our actual Q3 results and our improved outlook for Q4, we expect comp store sales growth of 1% to 2%, total sales to increase approximately 8% and EBIT margins to range from an increase of 60 to 70 basis points. As Michael noted earlier, this fiscal 2025 EBIT margin guidance is 40 basis points higher than our original full year guidance at the high end, and this is despite the significant pressure from tariffs. Finally, factoring in Q3 actuals and updated Q4 guidance, adjusted earnings per share are now expected to be in the range of $9.69 to $9.89, an increase of 16% to 18% for the full year 2025. Finally, I would like to touch on our preliminary FY '26 outlook. We are in the early stages of the budgeting process, so this could change. But at this point, we are planning on total sales growth in the high single digits. We are assuming at least 110 net new stores, and we're planning comp store sales in the range of flat to up 2%. For operating margin, as Michael said, we are assuming that at a 2% comp growth, our operating margin will be flat to this year, and we expect leverage of 10 to 15 basis points for each additional point of comp. And now I will turn the call back over to Michael. Michael O'Sullivan: Thank you, Kristin. Before I turn the call over to the operator for your questions, I would like to summarize a few of the key points from today's call. Firstly, Q3 was impacted by warmer weather in September through early October. Once the weather normalized, our trend improved to mid-single-digit comp growth. And we are off to a strong start to Q4 with comps up mid-single digits for the first 3 weeks of November. Secondly, we are pleased with our margin trends. We are updating our full year 2025 guidance to reflect the earnings beat in Q3 as well as our improved earnings outlook for Q4. At this point, we are maintaining our previously issued Q4 comp guidance of 0% to 2%. Thirdly, we are pleased with how we are tracking towards our long-range financial goals, especially the pace of margin expansion. And within this long-range financial plan, we think there may be additional upside in terms of our new store opening program. Now I would like to turn the call over for your questions. Operator: [Operator Instructions] Your first question comes from the line of Matthew Boss of JPMorgan. Matthew Boss: So on relative performance, your comp this quarter came in below both of your off-price peers. This is a clear reversal from results in the second quarter and over the last year. Clearly, you cited weather was a factor, but how concerned are you by this change in your relative comp versus peers? Michael O'Sullivan: Thank you for the question. You're right. Just to lay out the facts, we ran a 1% comp in Q3. Our peers were 6% and 7%, very impressive. That's a very significant difference. I can't give you a complete bridge, but at a high level, let me try and dissect that gap. I'll start with the obvious. We know that weather was the biggest driver of our slowdown in Q3. That's not an excuse, but it is a partial explanation. We changed our name some years ago, but shoppers still call us Burlington Coat Factory. So mild weather in September and October has a huge impact on our business. This is a real thing, and it is unique to us, I think, versus our peers. Now in September and October, cold weather merchandise balloons to more than 20% of our assortment. In the third quarter, our comp sales for ladies and men's coats, jackets, boots and cold weather accessories, all these important categories were down double digits. Now they bounced back in mid-October once it turned cold. But by then, it was too late to really drive the quarter. Let me go a little further and try to quantify the weather impact on our comp in Q3. If you strip out the drag on our overall comp from cold weather categories, the categories I just listed, and if I make an adjustment for the impact that lower weather-related traffic had on the rest of the store, then I can get to the low end of a mid-single-digit comp. In other words, I do not get to 6% or 7% comp. So in my view, weather only explains half of the gap versus peers. Now usually, in off-price, when your comp is lower than your peers, it's just the customer telling you that they preferred the value and the assortment that they found elsewhere. In the second quarter, when we ran a 5% comp growth ahead of our peers, the customer was voting for us. But in Q3, that changed. And we have some hypotheses on why, but we have more work to do to really tear that apart and then aggressively go after that performance difference. But before I leave the question, let me just call out a silver lining. The comp numbers that our peers have just reported reaffirm that the off-price shopper at all income levels is alive and well. Leaving aside the weather, the major implication for us is that we need to take better advantage of that than we did in the third quarter. Matthew Boss: Great. And then, Kristin, as a follow-up, could you provide more color on the 60 basis points of operating margin expansion in the quarter, particularly just given as we think about the pressures that you faced from tariffs and the 1% comp? Kristin Wolfe: Matt, thanks for the question. Yes, first, it's worth reiterating that we really are pleased with the 6.2% operating margin in the quarter, up 60 basis points versus last year on a 1% comp, as you noted in your question. Let me provide the major puts and takes. Starting with gross margin. First, our merchandise margin increased 10 basis points. And within merchandise margin, there was a lot going on. Tariffs had a negative impact on markup, but we were able to offset this impact through numerous actions such as negotiating with our vendors, adjusting the mix and driving a faster turn. The net impact of all this was much more favorable than we originally guided back in August. This was really driven by our tariff mitigation strategies. Now staying in gross margin, freight levered by 20 basis points. This was due to greater efficiencies and cost savings initiatives, particularly in transportation. So our overall gross margin increased 30 basis points versus the third quarter of last year, all this despite the impact from tariffs. On product sourcing costs moving down the P&L, we drove 40 basis points of leverage here. This was driven by supply chain and efficiency initiatives in our DCs. We're excited about the consistent progress we've made in streamlining our supply chain costs. And moving on to SG&A, we showed about 20 basis points of leverage here on a 1% comp, and this was driven by efficiency initiatives in stores such as speeding up checkout times at point of sale. Offsetting this leverage was higher depreciation, which delevered about 20 basis points, driven by increased CapEx in supply chain and new stores. So taken all together, this drove the 60 basis points of EBIT expansion in the quarter. Operator: Next question comes from the line of Ike Boruchow of Wells Fargo. Irwin Boruchow: I guess my question kind of piggybacking off of Matt's. So the comp growth in Q3 was lower than peers, but the margin and earnings were actually pretty much better. How should we reconcile that? And then really more importantly, are there choices that you made during the quarter that may have driven the higher margin in Q3 at the expense of sales? Michael O'Sullivan: Well, I'll take that, Ike. Thank you for the question. It's a good question. I think the direct answer is yes. There were decisions or choices that we made that helped drive our margin in Q3, but may have had a negative impact on our sales. And I'll give you a couple of examples, but maybe I should just preface what I'm going to say with a couple of points. Firstly, our margin and earnings performance in Q3 was very strong. Margins were up 60 basis points and adjusted EPS grew 16%. We've also taken up full year earnings guidance. In other words, we've rolled right over tariffs. Secondly, on comp sales, to reiterate, the biggest driver of the slowdown that we saw was weather. If I adjust our comp for weather, we probably would have been pretty happy with the outcome. But as I explained a moment ago, that only explains half of the gap between our 1% comp growth and our peers' 6% and 7% comp. So if I come back to your question, yes, there were choices that we made that might explain our relatively strong margin and earnings performance and our weaker comp growth in Q3. Now these were choices that we made as part of our tariff mitigation strategies. And let me describe two specific examples. When -- firstly, when tariffs were introduced -- first introduced, we reduced our sales and receipt plans for categories where the margin impact was too significant. We did not feel like we could raise retails in those categories, and we did not want to accept the margin compression. That meant that in some businesses, especially some categories in home, our inventory levels and assortments were -- they were very light in Q3. And we saw that in terms of the sales in those categories. The sales were lower. Now that wasn't an error. It was a deliberate decision. I would say it was an economically rational decision, and it worked. It may have hurt sales, but it drove our earnings in Q3. Now I should add that as tariff rates have come down, we've gone back and we've taken up sales and receipt plans in most of the categories that were affected. So I would expect this impact to be less significant in Q4. A second example, as Kristin described a moment ago, another step that we took to help offset tariffs was to trim inventory levels in many businesses across the store and force a faster turn. Again, this helped to offset the margin pressure from tariffs. Now we only really took that step in Q3, not in Q4. We already turned very fast in Q4. So we didn't want to try and force a faster turn going into holiday. But again, in Q3, that approach drove earnings, but it may have hurt sales. So -- for both of the examples I've just given, at a high level, those decisions worked. We fully absorbed tariff pressure on our margin, and we drove very strong margin and earnings growth in Q3. And all this happened actually despite a slowdown in comp sales due to weather. Normally, a slowdown like that would drive deleverage. Anyway, with that said, we really need to do a full after-action assessment on Q3. Now that we have our competitors' comp results, we need to go back and hindsight our performance and identify anything we could have done or should have done differently. Irwin Boruchow: Got it. And then maybe, Kristin, just to elaborate maybe a little more on the 2026 initial outlook, key risk opportunities in the outlook, anything else you could share? Kristin Wolfe: Yes. Great. Thanks, Ike. We're still -- it's still somewhat early in the process. We're actively working through the budget for 2026. But let me give some headlines or how we're thinking about it. The outlook for next year is pretty hard to predict with significant economic and political uncertainty that could absolutely affect consumers' discretionary spending. There are potential tailwinds like the possibility of higher tax refunds in the early part of next year. And then there are potential headwinds like tariff-driven price increases, which could put additional inflationary pressure on our core customer. Michael spoke to this earlier, but given this uncertainty, we're planning to stick with our off-price playbook. That really means planning comps at flat to 2% and positioning us to chase the trend if it's stronger. In terms of new stores, we mentioned this in the prepared remarks, but it's worth reiterating, we feel very good about the new store pipeline. We are planning to open at least 110 net new stores in 2026. So combined with our comp guidance, this should drive a high single-digit increase in total sales. On the operating margin side, as we said, we're modeling operating margin flat to last year at the 2% comp. We do expect 10 to 15 basis points of leverage for every point above a 2% comp. And then there's a couple of things in the margin, a couple of puts and takes. We are planning for slightly higher merch margin as we look to offset any impact of tariffs, particularly as we lap the fall season next year. We're planning for continued supply chain productivity gains next year, but there will be offsets here due to the start-up costs and the initial ramp-up of our new Southeastern distribution center, which we plan to open in the first half of 2026. And finally, we do expect fixed cost leverage on the high single-digit total sales growth, but we also are expecting higher depreciation, which creates deleverage. The higher depreciation is really due to the higher CapEx spend in supply chain and our increased number of new stores. Those are really the main call-outs for 2026 at this point. Operator: Your next question comes from the line of Lorraine Hutchinson of Bank of America. Lorraine Maikis: Michael, one of your off-price peers is accelerating comps with more focus on marketing, more in-store inventory and a store refresh. Do you see any risk that Burlington will lose market share? Michael O'Sullivan: Lorraine, thank you for the question. It's a good question. I'm going to avoid talking about any specific competitor, but I think I can still try to answer your question maybe in more general terms. I'll start by saying that actually, we like innovation and fresh ideas. We believe in off-price retail. And anything that drives off-price awareness and excitement is a good thing. In fact, I'd go further and say that a strong off-price sector is important for us. So it's good that our off-price peers are achieving very strong results. But your question was more about potential risks to Burlington. So let me come at it from that angle. I think there are 2 important points that I would make here. Firstly, when we talk among each other -- to each other and when we talk to analysts and when we talk to investors, I think we sometimes talk about off-price as if it were a separate isolated ring-fenced segment of retail. But the customer does not think of it that way. The customer does not respect the boundaries of off-price. If she needs a pair of pants or a dress, she might shop Burlington or one of our off-price peers. But we know from our own research that she also cross-shops department stores, specialty retailers. In fact, any retailer where she likes the assortment, she doesn't care about our off-price business definition. She just cares about finding a great deal and great value in the categories, brands and styles that she's looking for. Now if you're an off-price -- if you're an investor in off-price, I think it's very important that you understand this. This is not like the retail market for office supplies. We aren't 3 companies just scrapping it out for market share in a limited space called off-price. It's bigger than that. We compete in a very large and competitively fragmented market for apparel, accessories, shoes, home, beauty and so on. Off-price is really just a small part of that overall market. Our opportunity is to take share from non-off-price retailers. That's what has been happening over a long period of time. So I mean, just to bring it up to -- just to throw in some numbers, today, we announced 7% total sales growth in Q3 on top of 11% growth last year. At those growth rates, it's self-evident that we are taking market share, but so are our off-price peers. These share gains are not coming at the expense of each other. Mathematically, that wouldn't be possible. These share gains are coming from non-off-price. And I think that the shift from traditional full-price retail to off-price is unlikely to end anytime soon. So that's the first point. The second point I would make is that despite everything I've just said, I think it's very important and useful for us to pay close attention to our off-price peers. They matter. They operate a similar business model to us. They've been very successful over the years, and we can learn a lot from them. So if our off-price peers come up with new ways of doing things, new processes in stores, new innovative marketing programs, then we need to pay close attention. Now not all of those ideas will work, of course. And certainly, not all of them will make sense for us, but we need to be open to new ideas that could help drive our business and actually drive off-price retail in general. Let me finish up. Again, your question was about risk to Burlington. Right now, I see off-price as a whole as being very healthy. For 2025, we now expect to grow total sales by 8% on top of 11% last year. And at the high end of our guidance, we now expect to achieve EPS growth of 18% on top of 38 -- sorry, 34% last year. Those are -- by any metric, those are very healthy numbers. I anticipate that our off-price peers are going to be successful, too. But I don't see that as a risk. In fact, it's better for us if the off-price segment as a whole continues to perform well. Lorraine Maikis: And I wanted to follow up on pricing. Did you take price in 3Q? And what impact did that have on your comp? And then what's your strategy on pricing for the fourth quarter? Michael O'Sullivan: Yes. That's a good question. I would sum up our pricing strategy in 3 words. Be very careful. We recognize that because of tariffs, prices are going up across the retail industry, but we will not raise prices unless we've seen them go up elsewhere. And even then, we will test and monitor the impact of those price increases. We've said this many times before, we have a very price-sensitive customer. We know that the reason that they shop at Burlington is that they're looking for a great deal. Our core strategy is to offer great value. And of course, that means keeping prices low. Now our approach to tariffs this year has been to avoid retail price increases and to focus instead on finding other margin and expense offsets. Kristin described those actions earlier. We're very pleased with how that approach has worked. It's allowed us to avoid price increases, but still to grow margin and earnings this year. Now of course, we have tested some things. We've tried some higher prices. And in Q3, when we saw other retailers take prices up, we tested higher retails in some categories. But I would say that those pricing tests were in a very limited number of areas. And mostly the higher retails worked. We saw very little resistance from customers. So going forward, I would say that we will probably get more aggressive, but we kind of have to see what happens in Q4. And also, of course, we need to see what happens with tariff rates going forward. Operator: Your next question comes from the line of John Kernan of TD Cowen. John Kernan: Michael, sounds like you see an opportunity to take up the number of new store openings and the cadence of growth. Can you expand a bit upon this? What are you seeing in terms of the new store pipeline, both from a real estate perspective and also potential new store productivity? Kristin Wolfe: John, it's Kristin. I'll take this one. We're really pleased with the performance of our new stores across the board, they've been delivering results that are in line or better than expectations as well as our financial hurdles. It really reinforces the strength of our site selection process and the appeal of Burlington really across markets. And it's worth pointing out just some data. Our Q3 comp, of course, was at the midpoint of our guidance, but our total sales growth in Q3 was at the high end of our guidance, up 7%, and this was driven by new stores. And based on our Q4 guidance, our total sales increase is planned at 9% at the high end as we benefit from the slew of new stores we just opened in the third quarter, 73 net new. Now as I mentioned in the prepared remarks, we now expect to open 104 net new stores this year. This is a modest step-up from our original plan of 100 net new. And this increase reflects really two things. First, the ability to pull forward some openings that were originally slated for 2026; and secondly, the strength of our real estate pipeline. Looking ahead to 2026, we're raising that new store target to at least 110 net new stores. This is supported by this robust pipeline, but also by 45 leases we secured from the Joann Fabrics bankruptcy. These incremental sites really give us confidence in sustaining the high level of growth next year. And as for the pipeline for 2027 and beyond, it's still early to provide specific numbers, but I will say we feel very good about the long-term opportunity. Our real estate team continues to identify attractive locations, and we already have a very healthy pipeline for new stores beyond 2026. John Kernan: Got it. Maybe as a follow-up, obviously, all 3 off-price retailers are resonating strongly with consumers. I liked how Michael framed the industry's opportunity. You're clearly feeling more bullish on the number of stores, maybe a little bit more cautious on comp sales, but more bullish on the potential margin expansion potential for the business. Is that the right way to think about it? Kristin Wolfe: Great. Yes. John, thanks for that question. It's a good question. So 2 years ago, we shared our objective of getting to approximately $1.6 billion in operating income by 2028. The headline is that we feel very good about the progress we're making toward this goal. We're tracking in line with where we thought we would be at this point. And we're especially pleased with the progress we made in driving operating margin at the high end, Michael said this earlier, but it's worth repeating, at the high end of our updated 2025 margin guidance, we will have achieved 170 basis points of the 400 basis points of opportunity that we identified 2 years ago. And we will have achieved this despite the negative headwind from tariffs. So really, to sum up, we're pleased with the progress. But the way you characterized the long-range model and your question is about right. It's true, we're more bullish on new stores, and we are more bullish on margin expansion. On the comp, we still believe we can drive an average annual comp growth of 4% to 5% over the remaining 3 years of the long-range plan, but we recognize that there is external uncertainty, so we are slightly more cautious here. Operator: Question comes from the line of Brooke Roach of Goldman Sachs. Brooke Roach: Michael, I'd like to ask you about the trends that you're seeing with the lower income customer. How did these customers perform in the third quarter? And are there any other callouts in terms of customer demographics that are worth sharing? Michael O'Sullivan: Brooke, thank you for the question. The headline is that we feel very good about the lower-income customer. We've been -- and the trends that we're seeing with that demographic. We've been watching this particular demographic segment very closely all year. This is a critical customer for us. Given the economic uncertainty and the cost of living issues, we've been concerned about lower-income customers. But the good news is that this customer has been very resilient. When we look at our stores in lower-income trade areas, they continue to outperform the chain. This has been true for several quarters now. I should say, as we listen to other retailers, it seems like this is a consistent pattern. Many retailers are reporting strength with lower-income consumers. There is -- in terms of other demographic call-outs, there's one other call out, specifically relating to Hispanic customers. Again, we've been watching this demographic very closely all year. It's an important customer for us. We have many stores across the country that are in trade areas with a high proportion of Hispanic households. You may recall that in previous quarters, we've said that our stores that are in trade areas with a high proportion of Hispanic households have been slightly outperforming the chain in terms of comp growth. While in Q3, the trend in those stores slipped. They've gone from slightly outperforming the chain to trailing the chain. Now the change in trend for those stores varies a lot depending on the specific market and even the specific or the particular location of the store. In other words, it's very localized to what's happening in those particular cities. And of course, it's difficult for us to say how long those localized slowdowns might last. Brooke Roach: Great. And then my follow-up would be for Kristin. Kristin, can you give us more color about your guidance for the fourth quarter, both in terms of comp sales and for earnings? Kristin Wolfe: Brooke, thanks for the question. Sure. Let me repeat a little bit. I think it's worth reiterating some of what we described earlier. On comp store sales and total store sales, we're maintaining our Q4 previously issued guidance. So comp of flat to 2% and total sales growth of 7% to 9%. We do, as we said, feel really good about our recent trend in Q4, but it's still early in the quarter. The critical weeks are ahead of us. And in those coming weeks, we'll be up against very strong comparisons from last year. So we'll continue to take a cautious approach on sales. On the margin side, we are increasing our margin and EPS guidance for Q4. We now expect our Q4 adjusted EBIT margin to increase by 30 to 50 basis points. We do anticipate some tariff-driven pressure on merch margin in Q4 but we expect to more than fully offset that pressure and drive overall operating margin expansion in Q4 versus last year. And the drivers of the margin leverage should largely be similar to what we saw in Q3. We expect continued cost savings in freight and supply chain and in store-related initiatives. And finally, we should also see additional leverage in SG&A given the higher incentive comp accrual in the fourth quarter of last year. Operator: The question comes from the line of Alex Straton of Morgan Stanley. Alexandra Straton: Michael, can you talk about the availability of off-price merchandise as you're heading into the fourth quarter? And then I have a quick follow-up. Michael O'Sullivan: Yes. Alex, thank you for the question. I would characterize the buying environment for off-price as very, very strong. Earlier in the year, when tariffs were first introduced, there were some concerns, a lot of concerns about whether vendors would be reluctant to bring potentially excess merchandise into the country. But frankly, those concerns have just not materialized. Even some of the categories where supply was tighter in the summer, categories like housewares and home also housewares and toys have come back. I think that's probably pretty consistent with what you've heard from our off-price peers. There's a lot of great merchandise at great values, and we're taking advantage of it, both to flow to stores and to build up reserve. Alexandra Straton: Perfect. And then just on the cold weather merchandise in the quarter. Is there any just additional detail you can provide on that dynamic, the impact on the overall comp for the chain? I know you've given a lot of details, but anything else worth highlighting there? Michael O'Sullivan: Sure. Yes. Yes. So after back-to-school, the cold weather merchandise becomes very important to our mix. As I said earlier, it expands to more than 20% of our total assortment during the quarter. Now cold weather merchandise, just to define it, includes categories like coats, jackets, boots and accessories like gloves and scarves. So it's only stuff you need if it's cold outside. And our customer is very need-driven. For September through mid-October, our comp sales in those businesses were down in the negative mid-teens. Then in the last 2 weeks of October, once the weather turned cold, they grew up double-digit comp. Maybe if I step back for a moment, there are 2 ways in which milder weather in September and October affects our business. There is the direct drag on our overall comp growth from lower sales in the cold weather categories that I just mentioned. That's one impact. But there is also an impact on our non-cold weather businesses because if you think about it, if the customer comes in to buy a coat, she's probably going to put some other things in the basket, too. So if -- because the weather is mild, she doesn't come into the store to buy that coat, then this doesn't just hurt our coat sales, it impacts other businesses as well. Now mathematically, the drag on our overall comp from cold weather categories alone was worth about 200 basis points in Q3. If you then add the impact that lower traffic had on other non-cold weather categories, you can easily get up to a few points of comp. And I think that's somewhat consistent with the fact that we saw a bounce back to mid-single-digit comp growth in the second half of October once the weather had turned cold. Operator: Your last question comes from the line of Mark Altschwager of Baird. Mark Altschwager: Kristin, could you give us some more detail on regional trends, category trends as well as any of the detailed comp metrics for Q3? Kristin Wolfe: Mark, yes, absolutely. In terms of regional performance, the Southeast was our strongest region in the quarter. The West, Northeast and Midwest were in line with the chain, while the Southwest trailed the chain. On category performance, we saw the strongest performance in beauty, accessories and shoes. Apparel comp slightly above the chain, while home was softer, comping below the chain in Q3. In terms of the comp metrics, our traffic was down in the third quarter. That was largely driven by September and early October when weather was unseasonably warm. And this lower traffic was offset by a higher average basket size. So for the quarter, we were pleased to see that both conversion and basket size or average transaction size were higher than last year. So this tells us that once she's in the store, she liked what she saw. Mark Altschwager: Excellent. And then, Michael, as we look at the Q4 comp guidance, do you view that as conservative just given typically less weather sensitivity in the fourth quarter? Michael O'Sullivan: Mark, sometimes when we give comp guidance, we'll also sort of signal, if you like, if we think there may be upside. I don't think -- I don't see a lot of upside in our Q4 comp guidance. The reason I say that is that we're up against 6% comp growth from Q4 last year, so 6%. If you take our 0% to 2% guidance, that gets you to a 2-year stack of 6% to 8%. Now we exceeded that in Q2 of this year, but we were well below it in Q3. I should also add that when I look at our off-price peers, the way I'm interpreting their guidance, it looks like they are slightly below us on a 2-year stack basis. So even though we're happy with our recent trends and with how we started the quarter, and we're excited for our holiday assortments. We're not anticipating significant upside to our Q4 comp sales guidance at this point. Operator: I'd now like to hand the call back to Mr. Michael O'Sullivan for final remarks. Michael O'Sullivan: Let me close by thanking everyone on this call for your interest in Burlington Stores. We would like to wish you all a very happy Thanksgiving. We look forward to talking to you again in March to discuss our fourth quarter and full year 2025 results. Thank you for your time today. Operator: Thank you for attending today's call. You may now disconnect. Goodbye.
Operator: Good afternoon, everyone, and thank you for participating in today's conference call to discuss Educational Development Corporation's financial and operating results for its fiscal 2026 third quarter and year-to-date results. As a reminder, this conference is being recorded. On the call today are Craig White, President and Chief Executive Officer; Heather Cobb, Chief Sales and Marketing Officer; and Dan O'Keefe, Chief Financial Officer. After the market closed this afternoon, the company issued a press release announcing its results for the fiscal 2026 third quarter and year-to-date results. The release will be available later today on the company's website at www.edcpub.com. Before turning to the prepared remarks, I would like to remind you that some of the statements made today will be forward-looking and are protected under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied due to a variety of factors. We refer you to Educational Development Corporation's recent filings with the SEC for a more detailed discussion of the company's financial condition. With that, I would like to turn the call over to Craig White, the company's President and Chief Executive Officer. Craig? Craig White: Thank you, Alan, and welcome, everyone, to the call. We appreciate your continued interest. I will start today's call with some general comments regarding the quarter, then I will pass the call over to Dan to run through the financials, after which Heather will provide an update on our sales and marketing, and then I will provide an update on our plans for fiscal 2027. During the third quarter, we completed the sale of our Hilti Complex, which was a big achievement for the company and our shareholders. Selling the complex saves -- paves the way for us to move forward into fiscal year 2027 with no bank restrictions, which allows us to execute our strategy to return to growth and profitability. Our plan is not an overnight change with expected immediate results, but a carefully developed strategy for long-term growth. With that, I'll now turn the call over to Dan O'Keefe to provide a brief overview of the financials. Dan O'Keefe: Thank you, Craig. Third quarter financial summary compared to the prior year third quarter, net revenues were $7 million compared to $11.1 million. Average active brand partners for the quarter totaled 5,100 compared to 12,400. Earnings before income taxes were $10.6 million compared to a loss of $1.1 million in the third quarter last year. Excluding the building gain from the sale of $12.2 million, our loss before income taxes would have been $1.6 million. Net earnings totaled $7.8 million for the quarter compared to an $800,000 loss in the third quarter last year. Earnings per share totaled $0.91 compared to a loss of $0.10 on a fully diluted basis. Year-to-date summaries compared to the prior year, net revenues of $18.7 million compared to $27.6 million. Average active brand partners totaled 6,200 compared to 13,300. Our earnings before income taxes totaled $7.4 million compared to a loss of $5.3 million last year. Excluding the building sale gain of $12.2 million, our loss before income taxes were $4.8 million. Net earnings totaled $5.4 million compared to $3.9 million loss last year. Earnings per share totaled $0.63 compared to a loss last year of $0.47 on a fully diluted basis. Now for an update on our working capital. Inventory levels decreased from $44.7 million at the beginning of fiscal year 2026 to $39.1 million at the end of November, generating $5.6 million of cash flows from inventory reductions. This cash flow has been used to pay down vendors, reduce our bank debts and fund our operational losses. In October, following the building sale, we paid off our line of credit, our term loans with our bank, Bank of Oklahoma. At the end of the quarter, we had $3.4 million of cash, $800,000 of receivables, $39.1 million of inventory and $2.0 million of accounts payable and $0 owed to our bank. That concludes the financial update. Now I'll turn the call over to Heather Cobb for a sales and marketing update. Heather? Heather Cobb: Thank you, Dan. One of the most significant milestones this quarter was the launch of Gathered Goods, our reimagined fundraising program. This program represents a meaningful shift in both strategy and execution. Unlike our previous Cards for a Cause fundraiser, Gathered Goods features custom products designed and created in-house, allowing us to better control quality, storytelling and brand alignment. From a financial perspective, this also delivers stronger margins, which is increasingly important in today's cost-sensitive environment. Equally important to this project was the online opportunity embedded within the program. Gathered Goods allows individuals and organizations to fundraise digitally, expanding reach beyond a single event or community and making participation easier for the supporters. While still early, this program positions us well for scalable, modern fundraising and opens the door for broader participation in future quarters. This quarter also included our Black Friday, which we call Book Friday promotion, a large site-wide sale that continues to be a cornerstone of our Q3 marketing strategy. Book Friday drove strong engagement across customers and brand partners, reinforcing the value of our catalog and our ability to generate excitement through well-timed broad-based promotions. While discount-driven events are not our priority or preferred strategy, this sale remains an important visibility and volume driver in the midst of the holiday season. Turning to the results themselves. While the decline in brand partner count is significant and clearly reflected in the top line, it's important to look at what the data tells us beneath the surface. First, the drop in revenue is not proportional to the decline in brand partner count. This tells us that the brand partners who remain active are, in fact, more productive and more engaged than in recent years. We are seeing fewer casual or inactive participants and a higher concentration of truly active sellers. Second, when we look specifically at our leader levels, the decline is not occurring at anywhere near the same rate as the overall field. Historically, leaders are our most loyal group. They are the ones who persevere through challenging cycles, adapt their approach and continue building even when conditions are not ideal. Just as important, leaders are also the primary drivers of new brand partner recruitment. Their relative stability gives us confidence that while the field may be smaller today, the foundation for future growth remains intact. In summary, this quarter reflects a business in transition, smaller in size, but more focused and more resilient. We are investing in programs like Gathered Goods that improve margin quality and scalability, maintaining strong seasonal promotional moments and seeing encouraging signs that our sales force is highly engaged and leader-driven. As we look to the future, the combination of a committed leader base, more productive brand partners and strategic program innovation gives us reason to be optimistic about the path ahead. Craig, I'll turn it back over to you. Craig White: Thanks, Heather and Dan. As Dan mentioned, with the closing of the building sale, we paid off all of our bank debts, which will have a positive impact on our cash flows of approximately $1 million per year. While the last couple of years have been challenging to operate our business under the restrictions from our bank, I'm excited about the position we are in today and the plan for growth in fiscal 2027 and beyond. Since fiscal 2024, we have had to prioritize cash. While we need to execute on a plan that increases sales and therefore, cash, we are putting more focus on increasing our brand partner counts. Our actions necessitated by the bank's restrictions have given red flags to our sales force, and they have been anxious and waiting to see what would happen. A major factor for the reduced activity has been the lack of new products for them to get excited about and therefore, share with their customer base. As we got closer to closing on the sale, we put together a reorder and new title purchase plan in conservative phases. We were ready to act on Phase 1 within a few days of closing and placed reprint orders on some key out-of-stock items as well as several new titles that we expect will energize our customers and sales force, giving our brand partners another item to help build momentum. We are excited about the arrival of those titles beginning in late spring and early summer. Another key component to attracting new brand partners is a refreshed marketing strategy. We know we need to adapt to what the next generation entering the workforce, Gen Z, is seeking in a business opportunity. These would be tweaks to our existing model, including language used for marketing, onboarding once they have activated their account, et cetera, but would certainly not require an overhaul. We are still working on putting the pieces in place for this to be implemented and can move quickly once that is finalized. We have continued to focus on being prepared to execute a growth plan once restrictions were lifted. You heard from Heather about one of the major enterprise initiatives being our online fundraising program, Gathered Goods. We are very excited about that program's successful launch and have a few other exciting upgrades and initiatives being implemented very soon. Also, I have recently pulled together an AI task force. Some of our employees had already begun exploring, so I formalized an opportunity for collaboration, allowing a safe space to see how we can best utilize it as part of our overall strategy. So far, we have implemented in ways that automate rote tasks, which can save money. We are excited about this starting point and continue to work together on transformational ideas that will propel us forward and allow us to compete in both retail and direct-to-consumer spaces. Lastly, I want to thank all of our shareholders for their patience, our employees for their hard work and commitment to our mission and our retail customers and brand partners for their loyalty during this challenging period. Having seen the resilience of all involved, I am confident in our collective ability to emerge stronger than ever before. I truly believe we are tackling our growth plan from a position of strength with our team of employees as well as the strategies being built and implemented with our sales and marketing and IT initiatives. Now that we have provided a summary of some recent activity, I will turn the call back over to the operator for questions and answers. Operator: [Operator Instructions] Your first question comes from Paul Carter of Capstone Asset Management. Paul Carter: Well, good afternoon, everybody, and Happy New Year. So I know you've described in the past how your sales force has kind of been sitting on the sidelines waiting for the company to, I guess, to get out of hock with your bank. And I know it's only been 2.5 months or so since you sold your building, but do you have any evidence yet that this transaction has reinvigorated your sales force for a more productive 2026? Craig White: Well, I think one of the main factors in that reinvigoration, as you mentioned, was bringing in new titles and reorders of out-of-stock bestsellers. But also what we see is the uptick or the increased activity in leader promotions. That's been very exciting. I started in the last month or two calling all brand partners that promoted to upper level leadership. And there's a lot of excitement out there. So that's my couple of points. Heather, would you like to expand? Heather Cobb: No. I mean I would echo what he said, Paul. Specifically, I think it's hard to say specifically that just the sale of the building was going to be enough for them to just immediately roll back into action. We announced just immediately after we made the purchases from that Phase 1 of new titles and reprints that they would be coming as we shared with you, late spring, early summer. We concluded our incentive trip promotion in December with just on target the anticipated number of earners that we had predicted. We launched a new incentive in January. And so while it's hard to say in the midst of the holidays, especially with Christmas and New Year, that we see specific things that are happening, we can definitely say that the energy feels slightly different in a much more positive way than it has in a while. Paul Carter: Well, that's good to hear. And then just changing gears. So obviously, it's nice to hear about the $0 debt balance. But do you have a new credit line in place? I know you've been talking about putting something small in place once this transaction was completed. Dan O'Keefe: Yes. We're talking to a few banks and also talking to some other options. We're right now in a cash position where we're, I think that we're looking for just a relationship for banking to go forward with. And so we're talking to some local banks that have some interest and hope to have something in place here in the next few months. Paul Carter: Okay. Great. Just talking about your balance sheet. So I know the value of your inventory is like I think it's more than 3x the market cap of your company. So obviously, that's pretty important to investors. And I just wanted to ask a couple of questions about that. I guess, first of all, is your inventory like fully insured against all risks like water damage or pests or anything? Because I know some of them have been sort of sitting in boxes for a while up on the shelf. But -- and is your inventory like insured at replacement cost or something else? Dan O'Keefe: It is insured at replacement cost. So what we have on the books is what it's insured for. So if we've got $39.1 million on the books at the end of November, that's what it's insured for, full replacement cost. Now we don't want to talk about any worst-case scenarios with disaster... Paul Carter: Yes. No, fair enough. Yes, I was just sort of wondering about that because I know -- and actually sort of related to that, we're not really damaged, but I'm just thinking about kind of the nature of your inventory. So I know most of your titles are things like zoo animals or whatever that don't go out of date. But like do you have a sense for what percentage of your inventory could be out of date and therefore, worthless in like 3 or 5 years if there's not a lot of sell-through in certain titles? Dan O'Keefe: So I would -- the only thing I would say in response to that is our track record has been we've carried inventory sometimes for in excess of 10 years on certain titles before we sell through them. And we've never historically written down inventory, and we've never basically offloaded the title or gone into the remainder market to sell the title. So that's kind of reflected in our reserve. Our reserve is very small on our short-term inventory and also on our long-term inventory because our history says we typically don't participate in the remainder market and don't have topics, as you mentioned earlier, that go stale or out of favor. Heather Cobb: Yes. Paul, unless you know something we don't, and they're going to change the alphabet on us, I think we're fairly safe. Paul Carter: Okay. No, that's good to hear. And I figured that was the case, but I just know that's one of the hesitations, I guess, that some investors have is that if you're sitting on so much inventory relative to current sales that maybe that inventory isn't worth a hundred cents on the dollar. But obviously, that's -- you're a little bit of a different company than a grocery store or something like that. Okay. And then just -- I know this will come out in your 10-Q, but how much of your $39.1 million of inventory is Usborne-related? Dan O'Keefe: About 50%. Paul Carter: Okay. And then can you provide an update on the status of your relationship with Usborne Publishing? I don't know that you've talked about them in a little while. Craig White: Yes. There's really been no change. Dan actually has monthly or at a minimum quarterly calls with their -- the equivalent of their, Chief Financial Officer. They're anxious for us to get back and start ordering titles again. So because of the new distribution agreement, we're not required to purchase every title they offer, which is good for us. But yes, there's been no negative change in the relationship. Paul Carter: Okay. Okay. That's great. And then just the last one here, totally random question. But just regarding that 17-acre attractive excess land beside the Hilti Complex there. What is your plan for that? Are you just going to hold on to it for the time being? Or do you have sort of longer-term plans for it? Craig White: Well, it's kind of been an ace in the hole. I kind of kept that in my back pocket for now. It's -- there's been some flurry of activity on it recently, actually, which is interesting. Some people have kind of come across it and inquired about it. We've been given a proposal to develop it, which is intriguing. But in that particular proposal, the return for us just wasn't what I thought it could be or should be. So for now, we're just kind of holding on to it. It could be something that we develop for ourselves. It could be something that we sell if need be or develop it and retain ownership of it. So there's lots of options. It hasn't been necessary to do anything with it at all, and it continues to appreciate. So I'm happy to continue to do that. Operator: [Operator Instructions] Craig White: I guess we did better than ever. Answering everyone's questions before they asked it. Operator: There are no further questions at this time. I would hand over the call to Craig White for closing remarks. Please go ahead. Craig White: Thank you. Thanks, everyone, for joining us on our call today. We appreciate your continued support and expect to provide an additional update on the -- well, not the Hilti sale progress, but our banking relationship and just moving forward our growth plan. So again, thank you for joining us, and we'll talk again in May. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.