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Operator: Good day, and welcome to the Innovative Aerosystems Fourth Quarter 2025 Results Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Paul Bartolai, partner at Vallum Advisors. Please go ahead. Paul Bartolai: Thank you. Good morning, everyone, and welcome to Innovative Aerosystems Fourth Quarter and Full Year Fiscal 2025 Results Conference Call. Leading the call today are our CEO, Shahram Askarpour; and CFO, Jeff DiGiovanni. This morning, we issued a press release detailing our fiscal 2025 fourth quarter and full year operational and financial results. This release is publicly available in the Investor Relations section of our corporate website at www.iascorp.com. I would like to remind you that management's commentary and responses to questions on today's conference call may include forward-looking statements, which, by their nature, are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results could differ materially. For a discussion of some of the factors that could cause actual results to differ, please refer to the Risk Factors section of our latest report filed with the SEC. Additionally, please note that you can find reconciliations of all historical non-GAAP financial measures mentioned on this call in the press release issued this morning. Today's call will begin with prepared remarks from Shahram, who will provide a review of our recent business performance and an update on our strategic framework, including our accomplishments during fiscal 2025 and our key strategic priorities for fiscal 2026, followed by a financial update from Jeff. At the conclusion of these prepared remarks, we will open the line for your questions. With that, I'll turn the call over to Shahram. Shahram Askarpour: Thank you, Paul, and good morning to everyone joining us on the call today. Fiscal 2025 was another transformational year for the entire organization, highlighted by continued disciplined execution on our strategic priorities, culminating in outstanding fourth quarter and full year performance. In October, in connection with our ongoing transformation, we rebranded to Innovative Aerosystems, a move that better reflects our strategic focus on engineering, manufacturing and supplying advanced avionic solutions for commercial, business and military aviation markets. Our new brand identity underscores our unique capability to integrate next-generation avionics with intelligent system design, delivering innovative mission-critical aerospace solutions. As Innovative Aerosystems, we remain committed to powering progress across the industry's most prominent legacy fleets and emerging next-generation platforms. Entering fiscal 2026, we are executing against a clearly defined go-to-market strategy centered on integrating intelligent system design in advanced avionics to deliver differentiated solutions that improve performance and have safety and reduced operational complexity for commercial and defense aerospace customers. We ended the year on a strong note, with fourth quarter revenue increasing 45% year-over-year to $22 million. The combined benefit of increased throughput from client programs, a more favorable sales mix and improved operating leverage resulted in fourth quarter net income of $7.1 million or $0.39 per diluted share, adjusted EBITDA of $9.6 million, an increase of 71% versus the prior year. For the full year, we generated revenue of $84 million, up nearly 80% from the previous year. Our fiscal 2025 net income was $15.6 million or $0.88 per diluted share. Adjusted EBITDA was $25 million, up just over 80% from last year despite significant investments we made to position the company for its next phase of growth, including the expansion of our engineering team, enhancements to our sales organization, investments in infrastructure and systems to support our defense customers and the integration of our F-16 platform production into our Exton facility. I will discuss each of these in more detail shortly. To that end, I will now provide an update on our progress on the IA Next, our long-term value creation strategy. Our IA Next strategy prioritizes profitable growth, sustained operational excellence and disciplined capital allocation as key drivers of long-term value creation. This framework is the mechanism by which we intend to deliver on our long-term target of $250 million in revenue and adjusted EBITDA margins of between 25% to 30%, driven by a combination of organic and inorganic growth. Our strong fiscal 2025 results are a direct reflection of the execution of these key strategic initiatives. I will now discuss some of our key accomplishments during the year and highlight our focused priorities for the year ahead. Let's begin with a review of our growth initiatives, which focus on new product development, cross-selling of key solutions, expansion of our military capabilities and enhancements to our integrated avionics cockpit solution. An important milestone we achieved during 2025 was the successful completion of the integration of the F-16 program production into our Exton facility. We have completed all required recertifications and resumed full-scale production of the digital flight control computer earlier this month. The recertification and resumption of production of the improved programmable display generator is planned for the next month. We have a strong backlog of demand for our new products used in the F-16 and are encouraged by the growth potential here. The F-16 remains a workhorse for our military as well as many of our allies around the world, and we are encouraged for the long runway growth we see ahead. In addition to the attractive growth opportunities related to this platform, during 2026, we plan to begin in-sourcing F-16 product line subassembly. This initiative, combined with the elimination of the duplicative costs we incurred 2025 as we migrated the F-16 program production into our facility, should lead to improved and more consistent margins related to these products moving forward. Capitalizing on our legacy of engineering excellence, new product development is a critical aspect of our growth strategy. So we were pleased by the significant progress we made during 2025. In the year ahead, we intend to advance our progress towards autonomous flight within the business jet market through the next-generation UMS2 platform. This reengineered platform enables the integration of artificial intelligence in the cockpit, significantly enhancing level of cockpit automation. We have completed test flights on the Pilatus PC-24, and we'll be delivering a new version to Pilatus in June 2026. Another important area of new product focus during 2025 has been our new Liberty Flight Deck. This is a customer-centric, customizable design that can be tailored for virtually any type of aircraft, including large passenger and cargo planes, business jets and military aircraft. We unveiled the Liberty Flight Deck at the National Business Aviation Association Show in October of this year, and the customer feedback was very positive. In the coming year, we will continue with our Liberty avionics certification activities with a goal of 2027 for first certification. Our new Liberty offering can significantly reduce workload in cockpits by using automation to enhance safety and deliver substantial cost savings for Part 25 aircraft operators. The meaningful progress we achieved on new products is a direct result of the recent investments we have made in our engineering department and the core competencies of innovation and engineering expertise. Our engineering organization is a vertically integrated multidiscipline team that brings mechanical, electrical, software and systems engineering together under one roof. This structure enables agile decision-making, tight collaboration and full control over every stage of product development. IA maintains an independent verification and validation group that ensures strong design integrity and compliance throughout the development cycle in compliance with certification requirements to meet the highest level of safety. Our engineering team uses modern fully integrated development tools and employs state-of-the-art microprocessors and FPGA technology. The department has also invested as unitizes an internal AI-based development infrastructure, which hosts a knowledge-based AI model that optimizes documentation, supports training initiatives and facilitates cross-department product queries. We have expanded our engineering team by more than 50% in each of the last couple of years, with engineering personnel representing 1/3 of our total headcount at year-end. Management and the core engineering team have been with the company for over a decade on average, contributing to stability, deep product knowledge and continuity. We view our R&D capabilities to be critical to achieving our long-term growth objectives, and we plan to make additional investments in our engineering headcount in fiscal 2026. Importantly, we maintain an excellent engineering retention rate, supported by an engaging and challenging work environment. Unique initiatives such as sponsoring private pilot training, ensure engineers gain first-hand understanding of the pilot and avionics environment. Our engineering team has demonstrated its agility and innovation with programs like the new Liberty Flight Deck, and consistently shows the willingness to take on ambitious project and new technologies that strengthen the company's competitive position like multi-core processing technology. With a strong talent pipeline, unparallel vertical integration and a culture that embraces challenging projects and new technologies, our culture of innovation serves as a key driver of the company's continued growth and competitive advantage. We look forward to updating you on the continued progress on our UMS2 and Liberty platforms as well as additional innovation and new technologies in the future as we continue to enhance our integrated cockpit avionics solutions and move closer to autonomous flights. During 2025, we also laid groundwork for the expansion of our military business, which we view as an important future growth driver. We made important investments that strengthen our security and accounting services to become compliant with the Defense Federal Acquisition Regulation Supplement, or DFARS requirements. These are necessary improvements as we continue to bid on larger DoD programs. And finally, as it relates to our growth strategy, all of this is supported by the recently completed expansion of our Exton facility. We tripled the production capacity of our facility in 2025, positioning us to scale production over the coming years. Looking ahead, we now have the people, tools and capabilities in place to execute on our growth strategy. Now turning to our pursuit of operational excellence. We made key investments during 2025 that should position the company for solid operating leverage in the coming years as we focus our goal of delivering adjusted EBITDA margins between 25% to 30% over the longer term. During 2025, we completed the integration of our NetSuite ERP system, which provides a platform to efficiently scale our business. This new system will allow us to utilize more robust data to support actionable business decisions. Additionally, we have made further investments in infrastructure and systems to support our growth aspirations. With the infrastructure already in place, we expect only modest increase in operating costs moving forward, allowing for operating leverage as we grow. And finally, as it relates to balance sheet optionality, we continue to add available liquidity to support both organic growth and strategic acquisitions in the years ahead. An important accomplishment in support of our growth strategy was the recent closing of our new 5-year $100 million committed credit agreement with a lending syndicate led and arranged by JPMorgan Chase. The new facility provides an additional $65 million in liquidity versus our previous $35 million facility, and an option, subject to certain conditions, to request up to $25 million in additional loan commitments under an accordion feature in the agreement, bringing the total potential facility to $125 million. This facility provides the improved flexibility required to execute on our long-term growth strategy. In addition to the investments in organic growth I have already discussed, we remain focused on supplementing our growth strategy through strategic acquisition. Our disciplined acquisition strategy centers on acquiring aerospace and defense component product line or businesses with significant aftermarket potential and proprietary content and processes. We are focused on acquisition of product lines and businesses that have above-market growth potential, are strongly cash generative and are profitable. The aerospace supply chain is highly fragmented with many components supplied by smaller, privately-owned businesses that in turn sell to system integrators, Tier 1 or Tier 2 manufacturers or large OEM participates. We continue to see significant opportunities for further consolidation of this supply chain. Before I hand the call over to Jeff, I want to welcome Richard Silfen to our Board of Directors as an independent director. Richard is currently General Counsel of Hildred Capital Management, a private equity firm that specializes in control-oriented transactions in lower middle market company. Before joining Hildred, Richard was a partner and Co-Chair of Mergers and Acquisitions at Duane Morris, a multinational law firm. With Richard's appointment, the Board has expanded to 7 directors. In summary, as we enter fiscal 2026, we're well positioned to benefit from the foundation investments we've made across the organization during the last several years. Our team continues to execute at a high level and market trends remain favorable and our financial position is solid, all of which position us to deliver another year of profitable growth. We are energized by the opportunities ahead of us and remain committed to advancing our long-term strategic initiatives while maintaining a focus on delivering value for our shareholders. With that, I'll turn the call over to Jeff for his prepared remarks. Operator: Thank you, Shahram, and good morning to all those joining us. Today, I will provide a high-level overview of our fourth quarter performance, including a discussion of our working capital, balance sheet and liquidity profile at quarter end, and wrap up with some comments on our outlook for the new fiscal year. We generated net revenues of $22.2 million in the fourth quarter, up 45% from the fourth quarter last year. The strong growth came despite the expected pause in F-16 production we discussed last quarter as we completed the transition of this production into our Exton facility. Consistent with our prior expectations, production related to the F-16 began to ramp back up during December, and we expect to return to normal production levels in the first half of fiscal 2026. Revenues during the fourth quarter benefited from increased volumes in the air transport market and business aviation. Product sales were $14.3 million during the fourth quarter, up from $9.8 million during the same period last year, driven primarily by strong demand in the air transport sector. Service revenue was $7.9 million, owing largely to customer service sales from the Honeywell product lines, including $300,000 associated with the F-16 program and an increase of $1.3 million in nonrecurring engineering services. Gross profit was $14.1 million during the fourth quarter, up from $8.5 million reported in the same period last year, an increase of 65%. Strong growth was driven by the increase in revenue and a more favorable revenue mix, including the benefit of high-margin sales in the air transport market. As a result of the favorable sales mix, our fourth quarter gross margin was 63.2%, up from 55.4% in the same period last year. As we have stated in recent quarters, we continue to expect our gross margins in the future to be in the mid-40% range given our expected mix of revenue going forward. With the integration of the Honeywell product line into our facilities, we expect less volatility in our gross margins relative to what we saw in 2025. We could still see some quarterly variation based on our revenue mix, especially as we continue to grow our military and OEM businesses, but we still expect full year gross margins to be within our targeted range. As a quick reminder, military sales carry a lower average gross margin compared to commercial contracts. However, importantly, there is minimal operating expense associated with these contracts, resulting in incremental EBITDA margins. Operating expense during the fourth quarter of 2025 was $5.8 million, an increase from $4.2 million during the same period last year. The increase in operating expense was driven by investments to support growth, including additional headcount and engineering sales and services. Net income for the quarter was $7.1 million as compared to $3.2 million last year. GAAP earnings per diluted share of $0.39 increased from $0.18 last year. Adjusted EBITDA was $9.6 million during the fourth quarter, up from $5.6 million last year, an increase of 71%, largely due to our revenue growth and a more favorable revenue mix. During the fourth quarter, we recognized a $1.8 million gross benefit related to the employee retention tax credit, a refundable payroll tax credit enacted under the Cares Act and subsequent legislation. The benefit relates primarily to qualifying wages paid during the period and was recognized during the quarter upon confirmation of eligibility. Moving on to backlog. New orders in the fourth quarter of fiscal 2025 were approximately $27 million and backlog as of September 30 was approximately $77 million. The backlog includes only purchase orders in hand and excludes additional orders from the company's OEM customers under long-term programs, including Pilatus PC-24, Textron King Air, Boeing T7 Red Hawk and the Boeing KC-46A and the F-16 with Lockheed Mark. We expect these programs to remain in production for several years and anticipate they will continue to generate future sales. Further, due to their nature, the customer service lines do not typically enter backlog. Now turning to cash flow. For the full year ended September 30, 2025, cash flow from operations was $13.3 million compared to $5.8 million in the year ago comparable period due to our solid operating results. Capital expenditures during the fiscal 2025 were $6.5 million versus a little over $600,000 in the year-ago period. The increase in our capital expenditures related primarily to the cash outlays for the expansion of our Exton facility. Despite the increase in capital spending compared to last year, we were still able to generate free cash flow of $6.8 million during fiscal 2025, up from $5.1 million in the previous year. As of September 30, 2025, we had total debt of $24.4 million and cash and cash equivalents of $2.7 million, resulting in net debt of $21.7 million. As of September 30, 2025, we had total cash and availability under our line of credit of approximately $77.7 million. Our leverage at the end of the quarter was 0.9x. Our modest leverage, combined with availability under our expanded credit facility, gives us significant financial flexibility to execute on our strategic initiatives. Before we move into Q&A session, I'd like to provide our thoughts around the outlook for our business entering 2026. As we have discussed during fiscal 2025, our results benefited from the pull forward of revenues related to the F-16 platform as we prepared for the transfer of production into our Exton facility. Additionally, our fiscal 2025 results also included some service revenues for the F-16 platform that we do not expect to repeat in fiscal 2026. Excluding these factors, we estimate IA generated high single-digit year-over-year organic revenue growth in fiscal 2025 and believe this to be a reasonable annual organic growth run rate for the business on a normalized basis over time. However, when we look at fiscal 2026, we expect organic revenue to grow more modestly relative to our longer-term target given the pull forward of revenue related to the F-16 production and service revenue from fiscal 2026 into fiscal 2025, which was expected. Looking ahead, as we build off a higher base of revenue, we intend to drive the next phase of growth through a combination of market share gains, new product development, expanded capabilities and disciplined inorganic growth. When we think about the cadence of fiscal 2026, we expect first quarter revenues to be in the range of $18 million to $20 million, building steadily on a sequential basis as we move throughout the year. That completes our prepared remarks. Operator, we are now ready for the question-and-answer portion of our call. Operator: [Operator Instructions] Our next question comes from Bobby Brooks with Northland Capital Markets. Robert Brooks: So terrific 4Q results, and you had mentioned that the strength in sales is driven by some momentum in the military programs. Is it right to assume that when you're referencing that, it's really all related to the work with the F-16s, or is there something else? Jeffrey DiGiovanni: No, it's not just the F-16, there's also -- we do work with the C-130 and other Boeing products programs. So that's kind of where we saw some of the fourth quarter impact. Robert Brooks: Okay. So it was not just the F-16. Could you maybe help frame what was non -- for the military results, what was non-F-16 net positive? Jeffrey DiGiovanni: Yes. So it's probably a couple of million dollars in there for the C-130 and Boeing platforms in the military programs. And the F-16 really had nominal revenues in for the fourth quarter. There's probably about close to a little over $300,000 of service revenue that hit this period on the F-16 and -- as we expected. We didn't expect any revenue in production for the F-16 in Q4. Robert Brooks: Got it. And then it's great to see you guys put out this 2029 targets. I was curious to hear, and I'm sorry if I missed this earlier in the call, but was curious to hear your assumptions underpinning that outlook? Jeffrey DiGiovanni: Yes. Our $250 million revenue target assumes we're able to generate organic growth in high single digits range with the balance really driven by disciplined acquisition strategy. It's important to note that we believe our acquisition strategy could be accretive to our longer-term organic growth expectations given our expanded cockpit aviation solution, which will allow us to increase cross-selling and the broader market opportunities. Robert Brooks: Got it. And then any comments -- assumptions on the margin outlook there? Jeffrey DiGiovanni: Yes. So we're projecting margins in the range of -- EBITDA margins 25% to 30%, in that target range. Robert Brooks: Yes. But like just curious like what the assumptions are underpinning you guys had in that target? Jeffrey DiGiovanni: Yes, a lot of the platforms and a lot of, I would say, the operating expenses we have here today, so a lot of it we're going to be driving through the growth in EBITDA margins with that future growth. And we're looking to invest in R&D. So you'll see revenue go up and some of the R&D go up for these programs. That's why we're in the 25% to 30% EBITDA margin range. Robert Brooks: All right. I appreciate that. And just last question for me. You had mentioned the Liberty Flight Deck was really well received by both current and potential customers. I was just curious to hear what do they like most about it? Is it maybe lower cost than the alternatives out there? Or is there some type of proprietary tech embedded that gives you an edge? Just curious to hear that. Shahram Askarpour: So I think talking in general, where the avionics market has gone is now being dominated -- especially on the business aviation is being dominated by Garmin and to some extent, Honeywell and Rockwell Collins, all of which will give you a solution that they have. Our solution, we provide the solution to the customer of what they want, not what we have. And that was very well received because we also demonstrated that we can do that without significant NRE requirements. And that was very well received. I think we did have an agreement put in place with one new customer that -- it was a memorandum of agreement that is we're going to be negotiating the details of the contract. And we've also seen additional customers that have strong, good interest. We're in negotiations with 2 or 3 of those customers to -- with regards to the Liberty Flight Deck. What we see in the market is that the trend of industry going towards new OEMs coming along with the new engine technologies bring a lot of hybrid engines for carbon emission reduction, and that's driving a whole new groups of aircraft OEMs coming into the market, which they need customization because of the special needs of their airplanes. And we see an opportunity for us to grab that all by the horn and dominate that market. Operator: Our next question comes from Greg Palm with Craig-Hallum Capital Group. Greg Palm: Congrats on a good way to close out the year. Maybe we can start with, I just wanted to dig into that fiscal Q4 results just a little bit more. I mean, I think you mentioned air cargo, business jet, but was there specific product lines that contributed to the upside relative to maybe your prior expectations? Jeffrey DiGiovanni: So our prior expectations, a couple of things. One, when we look at what occurred over the quarter, as we mentioned before, we always have a lot of volatility, I think, when we're in these transitional periods with Honeywell. When we got their revenue reports and things like that, my team digs through them, challenges those questions and margins. We knew Q3 looked a little off. We got that resolved by the end of this year, fiscal year, and that was probably about another $1.5 million, roughly $2 million there, which went right to margins. So when you look at overall margin kind of, I would say, for the full fiscal year, you're in that 45% margin, but Q4 was high and Q3 was low, again a little bit there. And in terms of the air transport, we just saw more demand in the retrofit market, which typically has higher margins. And we saw comeback in business aviation as well. Greg Palm: Got it. Okay. And then the -- in terms of the orders number, I mean, that was a really good number in the quarter as well, a book-to-bill well over 1. Anything to necessarily or specifically call out there? Jeffrey DiGiovanni: No, I think as we make investments in our sales teams, we're starting to see some of the fruits of those labors where the sales folks are now out there trying to generate these sales for us. It just takes -- these kind of sales, it's a longer lead time. So we went from having 1 person back in 2023 to about a sales team of about 6 today. Greg Palm: Got it. Okay. And then I want to spend a minute on this targeted organic growth rate. I think you said high single-digit sort of on a normalized basis. I mean how much of Liberty and UMS2 is built into that because both of these seem like pretty significant opportunities that could contribute a lot more than high single-digit growth. And I guess we're probably talking out a few years, but I just wanted to kind of get your sense on the contribution potential of that. Shahram Askarpour: Yes. So on the OEM side of the Liberty cockpit, which includes the UMS2 as part of it, we're looking at 2030, 2031 for those new platforms to get into production. On the aftermarket side, we're going to see things hopefully as early as 2027, where we will have our initial certifications in the aftermarket side of -- on the business jet side of things. Organic growth in -- at least in the next few years is going to come from several platforms that we've already -- we're already seeing growth in those. Being on the air transport side, on the aftermarket side, we're beginning to see some of our product lines taking further legs into other platforms. For example, we were never that successful on the 737 business with our cockpit solutions, but we're seeing an uptick in that on the 737 side. On the C-130 side, on the military side, we're seeing some -- a lot of increased interest and mainly because the competitors we had in the past in those platforms, mainly being Collins and Honeywell, Honeywell's kind of doesn't have much to offer on their platform anymore. And Rockwell Collins hasn't done the investments. So we're seeing a lot of the countries, which don't have the kind of budgets to spend on Rockwell Collins solutions as they sell to the U.S. Air Force, coming and looking at lower-cost solutions like we have. And so we're seeing an uptick in a lot of areas that's going to drive our organic growth. Now prior to doing these acquisitions, we were growing somewhere in double digits, mid-teens organic growth. When you do $26 million in revenue, growing it organically by 15% doesn't require a lot of additional revenue to come in. When you're doing $100 million in revenue, obviously, that organic growth becomes hard to achieve in double digits. That's why we're seeing that long term, single-digit organic growth is -- high single-digit organic growth is what we're striving for. Operator: Our next question comes from Sergey Glinyanov with Freedom Broker. Sergey Glinyanov: So my congratulations on really successful quarter and the year. And my question is gross margin is much better than expected. You've achieved such a low product cost level, which is the same a year ago. Whether it's only due to sales mix or there is anything else? Should we expect any substantial changes in next year? Jeffrey DiGiovanni: So when we look at gross margins, as we said before, there's a lot of volatility, especially when you're doing transitions, product mix, especially with the governmental programs. That's kind of why we look at it from a whole year basis versus quarter-over-quarter because it's timing of also product wins and production. So when you look at the full year, we're in the mid-40s, and that's kind of what we projected a few months ago to say we're in the mid-40s. Q4 was over 60% and Q3 was under 40%. That -- there was a little bit, I would say, of a shift in terms of when we got the revenue and the information on the F-16, the margins were lower. Again, my team challenges and then we go back and forth, but that takes time and sometimes there's nothing there. This time, we had a resolution and we worked through with that with Honeywell. And there's probably about close to almost $2 million in changes there, which affects the margin quarter-over-quarter. So when you take that out, it's kind of, I would say, consistent between those quarters, but again, blended on the mid-40s. Sergey Glinyanov: Okay. Got it. And what should we expect revenue in the next 4 quarters? I mean will it be smoother and even in trajectory than a year ago in terms of previous acquisitions, et cetera? Jeffrey DiGiovanni: Yes. Unfortunately, we don't give that forward-looking guidance. We're trying to stay on the target of focusing on the $250 million revenue growth for the next few years to get there. Sergey Glinyanov: Okay. Maybe you can share your thoughts about capital expenditures in the next year after Exton facility expansion is finalized? Jeffrey DiGiovanni: So I mean the Exton facility has been finalized. That spend is all done. We're not expecting major shifts in capital expenditures in 2026. Sergey Glinyanov: Okay. And I think the last question is, you emphasize the employee retention tax credits was accretion. Is it onetime benefit or we can expect it in next year? Jeffrey DiGiovanni: No, that was a onetime benefit. So the company filed under the Employee Retention Credit Act a few years ago. I guess with some changes in the government and the process, we got those checks, the money back in during this period, and that's when you take credit for it. That's why we called it out because it's a onetime event that's not going to occur again. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Shahram Askarpour for any closing remarks. Shahram Askarpour: Well, thank you very much everybody for attending our conference call. Have nice holidays, and enjoy the season. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and thank you for standing by. Welcome to the Birkenstock Fourth Quarter and Fiscal 2025 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. I now turn the call over to Megan Kulick, Director of Investor Relations. Megan Kulick: Hello, and thank you, everyone, for joining us today. On the call are Oliver Reichert, Director of Birkenstock Holding plc and Chief Executive Officer of the Birkenstock Group; and Ivica Krolo, Chief Financial Officer of the Birkenstock Group. Nico Bouyakhf, President of EMEA; Klaus Baumann, Chief Sales Officer; and Alexander Hoff, Vice President of Global Finance, will join us for the Q&A. Today, we are reporting the results for our fiscal fourth quarter and full year ended September 30, 2025. You may find the press release and supplemental presentation connected to today's discussion on our Investor Relations website at birkenstock-holding.com. The company's annual report for the year ended 30 September 2025 on Form 20-F has been filed with the United States Securities and Exchange Commission and has also been posted to our website. We would like to remind you that some of the information provided during today's call is forward-looking and accordingly is subject to the safe harbor provisions of federal securities laws. These statements are subject to various risks, uncertainties and assumptions, which could cause our actual results to differ materially from these statements. These risks, uncertainties and assumptions are detailed in this morning's press release as well as in our filings with the SEC, which can be found on our website at birkenstock-holding.com. We undertake no obligation to revise or update any forward-looking statements or information, except as required by law. We will reference certain non-IFRS financial information. We use non-IFRS measures as we believe they represent the operational performance and underlying results of our business more accurately. The presentation of this non-IFRS financial information is not intended to be considered by itself or as a substitute for the financial information prepared and presented in accordance with IFRS. Reconciliations of IFRS to non-IFRS measures can be found in this morning's press release and in our SEC filings. With that, I'm going to turn it over to Oliver. Oliver Reichert: Good morning, everybody, and thank you for joining us today. As we enter year 3 as a public company, I would like to spend a few moments to highlight our accomplishments since our IPO in 2023. We have delivered strong double-digit top line growth in constant currency and generated a consistent 30% plus EBITDA margin without compromising on our disciplined engineered distribution. We made significant progress in unlocking our white space potential. We deepened our retail footprint and doubled our own store fleet to 97 stores. We have grown our APAC business at an average rate of 36% per year. And we have significantly increased close to our share of business by 10 percentage points to 38%. We generated significant cash flow, allowing us to delever from 3.3x to 1.5x while investing over EUR 150 million into our production capacity and buying back $200 million in shares. We achieved all this in an environmental faced by fundamental changes in global tariffs and international trade, a war in the Ukraine, and energy crisis and a significant decline in the U.S. dollar. Even for a brand like ours with a history spanning 2.5 centuries, these are unusual times. As our results show, we have navigated them consistently and successfully. Our brand delivers growth since 250 years. Our performance during these unusual times proved the resilience of our beloved brand. Our healthy brand momentum continued in the fourth quarter. We are very proud to report strong results for our fiscal year 2025, which came in ahead of our guidance. We delivered full year revenue growth of 18% in constant currency, above the 15% to 17% range we provided at the beginning of the year. We reached EUR 2.1 billion in revenue, the best year in our history. We grew double digits in every segment and channel, and we improved profitability. Gross margin was up 30 basis points to 59.1%. Adjusted EBITDA margin was up 100 basis points to 31.8%, meeting the high end of our target. Most importantly, we accomplished this in the face of significant tariff and currency pressures. Demand for our brand remains very strong across all segments, categories and channels. We sold over 38 million pairs in fiscal '25, up over 12%. ASP was up 5% in constant currency, supported by targeted price actions and the higher share of premium products such as closed-toe shoes and leather executions. We are winning in both B2B and D2C, gaining shelf space and taking share. Birkenstock had a very strong back-to-school season with retail sales at our top 10 partners increasing over 20% year-over-year. Importantly, we see a continuation of this momentum during the important holiday season and over 90% of the growth in B2B came from within existing doors. We remain committed to maintaining relative scarcity and managing tightly our distribution growth. Full price realization, the ultimate indicator for brand health and demand remains over 90%. This shows incredible brand strength in a market faced with significant discounting by others. We delivered as promised in fiscal 2025 in our white space growth opportunities. In owned retail, we added 30 new stores, ending the year with 97 stores and more than doubling our own store fleet since the IPO. The new stores are performing ahead of our expectations in terms of productivity and return of CapEx. We plan to open about 40 new stores in 2026, putting us well on track to reach our 150 store target ahead of schedule. This will allow us to capture more in-person shopping demand and younger shoppers within our own D2C business and allows us to showcase the full range of our collection. Closed-toe share of revenue increased by 500 basis points year-over-year to reach 38% for the year, supporting continued ASP growth. 10 of our top 20 silhouettes in '25 were closed toe. The Boston, a category-defining hero silhouette, which turns 50 years in '26, continues to lead the clog category, a category like sandals we believe we own. At the same time, non-Boston closed-toe silhouettes grew over 30%. Finally, our third white space, APAC, grew 34% in constant currency, approximately double the pace of the more mature markets. APAC increased to 11% share of global revenue and the APAC segment has the highest ASP. We expect to continue to steer APAC growth at double the speed of the other segments. Our growth is only limited by our production capacity and disciplined distribution. We, as many other brands did, saw a continued shift towards in-person shopping, especially in the important Gen Z group. This consumer most often shops in a multi-brand curated retail environment, which is supported by our B2B channel. We are a consumer-centric brand in its core meaning. Our desire is to be where the customer is, reach first-time users who need to touch and feel the product and transform them into brand fans for a lifetime. This strong wholesale growth driven by the younger demographic, which we expect to continue, requires us to produce more pairs in a situation where we are already capacity constrained. At the same time, the strongest demand we see is for our premium executions, which require even more production minutes. The combination of more wholesale and more premium execution is creating additional pressure on our vertically integrated supply chain. We need to manage growth in our production responsibly. This is why we are steering towards a mid-teens pace of growth for fiscal '26. I will now turn it over to Ivica to discuss our financial results and outlook for '26 in more detail. Ivica Krolo: Thanks, Oliver. I'm happy to share with you Birkenstock's performance for the fourth quarter and the fiscal year 2025, which exceeded our targets. We achieved this in the face of significant headwind from FX on our reported numbers. We closed the year with a strong fourth quarter with revenues of EUR 526 million, growth of 20% in constant currency. Reported revenue growth was over 15% due to the historically strong depreciation of the U.S. dollar compared to the fourth quarter of '24, which caused a 420 basis points drag to revenue growth in the quarter. This brought the full year revenues to EUR 2.1 billion, up 18% in constant currency, exceeding the high end of our guidance of 15% to 17%. We saw strong growth across all segments in fiscal 2025. The Americas segment was up 18% in constant currency. EMEA was up 14%, and APAC up 34% in constant currency. By channel for the year, B2B was up 21% and D2C up 12% in constant currency. As Oliver mentioned, we see sustained strength in our B2B channel. Share of business in the B2B channel was about 62%, up from 60% in fiscal 2024. Gross profit margin for the fourth quarter was 58.1%, down 90 basis points year-over-year. Like-for-like margins, excluding 120 basis points of pressure from FX and 100 basis points of pressure from incremental U.S. tariffs were up 130 basis points to 60.3%. For the fiscal year, gross margin improved 30 basis points to 59.1%. Like-for-like margin, excluding FX and tariff impacts, was up 90 basis points to 59.7%, close to our long-term target of 60%. Selling and distribution expenses were EUR 156 million in the fourth quarter, representing 29.7% of revenue. This was down 130 basis points from the prior year. For the full year, selling and distribution expenses totaled EUR 564 million or 26.9% of revenue, down from 28% in fiscal 2024, mainly due to a higher B2B share year-over-year and the reclassification of some expenses into G&A previously recorded in S&D. Adjusted general and administration expenses were EUR 35 million or 6.7% of revenue in the quarter, down 30 basis points versus prior year. Full year adjusted G&A totaled EUR 123 million or 5.9% of revenue, up 30 basis points from fiscal 2024, mainly due to reclassification. Adjusted EBITDA in the fourth quarter of EUR 147 million was up 17% year-over-year. Adjusted EBITDA margin of 27.8% was up 40 basis points year-over-year. Excluding FX and tariff impacts, adjusted EBITDA margin was up 280 basis points to 30.2%. For the full year 2025, adjusted EBITDA was EUR 667 million, up 20% year-over-year. Full year margin of 31.8% was up 100 basis points year-over-year and hit the high end of our targeted range, which we increased after the second quarter. Adjusted EBITDA margin for fiscal '25, excluding FX and tariff impacts, was 32.5%, up 170 basis points. Adjusted net profit of EUR 94 million in the fourth quarter was up 71% year-over-year. Adjusted EPS for the fourth quarter was EUR 0.51, up 76% from EUR 0.29 a year ago. For the fiscal year, adjusted net profit of EUR 346 million was up 44% and EPS of EUR 1.85 were up 45% from fiscal '24, driven by strong operational performance, lower interest payments and a lower effective tax rate. Cash flows from operating activities remained strong at EUR 384 million for the fiscal year, down 12% from fiscal 2024, mainly due to the timing of tax payments. We ended the year with cash and cash equivalents of EUR 329 million after the repurchase of 3.9 million shares totaling EUR 176 million and the partial early repayment of the U.S. dollar term loan of USD 50 million in September. Our inventory to sales ratio declined to 34% for the year from 35% in the fiscal year 2024. Our DSO for the year were healthy 28 days, up from 23 days in 2024, primarily due to the higher B2B mix. During the fiscal year, we spent approximately EUR 85 million in CapEx, adding to our production capacity in Arouca, Goerlitz and Pasewalk and continuing our investments in retail and IT. Even with the share buyback we executed in May, our net leverage was 1.5x at the end of fiscal 2025, down from 1.8x at the end of fiscal 2024. Without the buyback, the net leverage would have been at 1.2x. Our capital allocation priorities continue to be: number one, invest in our business; number two, reduce debt; and number three, opportunistic share buybacks. Now turning to our outlook for fiscal 2026. We are expecting significant headwinds from FX and tariffs in fiscal year 2026. Regarding FX, we will see an especially strong headwind in the first half of the year, impacting the quarter-over-quarter comparison. At today's euro-U.S. dollar exchange rate of 1.17, we expect approximately 600 to 650 basis points of headwind to revenue growth in both the first and the second quarter and around 300 to 350 basis points for the full year. The margin impact to gross profit and adjusted EBITDA will be 150 to 200 basis points in each of the first 2 quarters and about 100 basis points for the full year. As a reminder, nearly all of our COGS are in euro and the majority of SG&A is as well. As such, the absolute euro impact of movements in FX to revenue flows through about 90% to gross profit and about 67% to adjusted EBITDA. Our guidance for fiscal 2026 assumes today exchange rates will remain the same throughout the remainder of the year. Regarding tariffs, we were able to offset most of the 2025 impact with targeted price increases, including the July U.S. price increase. We also benefited from the fact that the majority of our goods for 2025 were already shipped prior to the increase in tariffs. This will not be the case in 2026, where we expect to see more impact from tariffs in COGS than we did in 2025. This will result in about a 100 basis point decline in both gross margin and EBITDA margin for 2026. With that explanation behind us, now on to the guidance. For 2026, we are targeting constant currency revenue growth of 13% to 15%, which, as Oliver mentioned, is a slower pace than we saw in 2025. The FX headwind should be about 300 to 350 basis points for the full year, resulting in reported revenue growth of 10% to 12% to EUR 2.3 billion to EUR 2.35 billion. This goal is based on our capacity constraints and the demand in our B2B channel, especially in the emerging youth segment. We target unit growth of approximately 10% per year, a manageable pace of growth when we consider our supply chain, access to specialized labor and equipment and our desire to maintain scarcity. We expect adjusted gross margin of 57% to 57.5%, inclusive of the 100 basis points of pressure from FX and 100 basis points from incremental U.S. tariffs. We expect adjusted EBITDA of at least EUR 700 million for the year, implying an adjusted EBITDA margin of 30% to 30.5%, inclusive of the pressure from FX and tariffs totaling 200 basis points. Excluding the impact of these external factors, forecasted adjusted EBITDA margin would be at 32% to 32.5%. Our expected tax rate should be in the range of 26% to 28%. Adjusted EPS is expected to be EUR 1.90 to EUR 2.05, including approximately EUR 0.15 to EUR 0.20 of pressure from FX. This is not including the impact of any additional share repurchases. We intend to repurchase share for a total consideration of $200 million during fiscal 2026, subject to market conditions. Capital expenditures should be in the range of EUR 110 million to EUR 130 million. Net leverage target for the end of fiscal 2026 of 1.3 to 1.4x, excluding the impact of any additional share repurchases. Finally, we expect to open about 40 new retail doors globally over the course of the year. Before I turn back to Oliver to close, I'm excited to announce our plans for a Capital Markets Day at the end of January in New York City. Details on venue and timing will be forthcoming and will be posted on our Investor Relations website. We are now in year 3 of our life as a public company, and we are looking forward to providing you a detailed look into the world of Birkenstock and our vision for growth for the next 3 years. We hope you can join us for a deep dive into all areas of our unique and dynamic business model. Oliver Reichert: Thanks, Ivica. 2025 was the strongest year in the over 250-year history of Birkenstock. I am extremely proud of the team and how well and disciplined we steal our business in an overall very challenging context. We remain very optimistic about our future. '26 is off to a great start with Birkenstock at the top of gifting list this holiday season. Demand for the footbed remains robust and unconstrained. The main constraints we face is in our own production capacity and our desire to maintain scarcity. As we look ahead to the rest of this fiscal year and beyond, we see opportunity. The opportunity to continue to take share globally, especially in the fast-growing APAC market, adding to our own retail store fleet, building on our closed-toe momentum and doubling down on our engineered distribution to maximize profitability. We look forward to seeing you all in New York in January to discuss the next few years of this incredible brand journey. We will dig deeper into our growth drivers, including investments in manufacturing, innovation, new usage occasions, retail and the APAC segment. I would now kindly ask the operator to open our Q&A session. Thank you. Operator: [Operator Instructions] Your first question comes from the line of Matthew Boss with JPMorgan. Matthew Boss: So Oliver, maybe relative to the 20% constant currency revenue growth in the fourth quarter and 18% for the year, which both exceeded your plan, you're targeting 13% to 15% constant currency growth for fiscal '26. What's driving the more conservative view for '26? Have you seen any slowdown in demand so far in the first quarter? And how should we think about this more moderate pace of growth within your long-term algorithm? Oliver Reichert: Matt, thank you for your question. First of all, we see very strong demand for our brand all over the world. During the holiday season, in the U.S. in specific, some of our big wholesale partners grew over 30%. So our full price realization is still north of 90%. So since nearly 2 years, we see a change in consumer journey in the Western Hemisphere. A lot of brands, including us seeing more traffic and demand coming from multi-brand environment and in-person shopping at wholesale, especially Gen Z customer -- consumers. Wholesale partners play successfully the full range of Piano marketing activities online, offline and social. They are very attractive partners. This is good news. We have the highest percentage in EBITDA margin in wholesale and Brand Rookies need to have a physical touch point with our products. They will return to us for their second, third, fourth and so on pair. These young customers buying into more expensive and more complex executions. Don't worry, we continue to manage scarcity and execute very tight inventory management door by door. But one of our most successful category in Gen Z, the Clog, Boston, Naples, we own the Clog category. But from a production perspective, a Clog takes more than twice as many production minutes per pair than sandals. So the Clog business puts even more pressure on our production minutes and ultimately, our production capacity, which is the biggest limitation to our growth. So we will produce more than 5 million pairs more in '26. These are the main reasons for our growth algo outlook. The demand is not limiting our growth. The capacity does. On your question about the long-term algo, we expect top line growth over the next 3 to 5 years to be in the mid-teens range. We assured we are investing heavily in our preproduction capacity in Portugal, ramping up stitching and preforming capacities, especially for our Clog styles and more complex and more expensive products. Our new purchased facility in [indiscernible], near Dresden will further increase our cork/latex footbed capacity and our final assembly lines where we currently face the biggest bottlenecks is the factory will be operational in '27. I believe our Investor Day end of January in New York City will help us a lot to further explain and address this topic in more detail. Operator: Your next question comes from the line of Laurent Vasilescu with BNP. Laurent Vasilescu: Ivica, I wanted to dig a bit more on the margin outlook for 2026 and the impact from FX and tariffs. Can you walk us through in more detail how FX flows through the P&L? Similarly, you took pricing in July to mitigate the tariff impact. Why are you seeing so much margin pressure for tariffs in 2026? And what more can be done to offset some of this? And then I've got a quick follow-up. Ivica Krolo: Thanks for the question, Laurent. It's Ivica. So you're right. Fiscal 2026 will be heavily impacted by FX and tariffs, so representing a drag to both gross margin and EBITDA margin of each 100 basis points, which is 200 basis points in total. So excluding these external factors, we do not have under our control, margin would be very consistent with fiscal 2025. So first, regarding FX flow-through and starting with revenue. The 2026 impact will be 300 to 350 basis points drag on top line growth for the full year or about EUR 70 million. And so given that almost all of our COGS are in euro, as you know, we are producing in Europe, this absolute impact flows through to gross profit at about 90% or EUR 63 million hit to gross profit. Pretty much the same picture for adjusted EBITDA. About 2/3 of the top line impact flows through the EBITDA or approximately EUR 47 million on adjusted EBITDA for the full year. So overall, these impacts will be more pronounced in the first half when the dollar was at its strongest level before the decline gain in April this year. On a quarterly basis, we expect revenue growth will be impacted by about 600 to 650 basis points and margin by 150 to 200 basis points in both Q1 and Q2. In our fiscal second half, the pressure will be much less year-over-year. Then with regards to your question on tariffs. So for the full year fiscal 2026, we expect about 100 basis points of margin pressure from incremental tariffs, which is reflected in our forecast. We look at pricing to offset the majority of the incremental tariff impact in absolute terms, which is dollar neutral, however, not margin neutral. So for example, we say we have a $100 shoe with $40 COGS and $60 gross profit. That is a 60% gross margin. Now we add $10 of tariffs to COGS, we need to add $10 to price to maintain $60 gross profit. But the margin is now 54.5%. So that is $60 over $110. If we wanted to maintain a 60% margin, we would have to take pricing up $25 to bring our gross profit to $75, not $60. The price increase would have to be 2.5x the tariffs. This is not something we would do to our customers being a democratic brand. And as you know, we review prices every season and make adjustments very surgically on a style-by-style basis. We will continue to mitigate the tariff impact on margin, lowering COGS in other areas. We do this through production efficiencies, improved logistics and better terms with suppliers and vendors along our vertically integrated supply chain, but this naturally does take time. In addition, our growing share of business in APAC will, for the longer term, reduce our exposure to the U.S. dollar and to U.S. tariffs regime. Laurent Vasilescu: Very helpful detail. And as a follow-up on a finer point on Matt's question. I know you don't guide by quarter, but just because there's a lot of pressure on the stock premarket on this 13% to 15% top line. Any finer point on just like on 1Q, could we assume that top line could be up high teens on that front? Oliver Reichert: It's Oliver again. Yes, of course. I mean, the guidance is the guidance. We guide mid-teens, especially on the long-term algorithm. But I mean, just remember my first comments on the holiday season, especially in the U.S., the business is going super well. So I understand your worry somehow. But listen, it's really brand is performing super strong. So yes, all good. Operator: Your next question comes from the line of Randy Konik with Jefferies. Oliver Reichert: Randy, can you hear us? Randal Konik: Yes. Can you hear me? Yes. Sorry about that. This unmuted thing. Look, can we talk a little bit about channel mix a little bit more? I think for the full year, B2B was up about 21%, D2C up about 12%. And then in the fourth quarter, the B2B channel was, I think, even stronger, up about 26% in constant currency. How do you think about channel growth in 2026? Do you think B2B will continue to outpace D2C by such a wide margin as it did? And then what are you trying to do to drive continued faster -- even faster growth in the D2C channel? Ivica Krolo: Thanks for the question, Randy. It's Ivica again. So as you know, this is a shift that we've been seeing in the business for over a year. In-person shopping is back, especially within our fastest-growing cohort, which is the youth market, where consumers prefer to shop in a multi-brand retail environment. This is very favorable to our B2B business, where we have over 6,000 high-quality strategic retail partners globally, and they are doing a very good job representing our brand, reaching new consumers through their own advertising and outreach. And this is basically marketing spend that brings consumers to our brand, and it's effectively not spent by us. This is a good thing and supports the very strong margins we are achieving. We are leaning in both channels, but we can't control where consumers choose to interact with our brand. We have learned through the experience of other brands that you can't force consumers into one channel or another. All we can do is make sure that touch points they have with the brand are high quality, educate on the purpose of Birkenstock, strive to maintain scarcity in the channel and support full price realization regardless of channel, and this is what we are doing. And we are thrilled to see the strong demand regardless of where it is. It means more Birkenstock on feed and the opportunity to turn the new consumer into a lifetime brand fan who we firmly believe will come -- will become a D2C consumer at some point in their consumer journey regardless of where they purchase the first or the second pair. So with regards to B2B outpacing D2C, so yes, we do expect this trend of faster B2B growth to continue in 2026 and for the foreseeable future as we continue to reach more and more consumers who are new to the brand, especially in the younger demographics. But both channels are growing double digit. A few points that are very important to this. We are not compromising high-quality distribution and full price realization. We manage inventory in the B2B channel very tightly through engineered distribution model. Full price realization is at over 90%. stock-to-sales ratios in the channel are very healthy, and our order book continues to be very strong. On the last part of your questions on the D2C channel itself, we are very much focused on accelerating our store rollout to promote the high-quality touch points with the brand and to present the full range of our products and, of course, introduce newness. With 97 doors globally, we are not able to capture all in-person demand that we are seeing with our own D2B business. We added 30 stores in 2025, and we should add another 40 in 2026. So additionally, we are working to drive an even stronger connection to our consumers through more targeted membership benefits, a loyalty program, exclusive styles, content and special events. Randal Konik: And when you -- and just to follow up, when you say -- I think you said you're committing to double-digit growth on both channels. Is that on a constant currency basis? And lastly, do you expect the -- again, the growth rate spread to widen or stay about the same or narrow from a B2B stronger than D2C growth rate in 2026? Ivica Krolo: With regards to the first part of your question, yes, it's constant currency. And with regards to the second part of your question, so we expect the trend that we are currently seeing to continue. Operator: Your next question comes from the line of Lorraine Hutchinson with Bank of America. Lorraine Maikis: The growth in EMEA accelerated nicely. What are you seeing in terms of consumer demand in the EU in particular? And any comments on first quarter trends there? Mehdi Bouyakhf: Lorraine, this is Nico. Thank you for your question. Indeed, we projected in the last earnings call an acceleration of growth in EMEA and the 17% in Q4 are a significant acceleration versus previous quarter. We saw double-digit growth across B2B and DTC in an overall flat to negative market. So effectively, we continue to be one of the very few chosen brands. And effectively, we take share from many other players. Growth as also part of your question in Q4 was predominantly driven by a strong consumer appetite for product newness and higher price points. We are particularly pleased with our closed-toe performance. This category grew more than 2x our overall business and closed shoes, so lace-up shoes, grew almost 2x our overall business. Looking at the top 20 styles in our sales, 10 styles are closed toe and half of these are closed shoes. Just to name a few, Naples, we're on to something here. That's a new clog silhouette, specifically the wrapped that we bring towards the consumer, and we see great traction. It's growing triple digit and it's really also outgrowing Boston. And then to name a closed shoe silhouette, the Utti, is doing really strong. Again, strong consumer appetite from a female consumer, but also from a male consumer. Your second part of the question was Q1. We are very pleased to see that we are off to a great start in Q1 and see a continuation of the trends that I just mentioned. So appetite for product newness and higher price points. We are very confident that we again outperformed the market and will take share from many other players and be the brand of choice for our consumers. We project our Q1 in EMEA to be very much in line with our overall guidance. And as shared in the opening remarks, our growth is not impacted by consumer demand, but our manufacturing capacity and distribution-wise, our will to maintain the quality in our distribution. Lorraine Maikis: And then it sounds like capacity constraints are the key reason for the slower growth in '26. Would you expect to be back in a position to return to mid- to high teens growth in fiscal '27? Ivica Krolo: Lorraine, it's Ivica speaking. So as you know, we are constantly capacity constrained, we've been for some time. What we are doing is now building up the capacity to close the gap to the demand. Otherwise, we would not be in a position to serve and keep up with the demand that we are seeing in the market. So overall, our goal is to increase our capacity by -- in terms of units by roughly 10% for the foreseeable future, and this will certainly help us to serve the demand going forward. Operator: Your next question comes from the line of Michael Binetti with Evercore ISI. Michael Binetti: Can you hear me okay? Oliver Reichert: Clear. Michael Binetti: So I guess on the EBITDA margin guidance, could you just help us unpack it a little bit more? You gave us 100 basis points drag from FX, 100 basis points drag from tariffs. So we're trying to bridge to the 130 to 175 basis points in total. I think when we last checked in, you had 75 basis points left to recapture from the factory. How should we think about like-for-like pricing as a good guy offsetting the tariffs? And then it sounds like wholesale grows above D2C. So I think that's positive on the EBITDA margin rate line. Is there any way to help us size a couple of those components? Ivica Krolo: Yes, sure. Michael, it's Ivica speaking. So we closed fiscal '25 with a gross margin of 59.1% and the external factors, that is tariffs and the drag in currency is representing a drag in total of 200 basis points. So that means 57.1% and we guided 57% to 57.5%. So what are the puts and takes here? A absorption and capacity absorption within our production will contribute roughly 60 basis points. You mentioned correctly, Michael, 75. However, the base for '26 is higher. As such, the positive contribution will be around 60 basis points. The next point is on channel as B2B will outpace D2C growth, there will be a drag in the gross margin from the channel shift. And this is basically around 50 basis points. So overall, this is neutral. And then what is not embedded is like-for-like pricing. And in that respect, the guide of 57% to 57.5% is more conservative. Michael Binetti: Okay. And then I'm just curious a quick follow -- a quick couple of follow-ups. So you said -- I think you said the units grow about 10%, and that's based on some capacity constraints and your desire to control scarcity. What is the unit growth capacity if you weren't trying to control scarcity? Like what could you produce given where the facilities are at right now? And then Ivica, just to clarify, how much the Australia roll-up adds to revenues this year? Oliver Reichert: Michael, I'm taking the first part. This is Oliver. It is not really easy to comment this because it's like a really diverse picture on what kind of article are we talking about. That's why I mentioned this from a production capacity perspective that a clog, as an example, will digest double the time in minutes and production minutes than an average sandal. So in total, somehow the multiple is if you sell one pair in online. It equals more or less 2.5 -- 2.4 pairs in wholesale to reach the same financial impact. So this alone is a big shift from a unit perspective. That is also what you can see in our unit versus ASP comparison, and that's why we have this 2/3 units and 1/3 ASP situation. So the more we grow in wholesale, the more we are capacity restricted. So that's why we are constantly managing these channels as well and try to maneuver us through their article mix and our production minutes. And we're constantly capacity constrained. So that is the big jigsaw pass at the moment, we are deep diving in. And I'm pretty confident that we can explain it really very transparent and answer all questions in our Investor Day end of January in New York because then you will really understand that -- and it's -- I know it's pretty unique and it sounds super weird from outside, but our growth algorithm is not designed by demand, it's designed by our production capacity. And if people decide to switch to wholesale channels to buy our products. And if they decide to buy into more expensive price groups and more complex price groups, the overall capacity in millions in units are declining because we cannot deliver simply more of the same thing. Makes sense to you or... Michael Binetti: Yes, completely. And just -- yes, the Australia part, please. Ivica Krolo: Sure, Michael, it's Ivica again on the Australia part. So we expect overall an immaterial impact on the Australia acquisition for the 2026 P&L. The benefit of this acquisition over the next few years is we cut out the middleman and take Australia to its full potential in D2C and capture the full value directly in our P&L basically. In a way, Australia was a unique situation in that we had a long-time partner who was looking for retirement. And basically, this was driving the decision to directly enter this market. Operator: Your next question comes from the line of Dana Telsey with Telsey Advisory Group. Dana Telsey: As you think about the DTC channel, was there any difference in performance between e-com and the physical stores? And then with your opening of stores in 2026, where are those stores going to be located regionally? How do you think about it? And is there any difference in store size and where you're going? And then just lastly, for 2026 price increases, any particular way we should think about it or how you're thinking about pricing, whether it's on closed toe or clogs or open toe for '26? Mehdi Bouyakhf: Dana, this is Nico. I'm going to take the first part of your question. So as you know, retail is a very important growth pillar for us. We are currently at 97 doors, adding 30 net new stores. And thus, we are actually holding our promise. So we promised to come closer to 100. We're now at close -- very close to 100. What we also did is we actually accelerated the pace of our openings in the second half, adding 20 in the second half versus 10 in the first half. So really getting much more experienced in driving this expansion. Amongst others, we opened Milan, Mumbai and Singapore, so really key cities and key connection points for our consumers. For next year, we have plans to add 40 more. So that will bring us to 140, and that will bring us very well set up to reach a total goal that we stated of 150 stores by 2027. Whenever we open a store, they perform really well. So we are very, very disciplined with our openings and store locations selection. We will continue to find stores in the format of 100 square meters, 150 square meters, not AAA locations. We go right next to the AAA locations, and that is really driving the very healthy economics of each store. The new stores will continue to outperform the longer-standing ones. We achieved higher average transaction value driven by higher ASP and more units per transaction. And all this, while the same-store sales are up high single digit. So you see that retail is the strongest growing channel and will also outpace in growth our digital channel. With regards to digital, we do continue to see very, very strong growth opportunities in 3 areas: markets. So there are some underdeveloped markets, if you will, underpenetrated markets with regards to our digital, specifically in Asia and Middle East, where we launched later than in the more mature markets. With regards to consumers, we heard that young consumers, young demographics are underpenetrated by us. And so does -- that accounts the same for our digital business. And then on the product side, our expansionary categories like shoes, closed toe, EVA, professional are trending much, much better in our digital business. So this will also enable us to catch more demand and drive the business in our digital channel. So we'll see retail outpacing digital, while we also see substantial growth coming in, in our digital channel. Ivica Krolo: Dana, it's Ivica, on the pricing part. So as you know, we are reviewing pricing on a season-by-season and style-by-style basis and are very surgical to increase prices throughout the product portfolio. And why we're doing that, again, it comes back to the fact that we are a manufacturing company. So we know what our input costs are. We know what labor does cost. We know what raw materials do cost. And this is very much a bottom-up exercise that we continue to do as we have done in the past to pass through inflationary pressures, while at the same time, maintaining our globally aligned pricing structure. Dana Telsey: And any update on the Americas? Oliver Reichert: Very strong holiday season, Dana. It's Oliver speaking. Very, very strong holiday season. I mean do your check in wholesale doors, do the check in New York in the store. It's one of the must-have gifting items. We are very, very confident and very, very successful holiday season in the U.S. Operator: Your next question comes from the line of Simeon Siegel with Guggenheim Partners. Simeon Siegel: [Technical Difficulty] Oliver Reichert: Simeon, we can barely hear you. You have digital dropouts. You dialed in on the land line or... Operator: Your next question comes from the line of Adrien Duverger with Goldman Sachs. Adrien Duverger: So I have one, could you please comment on the performance of the newer products and the opportunity for continued increase of the price mix as well as the appetite for customers on these new products? And I have a quick follow-up on that, which is on the share of sales from the closed-toe shoes. I think you're now at 38%. What are your expectations for the long-term share of sales from these? Mehdi Bouyakhf: Adrien, this is Nico again. Thank you for your question. Great question indeed. So what we definitely see is that our diversification of product offering is really paying off. Particularly, we are very pleased to see consumers adopting newer closed-toe silhouettes. So closed toe is not just the Boston anymore. Non-Boston silhouettes are growing at the same pace as Boston. So we are truly diversifying our Clog business. And we don't just own the sandals category. We now own the sandals and the clogs category. So you'll continue to see closed toe outperforming open toe while open toe is still growing. And that is also something that we've actively -- that we will actively drive forward. So we'll bring back open-toe silhouettes. We'll rejuvenate open-toe silhouettes such as the Madrid, such as fine-strap sandals, the Florida, the Miami. So we'll give them more investment in product and give them more oxygen and daylight to let them flourish further. So where does closed-toe grow forward? Where does it go? You see that we have a very strong growth trajectory until now. We once said it will grow over 30%. We are now coming to 40% and even above. And we'll definitely continue to see this growing further. Closed shoes as a market is a huge market for us. Again, we see new silhouettes being adopted by our consumers very fast, like the Utti, Highwood, and we're also further diversifying that business into different platforms. Boots are performing very strong during the winter season, high price points. Consumers are not shying away from these products. And again, particularly in our DTC, you'll see these categories trending very well. Adrien Duverger: And maybe just on what I have you. What's the opportunity that you see from further price mix? So I think you mentioned you expect about 10% volume growth over the next few years. So should we assume that there is between like the 3% to 5% remaining is from price list and price mix? Is that how we should think about it? Ivica Krolo: Adrien, it's Ivica. Happy to take your question. So it's certainly a combination of both. So looking back to 2025, if you disaggregate growth, it's a mix of 2/3 with regards to units and 1/3 with regards to ASP, but certainly a positive contributor to higher ASP is definitely the mix shift that we are seeing. So consumers are choosing intentionally higher quality and premium execution, including closed-toe, as Nico mentioned. And clearly, this will be driving ASP besides, of course, that we will continue to take targeted like-for-like pricing. Operator: Your next question comes from the line of Mark Altschwager with Baird. Mark Altschwager: Can you hear me? Oliver Reichert: Yes, loud and clear. Mark Altschwager: Wonderful. With respect to sustaining the mid-teens growth over the next 3 to 5 years, can you talk a bit more about what's giving you the confidence that you can continue to add capacity at a fast enough rate to support that growth as the base gets larger, especially as it relates to both labor and component suppliers? And then as a follow-up, you talked about new capacity expansion for the core product and demand is skewing towards the higher-end product. Can you give us a sense of how EVA is trending and how the capacity that you've added in Pasewalk is playing into the growth algorithm? Oliver Reichert: Thank you for your question. As I said in the previous answer to the first question from Matt Boss, we are heavily increasing our preproduction facility in Portugal, which is really a key thing for us to speed up the processes and speed up the go-to-market sequence from our products. And just keep in mind that in the near future, we will probably have a half finished goods warehouse where we simply collect all the uppers and then finally push them into final assembly when needed. And then we -- the reaction time of this company to be in the market with the right article at the right door is very, very significant faster than today. The acquisition of [indiscernible] near Dresden, the factory we bought like 80,000 square meters for EUR 18 million. This will be ready in '27, more or less. And then they can fill the gap of final assembly lines because that's the bottleneck at the moment, as I said, and cork/latex footbed baking. Last but not least, I think you were in Pasewalk with us. The same space in Pasewalk next to us is about to be converted into a construction area. And there will be another 80,000 square meters of production space. And we will definitely keep a very high flexibility within these spaces to react on the different perspective of the markets. And you mentioned the EVA in Pasewalk. We are very happy with the EVA development, especially in the what we call elevated EVA. One example is just the Big Buckle EVA that's performing very well. But keep in mind, globally, we keep our EVA around maximum 20% share of business here. So it's a very planned high scarcity executed model from the EVA perspective. And in Asia, the growth is very strong, highest ASP in Asia. That's a very important message, I would say, because that's very rare that you create as a brand the highest ASP in the APAC region. That's what we're doing. And they are ready for this PU products, direct injected in molds, textile uppers, leather uppers, you name it. And all this will definitely come from Pasewalk. Operator: Your next question comes from the line of Sam Poser with Williams Trading. Samuel Poser: Can you all hear me? Ivica Krolo: Yes, we can hear you, Sam. Samuel Poser: So I guess we have 14 days or 13 days left in Q1. Can you give us like an update on what Q1 looks like in more specifics? I mean the quarter is over pretty much. So I just wonder, I know you said business is very good and so on. But could you give us some details on what the quarter looks like, please, is number one, in more specifics? Oliver Reichert: Sam, can I quickly jump in and give you the first answer? It's Oliver. Samuel Poser: Yes. Oliver Reichert: Okay. So you should expect -- I mean, Q1 is our smallest quarter, but it will be well above our guidance, okay? So easy. Samuel Poser: From a margin and from a revenue growth perspective or in what respect? Ivica Krolo: Sam, this is Ivica speaking. Oliver is referring to top line. And in terms of margin, we're not preannouncing margin for Q1 yet. Samuel Poser: Okay. Do you anticipate doing that prior to ICR or at ICR? Ivica Krolo: No, we're not going to do that. We will give more detail, Sam, though, at our Capital Markets Day end of January. Samuel Poser: And then secondly, I just want to focus on the factories. There's been lots of conversations about that. Within Pasewalk, Goerlitz and Portugal, how the existing framework of your production, you had currently -- you had recently said that, I believe, going into Q3 '26, you expect those production facilities to be pretty much optimized given all the changes. Now it's not to say you're not doing other things, expanding Pasewalk and the new factory near Dresden. But within that framework, is that still the same expectation? And should we expect production capacity to increase going into the back half of fiscal '26? Oliver Reichert: Sam, this is Oliver speaking. There will be no big impact other than optimization within our existing structure. But within '26, all the machines are ordered. So we're waiting for the machines to come and then we have to implement them and then we have to roll them out, find the workforce. So it is a constant optimization, of course, and we're constantly on the edge of the capacity, as you know, blowing every single horn that's available, but it is really tough at the moment. And the big capacity push will come once [indiscernible] is on the net to deliver output from a cork/latex standpoint and very urgently needed from a final assembly standpoint. The construction site in Pasewalk will be a longer game because that's simply grass land at the moment. So we have to build the building first. So that's on a midterm perspective. And Portugal is ongoing. And Portugal will double or triple their capacity from preproduction manufacturing standpoint, which is a huge amount, okay? But this is also in the ramp-up scenario. We need to order lines, machines and stuff. It's all done. But ramping up workforce, especially in this very complicated stuff like stitching, shilling and all this, it's not that quick. Operator: Your next question comes from the line of Paul Lejuez with Citi. Paul Lejuez: You can hear me now, hopefully. Oliver Reichert: Paul, we can hear you loud and clear. Paul Lejuez: Sorry about that. Curious about your regional plans for F '26. I think you talked about pairs being up 10%. Curious how that looks by region, how you're thinking about the 3 big regions. And also curious if -- given your capacity constraints, if you're having to restrict your distribution in certain regions, I think you had to do that once with APMA. Curious if you're facing that again now. Oliver Reichert: Thank you for your question, Paul. You're completely right. I mean this is the basement of our distribution strategy. It's engineered distribution. So with the light of margin perspective on the different regions, Americas, Europe and APAC. And I said it before, the highest ASP is coming from the APAC region. Yes, we definitely will shift more product into this region to further develop the strength of the brand. They're growing very nicely, best-in-class quality. That's an important thing. And I know you guys heard a lot of success stories in Asia, but they are always margin dilutive. There are always low ASPs, and they're always mass driven. So it's the opposite we're executing in APAC, and this is now relatively low-hanging fruit for us to shift also capacity into Asia and making sure these territories are well developed over time. And keep in mind, what we said at pre-IPO, our ideal world, not midterm, but long term will be 1/3 business share Americas, 1/3 business share Europe and 1/3 APAC. And right now, in APAC, we are at 11%. So yes, there's a lot of things we can do, and we should continue doing. And it's very encouraging what we see in this region. Impacts of tariffs and FX is not that bad in this region. So yes, it's the right direction, and you're completely right. Paul Lejuez: Any color you can give around the different growth rates by region just tied to your guidance, full year guidance for the year? Oliver Reichert: APAC is twice the speed of -- compared to the rest of the world. But that's steered. It could be quicker, but that's what we're doing. That's how we -- it's also -- the steering is coming from our capacity restrictions because, honestly speaking, if I have 10 million pairs of clogs available right now, I can send them over to Asia and they are gone in a week. So this is not the issue. I know it sounds super weird. But Paul, believe me, we are not demand constrained. It's all about the capacity. We don't have enough product, we cannot deliver anything. Operator: We have time for one last question, and that comes from the line of Janine Stichter with BTIG. Janine Hoffman Stichter: Yes, I want to ask a bit more about the B2B expansion. I think in the past, you pointed to the long-term opportunity to add about 5,000 doors on a base of around 12,000. What would the time line look like on this, especially given the capacity constraints? And how should we think about that as a near-term driver of B2B growth? Just wondering if there's any change to what we've seen recently with 90% of B2B growth coming from existing doors. Mehdi Bouyakhf: This is Nico. Thank you for your question. Yes, we said there is an opportunity for us when we select the right doors that are 5,000 that are underpenetrated by now. So far, we've been very, very disciplined in our distribution, our B2B. So since IPO, we didn't add any major number of partners at all. So growth is really coming from within through a broader assortment, through a deeper assortment that our partners are enjoying while maintaining a full price realization of above 90%. And we're going to stay very close to that discipline, while we also unlock new areas of distribution, particularly in sport as a recovery opportunity for our footbed, but also in the outdoors area. So that is something that will bring us a small amount of doors, again, very carefully selected that we will increase in fiscal '26 in those 2 areas. But rest assured, we will look at full price realization, we look at stock-to-sales ratio, and we'll not put too much pressure out there with regards to our own DTC. Operator: This does conclude today's call. Thank you for attending. You may now disconnect.
Operator: Greetings, and welcome to the Darden Restaurants Q2 Fiscal Year 2026 Earnings Conference Call and Webcast. At this time, participants are in a listen-only mode. A question and answer session will follow the formal presentation. You may be placed into the question queue at any time by pressing star one on your telephone keypad. If anyone should require operator assistance, please press star 0. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Courtney Aquilla, Vice President, Finance and Investor Relations. Courtney, please go ahead. Courtney Aquilla: Thank you, Kevin. Good morning, everyone, and thank you for participating on today's call. Joining me are Rick Cardenas, Darden's President and CEO, and Raj Vennam, CFO. As a reminder, comments made during this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Those risks are described in the company's press release, which was distributed this morning, and in the filings with the Securities and Exchange Commission. We are simultaneously broadcasting a presentation during this call, which is available on the Financials tab in the Investors section of our website at darden.com. Today's discussion and presentation include certain non-GAAP measurements, and reconciliations of these measurements are included in the presentation. Looking ahead, we plan to release fiscal 2026 third quarter earnings on Thursday, March 19, before the market opens, followed by a conference call. During today's call, all references to industry results refer to the Black Box Intelligence casual dining benchmark, excluding Darden. During our fiscal second quarter, average same restaurant sales for the industry grew 1.3% and average same restaurant guest counts decreased 0.4%. Additionally, median same restaurant sales for the industry grew 1.9% and median same restaurant guest counts decreased 0.5%. This morning, Rick will share some brief remarks on the quarter, Raj will provide detail on our second quarter financial performance, and share our updated fiscal 2026 financial outlook. Then Rick will close with some final comments. Now I'll turn the call over to Rick. Rick Cardenas: Thank you, Courtney, and good morning, everyone. We had a strong quarter that exceeded our sales expectations as each of our segments delivered positive same restaurant sales. Commodity headwinds were stronger than we anticipated as beef prices remained at historically high levels throughout the quarter. Our restaurant teams did a great job of being brilliant with the basics during the quarter, driving record or near record guest satisfaction scores across all of our brands. At the Darden level, we continue to leverage our four competitive advantages to enable our brands to compete effectively and continue providing strong value to our guests. The power of our scale enables us to continue to price below inflation over the long term and not pass all the costs on to our guests. While the breadth of our portfolio enables our brands to stick to their strategy, even if they are overly impacted by a single commodity. We opened 17 new restaurants during the quarter and are on pace to exceed our planned openings for the full fiscal year. These new restaurants opened faster than planned, collectively contributing forty additional operating weeks, versus our plan for the quarter. This is a testament to the outstanding job Todd Burrows and the entire development team led by Mark Braun have done to strengthen our pipeline. Olive Garden delivered positive same restaurant sales of 4.7% for the quarter driven by the success of the Never Ending Pasta Bowl promotion and first-party delivery combined with strong operational execution that led to all-time high guest satisfaction scores. For the fourth consecutive year, the starting price for the Never Ending Pasta Bowl was $13.99. Preference was strong and refill rates reached a record high, demonstrating that guests continue to find abundance and meaningful value at Olive Garden in this environment. First-party delivery through our partnership with Uber Direct continues to drive strong results. This channel attracts younger, more affluent guests who crave Olive Garden at home, value convenience, and order more frequently. These guests have a higher check average than dine-in guests. Uber Direct sales represented 4% of total sales for the quarter and approximately half of that was incremental. As we have discussed on recent calls, across the portfolio we are placing a greater emphasis on sales growth and reinvesting to drive long-term success. At Olive Garden, the success of first-party delivery is helping fund investments such as the addition of the lighter portion section on their menu, which features seven existing dishes with a smaller portion and a lower price. This section is designed to give guests more choices and is offered in addition to Olive Garden's regular portion sizes. Olive Garden has seen a double-digit increase in affordability perceptions from guests who order from the lighter portions menu and an increase in frequency among these guests, which should help build traffic over time. 40% of restaurants offered this menu during the quarter and they added another 20% of locations early in the third quarter. Olive Garden plans to complete the rollout system-wide in January. As we begin the third quarter, the Olive Garden team is poised to build on their momentum. They are currently offering two fan favorites for a limited time, ravioli de portobello and braised beef tortelloni. Thousands of Olive Garden fans requested the return of these iconic dishes, which included multiple online petitions to bring them back. Turning to LongHorn Steakhouse. The team's ongoing commitment to their strategy rooted in quality, simplicity, and culture continues to guide their success as they delivered strong top-line momentum driven by same restaurant sales growth of 5.9%. The relentless focus on executing every dish on their menu to their high standards was reflected in an all-time high Steaks Road Correctly score for the quarter. Their ability to consistently operate at this high level is enabled by having one of the most experienced teams in the industry. In fact, LongHorn further strengthened their impressive retention by setting their record low for team member turnover during the quarter. The investments LongHorn has made in food quality, combined with their grilling expertise, have built strong guest loyalty. And to further build on their leadership in food quality, LongHorn brought back a guest favorite for the holidays, the 14-ounce seven pepper crusted New York strip with brown butter sauce, which was met with enthusiastic reviews by guests and social media influencers. Same restaurant sales for our other business segment grew 3.1% during the quarter driven by strong performance at Yard House. During the quarter, Yard House's Oktoberfest event returned for the fifth year. This event continued to deepen guest engagement and drive results through limited-time menu offerings, that strengthen Yard House's competitive advantages of a socially energized bar and distinctive culinary with broad appeal. The event also featured a $5 refillable beer stein that was a hit with guests, with all steins selling out within the first few weeks. Also during the quarter, Yard House began rolling out first-party delivery through our partnership with Uber Direct. While the impact on total sales won't be as significant as what we've seen at Olive Garden, the team is pleased with the initial results and plans to continue rolling it out to additional restaurants in the third quarter. Same restaurant sales for the fine dining segment grew 0.8% for the quarter driven by strong performance at Ruth's Chris Steakhouse and improving trends at the Capital Grille. As guests continue to seek price certainty, Ruth's Chris brought back its limited-time offer featuring a three-course menu for $55. It was a key driver of sales and traffic growth and featured a new eight-ounce prime thick cut strip and two guest favorites, stuffed chicken, and salmon and shrimp. Each entree came with a soup or salad, an individual side, and a dessert. The Capital Grille's Wagyu and Wine event returned during the quarter, featuring the choice of a Dave's Finney Wine and Wagyu Burger for $35. This event delivered strong guest preference and sales momentum at the Capital Grille continued to grow throughout the quarter. I'm pleased with our performance as we move back into the back half of our year. Our brand teams have the appropriate plans in place and the power of Darden positions us well to win in a competitive environment. Now, I'll turn it over to Raj. Raj Vennam: Thank you, Rick, and good morning, everyone. As Rick mentioned, the second quarter was another strong sales quarter for Darden with top-line momentum exceeding our expectations. While elevated commodity costs driven by beef were a significant headwind for the quarter, we priced 130 basis points below inflation, as we remain committed to providing strong value to our guests. This large investment in underpricing inflation resulted in level margins being below last year. The near-record beef cost has sustained longer than we anticipated and is likely to remain elevated into the third quarter with some relief as we get into the fourth quarter. In the second quarter, we generated $3.1 billion of total sales, 7% higher than last year driven by same restaurant sales growth of 4.3%, the addition of 30 net new restaurants, and the acquisition of Chewy's in October. Both our same restaurant sales and same restaurant guest counts were in the top decile of the industry again this quarter. Same restaurant sales exceeded the industry benchmark by 300 basis points. And the positive gap widened throughout the quarter. Adjusted diluted net earnings per share from continuing operations of $2.8 were 2.5% higher than last year. We generated $466 million of adjusted EBITDA and returned $396 million to our shareholders this quarter by paying $174 million in dividends and repurchasing $222 million in shares. Now looking at our adjusted margin analysis compared to last year, food and beverage expenses were 90 basis points higher primarily due to elevated beef costs driving total commodities inflation of approximately 5.5% for the quarter. Restaurant labor was 10 basis points higher with total labor inflation of 3.3%. That's our labor in our comparable restaurants was favorable to last year driven by productivity improvements that more than offset pricing below labor inflation. Restaurant expenses were 10 basis points higher as sales leverage was more than offset by Uber Direct fees and brand mix with the addition of Chewy's. Marketing expenses were 10 basis points lower due to sales leverage. We had incremental marketing activity in the quarter that was funded by cost savings. This all resulted in a rational level EBITDA of 18.7%. Adjusted G&A expenses were 60 basis points favorable driven by leverage from sales growth and lower incentive compensation accrual as well as favorable mark-to-market expense on our deferred compensation. Due to the way we hedge mark-to-market expense, this favorability is fully offset in the tax line. Our adjusted effective tax rate for the quarter was 13.2%, and we generated $243 million in adjusted earnings from continuing operations which was 7.8% of sales. Looking at our segments, all segments grew sales for the quarter driven by positive same restaurant sales. The high beef cost pressured segment profit margins at all of our segments except for Olive Garden. Total sales for Olive Garden increased by 5.4% driven by strong same restaurant sales and traffic growth as well as the addition of 11 net new restaurants. The sales momentum continued from prior quarters with same restaurant sales in the top decile of the industry and outperformed the industry benchmark by 340 basis points. Olive Garden delivered its strong segment profit margin of 21.8% for the quarter, which was 30 basis points above last year even with an approximate 20 basis points of margin investment related to the lighter portions menu, and the continued impact of delivery fees. At LongHorn, total sales increased by 9.3% driven by same restaurant sales growth of 5.9% and the addition of 21 new restaurants. The sustained sales and traffic outperformance resulted in same restaurant sales and traffic in the top decile again this quarter. The LongHorn team is doing a great job of staying focused on their strategy and maintaining momentum despite elevated beef costs. Our measured approach in reacting to inflation resulted in pricing 320 basis points below inflation at LongHorn that resulted in a segment profit margin of 16.2%. Total sales at the fine dining segment increased 3.3% driven by positive same restaurant sales and the addition of three net new restaurants. High beef costs also had a large impact on the brands in this segment resulting in a segment profit margin of 14.8%, 280 basis points lower than last year. The other business segment sales increased 11.3% with positive same restaurant sales of 3.1% and the acquisition of Chewy's benefiting part of the quarter. The positive sales growth and the continued productivity improvements in multiple brands within this segment were not enough to fully offset the elevated commodity pressures from beef and the impact of delivery fees. This resulted in a segment profit margin of 13.4%, 60 basis points lower than last year. Turning to our financial outlook for fiscal 2026. We have updated our guidance to reflect year-to-date performance, the evolving commodities environment, and the expectations for the back half of the year. We now expect total sales growth for the year of 8.5% to 9.3%, same restaurant sales growth of 3.5% to 4.3%, 65 to 70 new restaurant openings, total capital spending of $750 million to $775 million, total inflation of approximately 3.5%, with commodities inflation of 4% to 5%, and approximately 116.5 million diluted average shares outstanding. All other aspects of our guidance remain unchanged, including adjusted diluted net earnings per share between $10.60 and $10.70, of which approximately 20¢ is related to the addition of the fifty-third week. We expect earnings per share growth in the third and fourth quarters to sequentially improve as the gap between pricing and total inflation narrows in the back half of the year. Specifically for the third quarter, we expect earnings per share growth in the mid-single digits compared to the third quarter of last year. In summary, we're pleased with our strong top-line performance and continued industry outperformance this quarter. While our pricing strategy amid elevated commodity costs has impacted margins in the near term, we believe it's the right approach to support our long-term success. As we move through the rest of the fiscal year, we remain confident in our ability to grow sales, manage costs, and deliver value to our guests and shareholders. Now back to Rick. Rick Cardenas: As I reflect on our performance, I'm reminded of the power of the platform we built over time and our ability to navigate whatever comes our way. When you look at our company, there are three key factors that we believe make Darden a great company and a great stock. First, our winning strategy grounded in our four competitive advantages and our commitment to managing the business for the long term has led to a long track record of success. Over our thirty-year history as a public company, Darden has achieved annualized total shareholder return of 10% or greater for any ten fiscal year period when considering Darden stock appreciation plus dividend yield. Second, we have a clear roadmap to grow our portfolio of iconic brands which includes two dominant brands, three high potential growth brands, and several balanced brands that are leaders in their respective categories. And third, our strong commitment to disciplined capital stewardship enables us to return capital to shareholders while making appropriate investments in the business for long-term success. I'm incredibly proud of the results we continue to deliver for our shareholders and we remain committed to executing our strategy to drive shareholder value now and for generations. Finally, I want to take a moment to acknowledge the recent passing of Darden's first CEO, Joe Lee. Joe was a visionary leader whose leadership helped shape not only Darden, but the entire casual dining industry. I was fortunate to work with Joe, and one of the things that always stood out to me was the care and compassion he had for his people. He always said, if you take care of your people, they will take care of your guests. Those words remain fundamental to Darden's culture today and they are especially meaningful during the holidays. Now is the busiest time of the year in our restaurants, and I'm so proud of our 200,000 team members who do such a remarkable job of nourishing and delighting everyone they serve. On behalf of our entire leadership team and the Darden board of directors, thank you to all of our team members for everything you do. I wish you and your families a happy holiday season. Now we'll take your questions. Operator: Thank you. We'll now be conducting a question and answer session. You'd like to remove yourself from the queue, please press 2. Once again, that's 1 if you place in the question queue. And please ask one question and one follow-up, then return. Our first question today is coming from Brian Bittner from Oppenheimer. Your line is now live. Brian Bittner: Good morning, and happy holidays, and congratulations on solid top-line results. First question is on the lighter portions menu and the strategy. As you roll that out to 100% of the Olive Garden restaurants here in January, how impactful do you think this will be to sales just based on what you've seen so far? Is it something that actually gonna be able to identify here from the outside or is it more of an impact to internal metrics like value perception, etcetera? Rick Cardenas: Hey, Brian. There is an impact to internal metrics, value perception, affordability, and portion and the right portion size. But we will see some impacts to sales in a couple of ways. In the long term, as we said, we've got higher frequency in the guests that are ordering this versus the guests that aren't. And the guests that aren't are increasing frequency as well. So this is a good, tough spend. In the short term, there will be a little bit of check mix. So as Raj mentioned, in the second quarter, we had about 20 points of mix from 20 to 30 basis points of mix from the lighter portion. As we roll it out to more restaurants, there will be a little bit of a bigger mix impact. But that's being offset by the other things we have. With the strong performance of delivery, it might not be necessarily in mix offset, but in total sales. So we believe this is the right thing to do for our guests in the short term and the long term. And that's why we've actually accelerated the rollout. Brian Bittner: Thanks for that. And my follow-up is on labor and the margins on labor. Over the last couple of quarters, you've seen some labor margin deleverage despite growing comps over 4%. The last couple of quarters. What do you attribute this to? Because historically, you've been able to better leverage labor margins on these types of comps. Is there any specific investments going into labor or mix issues within the brands worth pointing out? How are you thinking about the ability to maybe better leverage labor margins moving forward? Raj Vennam: Hey, Brian. This is Raj. So from a labor margin perspective, I think I said in my prepared remarks, if you actually look at our comparable restaurants, which is where we obviously had the same restaurant sales growth, you have actually labor leveraging. We actually saw labor improve year over year even with us underpricing inflation. Because labor inflation, as I said, was about 3.3%. Our pricing was 2.6%. So we were able to offset that underpricing inflation and drive labor leverage through productivity improvements. The reason you don't see it at the total Darden level is because of the growth over the last year and the acquisition of Chewy's. And so that's really what you gotta look at, the brand mix combined with some of the nuances. So it's more, I would say, idiosyncratic versus a systematic issue. We actually feel like as we go through the back half, you should start to see labor start to be more of the good guy. Operator: Thank you. Next question is coming from David Palmer from Evercore ISI. Your line is now live. David Palmer: Thanks, and congrats on this particularly this Olive Garden same store sales result in the quarter which should help with concerns about that brand lapping the tough comparisons coming up in the fourth quarter, but I'm wondering, what is your guidance generally anticipate with regard to Olive Garden comps going into that quarter? Are you factoring any benefit from fiscal stimulus? And just generally, what do you think you'll be doing in general to help maximize your chances of keeping positive comps going over those tough comparisons? And I have a quick follow-up. Raj Vennam: Yeah, David. Thanks for those comments. So from a same restaurant sales perspective, if you look at our guidance, we talked about for the full year, 3.5% to 4.3%, which essentially means roughly 2.5% to 4% in the back half. Which would imply basically flat traffic at the midpoint of that range. I don't want to get specifically into the brands, but here is how we think about the total. When we look at the, you know, take into consideration the first half of the year, some macro uncertainty, but potential consumer spending benefit from the fiscal stimulus in early 2026. And, you know, we have several initiatives at the brand levels to drive sales. We feel like the outlook we provided is reasonable. And so I think that's really all I have to say on that front. Thanks. David Palmer: You know, the other thing I'm curious about is how you're thinking about pricing versus the path of inflation on beef and steak? Clearly, I think you said something about your pricing was trailing inflation by three points or more. I think I didn't quite catch that. At LongHorn. So I'm just wondering about whether you think that does your guidance anticipate additional pricing at LongHorn through the rest of the year? Any thoughts on that? Thank you. Raj Vennam: Hey, David. So yeah, on the pricing front, let me start at a bigger picture and then get back to LongHorn specifically. So we did price, you know, for the quarter at the Darden level was about 130 basis points below inflation. You know, one, we're taking some pricing. And we do expect that to cut in half by the time we get to the third quarter and actually catch up to inflation as we get to the fourth quarter, primarily because of But also we expect inflation to come down, especially as we go into the fourth quarter. And, specifically at LongHorn, yeah, I don't expect LongHorn to have underpricing by 320 points as you move forward. We'll take some modest price increases. But, look, that's the benefit of the portfolio. Right? We talked about Rick mentioned this in his prepared remarks. That when there is some near-term pressure on one of the commodities, the portfolio provides the air cover to be able to kind of deal with this for the near term. And so all that said, look. Our bias is to minimize pricing, and we'll do what we think is right to protect the guest even if that means some margin erosion in the near term, primarily, we're talking about second and third quarter because we expect margin growth as we get into the fourth quarter. Thank you. Operator: Thank you. Next question today is coming from Brian Harbour from Morgan Stanley. Your line is now live. Brian Harbour: Yes, thanks. Good morning, guys. Raj, could you maybe just talk more about the beef piece and what kinda gives you the confidence that that starts to come down by 4Q? Raj Vennam: Yes, Brian. I guess maybe let me start with what happened in the second quarter and how we're transitioning and how we see this because beef prices peaked in our fiscal second quarter. And they were well above the normal seasonal trends due to supply constraints that stem from packer cutbacks, and, you know, halted Mexican cattle imports due to this screw worm outbreak. We have seen retail demand destruction accelerate over the past few months. And we think November was actually down about 14% demand volume down at in steaks. Prices have started to improve in recent weeks, and we've been able to take some coverage for the back half. I think we want this morning, we showed about 45% coverage for the back half. And actually, as we're speaking, our team is getting a little bit more coverage. So and, so that's and the prices that were the coverage we're getting at is at the levels that are in line with our updated thinking. And all of that is contemplated in our guidance. You know, if you look at what happened in the near term, prices are expected to ease a little bit as beef production actually increased to near prior year levels the last couple of weeks driven by packer profitability and lower cattle prices. Now there is enough inventory on feedlot to support recent production increase. Brian Harbour: Okay. That's helpful. Thank you. The with first-party delivery is 4% of sales, you know, is that kinda where you expected to be at at this point? Or I guess, you know, what else do you think could continue to push that higher? If you know, in fact, want that, are you still seeing sort of sequential increases in delivery mix? Rick Cardenas: Yes, Brian, we're really pleased with 4%. As you recall, we didn't do any marketing. You didn't know. But we didn't do any marketing in Q2. We're at 4%. I think the way that would increase is if we do some more marketing and get more people into it, but it's tracking pretty closely to our overall to-go business. And we feel good where that is with the incrementality we're getting. But if we want to drive that up, we have some options on the marketing side. Operator: Thank you. Next question today is coming from Jacob Aiken-Phillips from Melius Research. Your line is now live. Jacob Aiken-Phillips: Hi, good morning. So I want to ask on Olive Garden delivery. As delivery grows, the income and travel will stay where it is or get better because it's these folks that are ordering delivery or higher frequency, and then just more broadly, you've talked about guests moving between channels depending on value or occasion. And, lower, a little bit younger and more affluent. So as it grows, if it continues to grow, we would expect a little bit more. Have you seen any meaningful shifts in where full service or casual dining fits into the broader food spend mix? Rick Cardenas: Yeah. As you see our sales performance, in the casual dining industry itself, I think the industry has been growing faster than other segments. And we've been growing faster than the industry. So I would say that we're continuing to take share from casual and we're taking share from a little bit on the limited service. Operator: Thank you. Next question today is coming from Jake Bartlett from Truist Securities. Your line is now live. Jake Bartlett: Great. Thanks for taking the question. My first was about marketing. And marketing as a percentage of sales was down a little bit in the second quarter, I think roughly flat in the first. What are your expectations for the year? Is it still the 10 to 20 basis points? And I guess that would imply acceleration, maybe if you can confirm that. And then I have a follow-up. Raj Vennam: Hey, Jake. So recall we said at the last quarter, I think we talked about we got about, you know, call it roughly $20 million of savings in marketing. It's all the work our, you know, great work our teams did to go back and take a look at how we spend the dollar. So anyway, when we take that into consideration, that helped increase marketing activity even though the dollars were basically flat to last year. Now as we look at the full year, we're probably closer to, you know, somewhere around 10 basis points increase year over year. But if something changes, we'll update you next quarter. Jake Bartlett: Okay. And, you know, my follow-up was just on the macro environment. I'm, you know, not sure if I heard you kind of, you talk about what you're seeing from a consumer perspective, lower income whether some of the weakness is bleeding up into the middle income, you know, what is the baseline macro environment that you're basing the back half sales guidance on? Rick Cardenas: Yeah. I would say that we see the same reports you see we've said that before, but the consumer is still resilient. They're being cautious. As we've said a few times, the weaker consumer sentiment doesn't necessarily translate into reduced spending. During the quarter so this is what's happening with our brands. During the quarter, our casual brands saw an increase of visits year over year. From guests within middle to higher income groups. So it hasn't kinda moved up for us to the middle income group with the largest growth, though, coming from our higher income households. We did see strong traffic growth from guests 55 and over as well. So on the demographic side, but there was a little pullback in those earning less than $50,000 in the casual brands. But we'll I'll end it with the way we always talk about it. We know casual dining is the number one category where consumers intend to treat themselves and indulge. When they're thinking about where they spend their hard-earned money, they want to go to a place that they get a great value. And a good experience. For a great price. So we'll continue to focus on delivering an excellent experience and deliver value for every guest that chooses to dine with us. Operator: Thank you. Next question today is coming from Andrew Charles from TD Cowen. Your line is now live. Andrew Charles: Great. Thank you. Raj, just curious, with the updated same store sales guidance, does that embed any incremental pricing? You talked about the higher inflation forecast and you're not going to fully price to offset inflation. Just curious if there's an increased pricing factor contemplated within the updated guidance? Raj Vennam: Yes, Andrew. There is a little bit of increase in price. As I said, we actually expect our pricing to be closer to mid threes in the back half, for the full year to be close to 3%. So if you think about where we started the year, I think we were 2.2% in the first quarter. 2.6% in the second quarter. So there's a little bit of an increase there. That we incorporated into our guidance. Andrew Charles: Very good. Thanks. And Rick, in the past, you've laid out your hesitations around listing Olive Garden on third-party delivery. I'm curious if any of those pieces around you've laid in the past, like data sharing, tip sharing, the ability to throttle it on and off. Do you believe are better addressable as ultimately contemplating the decision to add Olive Garden to third-party delivery? Rick Cardenas: Yes, Andrew. I would say the two big third-party delivery providers know what our concerns are on third-party. And as long as we get a solution for those concerns, then we would look at it. It wouldn't make sense for us not to look at it, but we really do have some concerns, and they know what they are. Andrew Charles: Very good. Thank you. Operator: Thank you. Next question is coming from Jeffrey Bernstein from Barclays. Your line is now live. Jeffrey Bernstein: Great. Thank you very much. My first question is just on the comp commentary. Just I think Raj, you mentioned that the favorable gap to the industry improved through fiscal 2Q. Was wondering whether you would assume or you are assuming that that continues, maybe you have some quarter to date third quarter numbers, but your assumption for the back half of the year in terms of maybe a further widening of that gap? And then I had a follow-up. Raj Vennam: Hey, Jeff. Look. We did see an increase in our performance. And we've said historically when the industry slows down a little bit, we have widened the gap, you know, and as we look at the back half, we don't really start with what the industry numbers are. We actually look at a lot of, you know, what's macro and then all the things I mentioned about the brand initiatives. Because you know, industry is a representation of some of it, but not all of it. And so we just, you know, we do it differently. And so I don't want to comment on what we expect the gap to be going forward. Jeffrey Bernstein: Understood. And then the follow-up is just on the Uber addition. It sounds like Yard House is next up, third in line, therefore, behind Olive Garden and Cheddar's. I think you mentioned it's not likely to be as meaningful of a contributor as it is more of a bar type concept. But just wondering where LongHorn sits or where I know you don't dictate it, so where perhaps management of LongHorn specifically. Think about it. It would seem like that's the next big brand that could have more of a meaningful contribution offsetting that, I know often discussed that maybe their food doesn't travel as well. So just wondering your updated thoughts in terms of whether LongHorn could add 1P delivery? Thank you. Rick Cardenas: Hey, Jeff. I'll start with the Yard House part. We don't anticipate it to be as big an impact because Yard House is a smaller brand. Not just because they're a bar, but they also do a little bit lower to-go business. So you know, you think about when we implemented it at Olive Garden, and then at Cheddar's, the percent to-go the percent delivery aligned up pretty well with the percent to-go. So you know, Cheddar's right now, I think, is doing about 15% off-premise. LongHorn does about 15% off-premise. So it's not a small off-premise business. And we do know that when guests order at LongHorn off-premise, the mix is different. So they order more chicken and seafood, and a little less steak than they do in the dining room. So, you know, it's something that LongHorn is learning from the other brands. To see if it makes sense for us to go onto Uber Direct. And if it does, then we'll start testing it. But we don't have anything to say about that right now. Operator: Thank you. Next question today is coming from Sara Senatore from Bank of America. Your line is now live. Sara Senatore: Thank you. I was interested just to on the topic of value at sounds like that's resonating even actually in fine dining. Talked about these sort of combos and these you know, and the $55 at Ruth's. I guess, are you bringing in different customers to the across the brands? I mean, I know you mentioned maybe some softness in below 50%, but if I just think about you know, while the pricing may be up low single digits, there's presumably some negative mix and the sort of entry-level price points are lower across sounds like across maybe all your brands. So are you seeing different come in, for that? Or is it just more increasing frequency among the customers you do have as you offer these kinds of very accessible price points? Rick Cardenas: Yes, Sara. Most of our promotions really help our core customers. We are seeing a little bit of an increase in new customers or customers who haven't seen in a while that when we do these, but we actually see an increase in our core too. So it's not targeted to get new people. It's targeted for anybody. And we do see a little bit of a mix at Ruth's Chris when we do the $55 prefix menu but that's because guests are looking for certainty and price certainty. And so that's what we're giving them. And it drives quite a bit of volume at Ruth's Chris, and it's a good thing for us. It's not a it's a profitable deal for us. Sara Senatore: Right. Right. Thank you. Understood. And then just on the follow-up, Raj, you mentioned, I think that demand has declined about 14% November for beef. I guess do you are there certain kind of rules of thumb about, you know, what that would mean for beef prices just as I think about it. It seems like this is the first time we've really seen, like, retail demand pull back. So just trying to understand, you know, how that translates into you know, kind of the market prices for beef? Thanks. Raj Vennam: Yeah. I would say, you know, the last few months, have been different from what we would have seen historically. Historically, there was retail demand destruction. You saw the prices come down sooner. I don't want to get into a lot of the dynamics, but there is something with how the between the packers and, you know, how things are working. It seems like there is some constraining of supply, but it's hard for us to really know what's happening. You know, maybe there are other challenges. But so it's really going to be a function of how much production is out there. Right? And so I yeah, I don't think we have a good crystal ball on that. But I did share we are seeing some, you know, some green shoots, and that's, you know, that are actually starting to see the car coverage that comes come more in line with our expectations. Operator: Thank you. Next question is coming from Jim Salera from Stephens. Your line is now live. Jim Salera: Hey, Raj. Good morning. Thanks for taking our question. Raj, I wanted to start and maybe ask if you could give us the comp components for Olive Garden breaking out particularly mix and traffic? And then as an add-on to that, are you able to give us any details around the type of consumer that you're seeing in the near term with Olive Garden, given that it's a well-established brand, but they have a lot more avenues that consumers can access the brand. I wonder if that has any noticeable changes in the type of guests, whether it's income level, age, group sizes, anything like that you could provide would be great. Raj Vennam: Yeah. So from a guest, from Olive Garden breakdown, the comp same restaurant sales were 4.7%. The traffic as we measure was 1.7%, but when you add the catering of 1.1%, basically a traffic growth of 2.8%. And their pricing was, you know, 2.6%. So there was some negative mix, but also there was some help from Uber Direct fees. But that's the mix of the traffic and the sales. From a guest perspective, I think Rick already addressed it in the script. In or in his prepared remarks. About we're seeing more increased growth across, all income levels above 50k. And we're seeing a little bit more growth from the as we move up the age spectrum, there's a little bit of a pullback the below 50k and lowering, you know, lower or younger folks. But that's really it. Jim Salera: Okay. And then if I could shift gears a little on LongHorn. Continued outperformance there, I think value stake in general. Is there any way for us to maybe match that up with the outperformance in fine dining as well? Because I think a lot of people expect the value to continue to do well, but we're surprised by the outperformance in fine dining. I don't know if there's a read to make there if there's some maybe aspirational guests that are accessing fine dining or if we just reached a point where you know, we've lapped enough and the sales base is lower that we can get back to positive on fine dining. Rick Cardenas: Yes, Jim, start with LongHorn. And I think LongHorn their outperformance is driven by years of what they've done focusing on their strategy. Continue to price a little below inflation, invest in their food, and cook their steaks better. And that's been very helpful for them. Now I think they may be benefiting right now with such a high price of beef. That consumers are actually going to LongHorn instead of eating at home. And when we talk about the 50k consumer, under 50k, think 50,000. So interesting. They have a higher check than Olive Garden, but they grew their guest count at an under $50,000 range. That could be because such a disparity between how much you have to pay in the grocery store versus what you pay in the restaurant could be driving some of the traffic growth. But it is impacting their margin. So, on the fine dining side, I'll finish with one other thing at LongHorn. I still think they might be taking a little bit of share from fine dining. That said, fine dining had a good quarter this quarter. The trends are improving. And it may be that we're getting closer to kind of clearing everything out that happened during COVID. We're seeing some good value some good performance at Ruth's Chris, Capital Grille, had a good quarter. But, you know, we don't it's not over yet. We've gotta see that continue for a while to feel really great about it. We feel good about it. We only feel great about it. So you know, as we think about what's happening in the industry, we continue to say that as long as we do the things that we're supposed to do, provide a great value, cook the food properly, give a great experience to our guests, they're gonna be coming back. Jim Salera: Great. I appreciate the color. Operator: Thank you. Next question is coming from Lauren Silberman from Deutsche Bank. Your line is now live. Lauren Silberman: Great. Thank you, guys. Can you just help unpack what you saw in terms of cadence of actual comp as you move through the quarter? I know there's a lot of volatility and noise in the industry. And then anything that you can provide on what you're seeing quarter to date as well as differences that you may be seeing across regions? Thank you. Raj Vennam: Hey, Lauren. I want to get into the quarterly cadence of comps, but I'll just say from an earnings perspective, I think we kinda provided the high level how we're thinking about it. It's really more driven by pricing. As I said, pricing gap to inflation is expected to cut in half as we get into the third quarter. As we take a little bit more price and inflation actually is probably closer to Q2 level. But then as we get to the fourth quarter, we expect pricing to go up a little bit more and inflation to come down a little bit more. And so that's kind of why we talked about what we expect the earnings growth to be more in the third quarter to be in the mid-single digits. But I don't want to get too much into the quarterly sales comp. Lauren Silberman: Okay. And then just on stimulus, there's some excitement about stimulus into '26. If you go back to prior fiscal stimulus, which brands tend to benefit the most in your portfolio? And do you see it through traffic or average check? Rick Cardenas: Yeah, Lauren. I would say all of our brands benefit from stimulus depending on how it comes in. But I will say that if you think about the folks that benefit from no tax on tips, and no tax on overtime, they may be a median income and lower. So that could help our brands like Olive Garden or Cheddar's. Or Chewy's. That have a little bit higher mix there. But all of our brands benefit when there's stimulus that gives more money to consumers. Operator: Thank you very much. Next question is coming from Peter Saleh. Your line is now live. Peter Saleh: Great. Thanks for taking the question. I just wanted to follow-up on the conversation around the marketing efforts around Uber Direct. I think you guys mentioned you didn't do any marketing this quarter. Can you just talk about that decision? And what's the game plan for the back half of the year? Are you planning on increasing marketing around that effort? Any thoughts on that would be helpful. Rick Cardenas: Hey, Peter. The reason we didn't do any marketing on Uber Direct in the second quarter was we had just kind of done some in Q1, and we had other things that we wanted to spend our marketing dollars on. Particularly NeverEnding Possible. NeverEnding Possible is our best promotion at Olive Garden. And, you know, I think others had some concern that we were wrapping on NeverEnding Possible and how that would go. And as Raj mentioned, our gap to the industry grew every month in the quarter. Even though NeverEnding Possible was kinda coming towards the end of the promotion period. So we think that we were better off spending marketing dollars on NeverEnding than we are on delivery. At that time. I can't comment on if we're going to do it in the third or fourth quarter. But it's something that people will see pretty quickly if we do. Peter Saleh: Great. And then just following up my last question on tariffs. Is there any sort of update on the impact there, tariffs on either commodities or on development costs? I think in the past you had mentioned there was maybe a slight impact on development costs from tariffs. Just any update on that front would be helpful too. Raj Vennam: Yeah, Peter. Not a lot. I mean, at this point, you know, of our commodities inflation includes all the tariff impact. You know, it's in the tens of basis points as a percent of sales, which is in line with what we had indicated earlier. From a construction cost, I'd say we're still, you know, from the data we're seeing, it's in that mid-single-digit impact. No change there. Operator: Thank you very much. Next question is coming from Jon Tower from Citi. Your line is now live. Jon Tower: Hey, great. Thanks for taking the question. Maybe going back to the small plates that you're rolling out now and getting it done by January. I'm just curious, have you tested any media behind it? What's your intention behind doing that? Obviously, you're seeing a bit of negative mix now that you've rolled it out to some of the stores. So, how are you thinking about communicating it to guests? And, you know, obviously, there could be some pressure on the business if you were to market it to them so, how are you thinking about that the trade-off there? Rick Cardenas: Yeah, Jon. Currently, we're not expecting or we're not thinking about marketing it to our guests. Because it's doing pretty well on the menu the way it is, and it's driving a little bit more frequency and the guests should order it. And maybe the word-of-mouth from other guests will do that. But our plans right now don't include marketing it. But those could change. Jon Tower: Okay, and is this something that will be available to delivery so one p guests as well? Rick Cardenas: Yes. The way we think about 1P is if it's on our menu, it's probably available for delivery. Jon Tower: Okay, cool. And then just on the unit growth update, it's nice to see you guys taking up the numbers by another five potentially for the year. Can you just give us some color on where you're seeing those numbers or what brands it's coming from? And then is this just a pull forward from what you were thinking for fiscal 2027? Rick Cardenas: Yeah, Jon. When we're talking about five restaurants, it's a couple of brands that are driving that. So without telling you exactly which one, because that can change throughout the year. We end up at fiscal year. So we did say 65 to 70. It isn't necessarily a pull forward from next year that doesn't get backfilled by other brands. So don't anticipate that this year's growth a little bit ahead of plan will damper next year's because our teams are out there working hard going and finding sites, and getting deals done faster than they had before. And as you recall, in the June call, I said, that we are farther along in development than any point in any June we've had in years. So we feel really good about it. And, you know, that team is still doing great work to get us more sites. Jon Tower: Great. Thanks for taking the questions, and happy holidays. Operator: Thank you. Next question is coming from Jeff Farmer from Gordon Haskett. Your line is now live. Jeff Farmer: Thank you. With all the pushes and pulls, how are you guys thinking about the fiscal 2026 restaurant level margin versus fiscal 2025? Raj Vennam: Hey, Jeff. I would just, you know, refer you back to the long-term framework, and we've talked about, you know, that we put out at the beginning of the year, and we said we're on earnings after tax margin of flat to positive 20 basis points. I think our guidance still implies we're going to be in that range. You know, give or take 10 basis points, but that's kind of how we look at it. I don't we don't want to get too bogged down on any one level of one line item. We manage the business holistically to get a good return to the investor. And I would encourage you all to look at it through that lens. Jeff Farmer: And then with your top line exceeding expectations for the second consecutive quarter, I appreciate that there's some incremental costs or greater than expected costs that you guys are incurring. But are there areas where you're increasing reinvestment relative to prior expectation with that better top-line performance? Rick Cardenas: Yes, Jeff. We are making investments with these incremental sales primarily, it's in the lighter portion section on the Olive Garden menu. We're rolling out faster than we anticipated. We had originally expected to roll it out over the fiscal year and maybe even into fiscal year, but it's doing so well. And the delivery is doing so well. We just decided to keep going. And then we're also making big investments in still pricing below inflation. Operator: Thank you. Next question is coming from Dennis Geiger from UBS. Your line is now live. Dennis Geiger: Great. Thanks, guys. I just wanted to ask the latest on the operational efforts or the speed of service efforts. I know it's a longer-term initiative that you've touched on previously, but just any updates on the implementation of that or how you're thinking about the plan? Rick Cardenas: Yeah, Dennis. Every brand's implementing it a little differently depending on what they need to do. I would say that some brands are getting their speed up faster than other brands. All brands are making some improvement. And, again, this is gonna take a lot of effort and a lot of time to convince a group of folks that they have to do something a little differently than they thought. And to help the teams understand that the guests want things faster, and we don't really get a whole lot of complaints about being too fast. We get about being too slow. So those are the things that we have to keep doing. This is changing people's habits. And that takes a while. But we're seeing some improvement. Dennis Geiger: Great. Thanks, Rick. Just to follow-up on that, I know the genesis of the plan is to improve the customer experience, etcetera, more so than table turns, I believe. But an obvious benefit over time if this goes well presumably is your table turns move notably and maybe there's a traffic benefit that you from this. Is that fair? Rick Cardenas: Absolutely. I think especially during peak times, if we can get the speed better, then table turns should speed up. And it would increase traffic during those times. But I think it'll increase traffic long term anyway. Because people are getting the experience they want at the pace they want, and they'll come back more often. Dennis Geiger: Makes good sense. Thanks, Rick. Operator: Thank you. Next question is coming from Andy Barish from Jefferies. Your line is now live. Andy Barish: Hey, guys. Good morning. Could you give us just kind of a Cheddar's brand update and, you know, not a lot of call out there. I imagine there's some pressure just given the success of some big Bar and Grill concepts right now, but just kind of where that stands and what you might look at as a key for more unit growth there? Rick Cardenas: Yeah, Andy. Cheddar's is part of the other segment. The other segment also grew same restaurant sales. And Cheddar's didn't disappoint. So they grew their same restaurant sales as well even if other bar and grills are kind of out there talking a little bit more a lot more about value. Cheddar's is still doing what they do. Provide a great everyday experience, with Wow pricing. The other thing that we've been able to do over the years is to significantly improve their operational turnover. So if you think about turnover, when we bought Cheddar's, it was well, well above industry average, and now it's below industry average. It's much closer to Darden averages for turnover. And that means a better experience. And so we do believe that Cheddar's is one of those brands that we I mentioned earlier that have high potential for growth. And what I would say is I want to remind everybody that we think that growing way too fast is an issue in the industry. So our growth rates for any of our brands won't exceed 10%. But for Cheddar's, this year is the year that they're kind of finalizing and building their pipeline. And so it might take a year or so before you start seeing a little bit more growth at Cheddar's. Andy Barish: Thanks. Appreciate it. And then Raj, you just go through, I missed some of the Olive Garden, the components of same store sales. Raj Vennam: Sure, Andy. So the traffic was, as we measure, was up 1.7%. Catering was another 1.1%. So I'd say really, the traffic growth was 2.8%. And then the check was 2.6%. And then not check. Sorry. Pricing was 2.6%. So yeah. If you look at it through that lens of 2.8%, then the check the implied check would be 1.09%. Operator: Thank you. Next question today is coming from Christopher O'Cull from Stifel. Your line is now live. Christopher O'Cull: Yes, thanks for taking my question. Rick, is there a plan to take the smaller portion approach with any of the other brands? Rick Cardenas: We do have another brand testing smaller portions of current menu items. But they're doing it in a different way. And not as many items. So, you know, there are some brands that lead to being able to do different kinds of portions based on the protein. And so other brands already have it. So you think about LongHorn has different sizes for some steaks, they're testing a little bit more. They have different sizes for their chicken tenders, so does Cheddar's, I believe. So we do have other brands doing it, but not in the same way. We don't have a separate section on the menu for it. Christopher O'Cull: Okay. And just based on the company's research on GLP-one usage, do you see a need to make any additional changes beyond the smaller portions to kind of accommodate these consumers? Rick Cardenas: You know, we're continuing to monitor the usage and the impact on eating and drinking. It's impacting drinking more than it's impacting eating, especially in our kind of brands. Data that we see is they're basically pulling back on some restaurant visits, but more so limited service. That said, you know, the lighter portion section is helpful for that, but we aren't doing the lighter portion just for GLP ones. We're doing it to give all of our guests more options. It just so happens to benefit the consumers that might want smaller portions that are on GLP one medications. And we have a lot of options like that in all of our menus. Operator: Okay. Great. Thanks, guys. Thank you. Next question is coming from Andrew Strelzik from BMO Capital Markets. Your line is now live. Andrew Strelzik: Hey, thanks for taking the question. Wanted to ask about your comments that the all-time delivery was tracking with a broader off-premise business. Does that surprise you at all? I mean, it's supposed to be a different guess. It's as incremental as it is. Earlier in the life cycle. Just curious for your perspective on that. Rick Cardenas: No, Andrew. It doesn't surprise us. They're more similar to off-premise guests than on-premise guests. So if you think about Olive Garden, and the percent of sales they do with ToGo, and you look at the ratio of what they do off-premise versus delivery, then I would expect that same ratio to happen at our other brands. Because they are more similar. Our off-premise guests that are not delivery are also a little bit higher frequency than on-premise guests. These are just the delivery guests are even higher frequency. So it wasn't surprising that the same kind of mix happened at other brands. Andrew Strelzik: Okay. Alright. And then just curious on the changing CapEx guide. Is that all the new units and with the updated new unit guide, you're close to the low end of your updated range. What's a realistic timeline to pushing kinda higher towards the higher end of that range? Thanks. Raj Vennam: Well, so let's start with the CapEx part of it. CapEx is really a function of, you know, saw the openings happening sooner than we planned at the beginning of the year. And, again, kudos to the team for doing a great job on that. But, you know, it's also a function of what we're, you know, as we fill up the pipeline for next year, because the spending this year happens for some of the restaurants opening, especially in the front half of next year. So we feel good about the pipeline. We just updated our framework to reflect 3% to 4% unit growth, contribution from new units. And we think we're going to be in that range based on what we provided here. Operator: Okay. Thank you. Next question is coming from Danilo Gargiulo from Bernstein. Your line is now live. Danilo Gargiulo: Thank you. Stepping back and looking at the long term, you had been outperforming the industry for quite some time. And I was wondering if you were to decompose this outperformance versus the industry, on which consumer course are you winning the most? And I don't mean just by income level, but also maybe occasions, age, and as you're maturing your brand, how do you see this outperformance continue? Rick Cardenas: Yes, Danilo, I would say granularity of data on where we're outperforming more is a little bit harder to get because we don't know where other parts of the industry are getting their guests. We do know that we've had over the last couple of years a little bit better performance in our higher income consumer than not. But I would say during COVID, we had a great in our lower income consumer. So it's really hard to say where we're getting the outperformance versus the industry. I can just tell you we've got a great portfolio of brands that meet all the different consumer needs, and so if a higher-end, higher-income consumer is feeling great, we've got great brands for them. If a lower-income consumer is feeling great, we've got great brands for them. So that's the way that's the beauty of our portfolio. And that's what makes us pretty different than most. Danilo Gargiulo: Thank you. And then I want to follow-up on your comment on GLP-one. Specifically, think your brands have enough flexibility within your menu to offer different options for consumers and solve different needs. I was wondering if you can comment also on how the spending behavior is changing, just on the hardcore mix, but also on the eating behavior of whether, you know, you see, like, a greater mix of protein, pure desserts inside. And what's your best estimate on how this is going to be evolving over time? And how it would be impacting the overall spending behavior in the industry. Rick Cardenas: I would say the only real big change in mix that we're seeing is in alcohol sales and we've been seeing that for a little while. And you can see that more in the fine dining brands and the other brands. We're not seeing a dramatic we are seeing a little bit of mix in appetizer desserts. Probably from some folks that are on GLP one drugs. Because I think when people get on GLP-1s, they also want to try to change their lifestyle. And they want to eat less little less fried food and if you think about most restaurants appetizers are fried. So that could be part of it. But we've got a broad menu and we are going to continue to monitor what's going on with folks on GLP-one drugs. We believe we have great brands that have a lot of protein, which is something that GLP one users want. And I would say we've got a great brand that was designed twenty years ago that is in the sweet spot of GLP ones, that season 52. We've got a lot of things that we can offer folks on those medications. And anybody else. So I don't want to focus just on GLP-one users. We've got a broad portfolio that can serve any guest need. Operator: Great, thank you. Next question is coming from Gregory Francfort from Guggenheim. Your line is now live. Gregory Francfort: Hey, thanks for the question. Raj, can you just maybe give us an update on where turnover sits either for Olive Garden or your total system for labor? And do you think we're in a different environment now than we were the last few years and what that might look like going forward? Thanks. Raj Vennam: Hey, Greg. I would just say the turnover is actually pretty low, which to be better year over year. I think we're still trending probably double-digit increase versus prior year from a turnover essentially lower turnover. And so I think for most of our brands, we'll probably this is a record low. Like, yeah. And so, you know, from that perspective, we feel really good about that environment. And I think the other factor I'll mention is our hourly wage rate is, you know, inflation, on the hourly wage was about 3%. This is kind of lower than what we saw even before COVID. We used to be in the mid-threes, so to be around 3% tells you that, you know, the labor environment is actually pretty solid for us. Gregory Francfort: Okay. Awesome. Thanks for the perspective. Operator: Thank you. Our next question is coming from Brian Vaccaro from Raymond James. Your line is now live. Brian Vaccaro: Hey, thank you. I just had a question on Olive Garden. Rick, you spoke to the strength of, never-ending pasta. Was this I was just curious. Was the sales mix up on NEP year on year? And are you seeing any changes in the mix kind of the entry-level price point versus the higher tiers? And could you comment also just on the lighter portions? I think the sales mix was running mid-single digits last time we heard. Have you seen that increase the longer it's been in the market? Rick Cardenas: Yeah, Brian. I would start with the never-ending pasta bowl. We did see a little bit more mix, to Never Ending Pasta Bowl, so a little bit more preference in it. We did see a much stronger refill rate. I think we had a record refill rate potentially. And we did see a little bit fewer buy-ups to the higher protein, the more protein it could be because we've got more guests coming in. And because the refills were so high, they were getting great value. In regards to the lighter portion menu, still about, you know, still somewhere 1.5%. But we're around. So it could be up ten basis points down, 10 basis points here, there. As we talk about frequency growing, it's gonna take a while for that frequency to really make a meaningful impact in that mix. And we feel good about that mix. Brian Vaccaro: Alright. That's helpful. And then, Raj, just a quick one on G&A, if I could. It came in lower than we were expecting here in the current quarter. I know there's quarter-to-quarter volatility, but could you just give a quick update on where you see G&A is shaking out within your fiscal 2026 guidance? Thanks very much. Raj Vennam: Yeah, Brian. I'd say we're still probably around, you know, when we look at the full year, we're probably going to be still close to $500 million. Q4 is probably 15 to 20 million higher than Q3. Part of it is because of the fifty-third week and some seasonal stuff, but really, no change to the total guidance for G&A. Operator: Thank you. Next question is coming from Jim Sanderson from Northcoast Research. Your line is now live. Jim Sanderson: Hey, thanks for the question and the time. Just wanted to follow-up on the lighter portions at Olive Garden. Anything to call out that's notable about the demographics of the consumer that is purchasing this light portion, whether by gender, household income, daypart, anything like that? Rick Cardenas: Hey, Jim. We're still doing some more work on that. If you think about we haven't had it in all the restaurants, and we're talking about 1.5% of sales. Think about the number of tokens we have for that it's gonna take us a little bit of time to get that work. Jim Sanderson: Oh, and just another quick follow-up. Anything to comment on with respect to holiday bookings? Are they exceeding your expectations for the current time frame? Maybe in line? Just anything you would provide as a test on how the consumer is behaving. Rick Cardenas: Yeah, Jim. Two things. One, in regards to Thanksgiving, which was already happened, we had record Thanksgivings in our fine dining brands or reservation brands, and our holiday bookings are strong. Jim Sanderson: Alright. Thank you very much. Operator: Thank you. Next question today is coming from John Ivankoe from Morgan Stanley. Your line is now live. John Ivankoe: Hi. Thank you so much. Yeah. So the question is on immigration broadly. You know, I was hoping we could touch on a couple of, you know, maybe related topics. To that. You know, firstly, you know, I heard the comments, obviously, that labor inflation is now running lower than even it was pre-COVID. So that must mean that your supply of labor overall is very good, but I wonder if there's anything happening kind of below the surface that maybe in certain restaurants, certain pockets that labor markets have kind of turned over, but you've just been able to replace the people that perhaps would have left or maybe gotten competed away. So that's kind of the first question. And then secondly, a comment if you can in terms of pockets of demand. I think I remember you using the word that there may have been some ripples of kind of demand being affected in various markets. So I wanted to see if there was a change there. And then the third point, there's a comment made on beef that maybe were constraining some supply. I wonder, and this is actually came to mind when you said that, if there may be kind of an immigrant worker situation on the packer side, if that could potentially be a leading indicator for other types of industries. So just the overall your view on this broadly important topic. Thanks. Thank you. Rick Cardenas: Hey, John. Thanks. I'll try to get those answers and maybe Raj can jump in too. On the immigration front on our team members, you know, we really haven't seen anything material. On any restaurants turning all of their team members for those reasons. As we mentioned, we've got record level churn record retention. So you know, there might be a restaurant or two that had a few folks but it's not something that we're too worried about. In regards to the packer situation, you know, we can't comment on what's going on and why there might be some supply constraints. I don't think it's necessarily driven by labor. Although one supplier did close one of their plants. I don't know if that was a labor issue or not. They didn't comment on why. And then Raj can talk about the sales impact for us. Raj Vennam: Yeah. From a regional difference, John, I'd say for the quarter, when we look at the second quarter, the Midwest was our strongest growth. And then I think we saw actually softness in sales in the New England area and then Northwest. Other than that, others were pretty close to the median. Even Florida and Texas, which were lagging, were still below the company average, but they were a little bit closer to the company average than they were a quarter ago. John Ivankoe: Okay. Alright. Thank you very much. Operator: Thank you. Next question is coming from Christine Cho from Goldman Sachs. Your line is now live. Christine Cho: Thank you so much. Follow-up to the earlier question on the casual dining outperformance. With many other segments kind of playing catch up on value. Could you kind of talk about your plans to better communicate value to consumers? Any new or expanded marketing purchase you are planning for the back half? And, additionally, I think, Rick, you mentioned that you have no imminent plans to market the lower portion size menus. But what would make you change your mind? Thank you. Rick Cardenas: Yeah. Christine, competitively I don't want to get into too much detail about our plans, especially for each brand. We're disciplined and remain committed to our marketing filters and as you all remember the marketing filters is just the does the message build brand equity? Is it simple to execute and not at a deep discount? And so, you know, we're going to continue to pull the right levers like we did with Never Any Pasta Bowl, Oktoberfest at Yard House, the three-course menu at Ruth's Chris, Wagyu and Wine at Capital Grille. Those are all things that elevate everything that we talk about. Without a deep discount. You know? And you look at our promotional calendar last year for the back half, I wouldn't anticipate it's gonna be significantly different than that. Now on the lighter portion menu in marketing, yes, right now, we have no plans to do it. You know, if that changes, we'll have to find the right way to communicate it. But, you know, it'll have to be something that we feel like we've got a great way to communicate it to explain what it is. For consumers that don't really know that section of the menu. But I think that there's a better way to do that, which is just let the consumer tell their friends. And so right now, don't have plans to do it. If that changes, it's because Olive Garden came up with a great way to talk about it. Operator: Great. Thank you. We reached the end of our question session. I'd like to turn the floor back over for any further or closing comments. Courtney Aquilla: That concludes our call. I want to remind you that we plan to release third quarter results on Thursday, March 19, before the market opens with a conference call to follow. Thank you for participating on today's call, and happy holidays, everyone. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, have a wonderful day. We thank you for your participation today.
Operator: Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Full Year 2026 Consolidated First Half Results Conference Call of Sesa. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Jacopo Laschetti, Stakeholder and Corporate Sustainability Manager of Sesa. Please go ahead, sir. Jacopo Laschetti: Good morning, and thank you for joining the Sesa Group presentation. Representing the group today are Alessandro Fabbroni, Group CEO; Caterina Gori, Investor Relations and Corporate Finance and M&A Manager; and myself, Stakeholder Relations and Head of Sustainability. Earlier today, the Board of Directors approved the consolidated financial results for the first half of the fiscal year 2026, ended October 31, 2025. The corporate presentation is available on the Sesa website and will serve as a reference throughout today's conference call. Alessandro will begin by providing an overview of the key business developments and achievements. Alessandro Fabbroni: Good morning, everybody, and thank you for joining our group presentation. In the first half of 2026, Sesa started the implementation of the new '26-'27 industrial plant by evolving our data-driven digital market-oriented and people inspired platform for enabling the sustainable growth of corporates and organizations with a specific focus on organic growth and skills development in a challenging market scenario confirming growing demand for digitalization, Sesa has achieved its goal of consistent organic growth in revenue and profitability by strengthening our position in the key areas, catalyzing digital transformation such as cybersecurity, cloud, AI and automation, vertical and digital platform by enabling the value creation from our stakeholders. The group's transformation from a technology to a leading digital integrator has improved with investment focus on skills development and the adoption of the so-called digital enablers. In the first half of 2026 on a consolidated basis, Sesa achieved revenues and other income for EUR 1.6 billion, up by 12% year-on-year, and EBITDA for EUR 114 million, up 11.4% year-on-year, and the net profit adjusted for around EUR 50 million, up by 17% year-on-year. On an organic basis compared to the half year pro forma, including the first half 2025 data of Greensun, consolidated revenues grew by 5.5% year-on-year, EBITDA by 6.0% year-on-year, and group net profit after taxes adjusted by 7.6% year-on-year. The second quarter '26 alone, show a great acceleration in consolidated revenues, which achieved EUR 755 million, up 16% year-on-year compared to reported years and 9.4% like-for-like compared to pro forma, and an increase of operating EBITDA by 16.6% compared to reported figures and 8.4% compared to pro forma. With a group [ EAT ] adjusted increase by 30% compared to reported figures and 17% compared to pro forma. Consolidated revenues show positive contribution from all group sectors. ICT VAS, recorded EUR 939 million, up 2.1% fully organic with a great recovery compared to the decline in first quarter '25 with a down of 2.7%, driven by the high single-digit growth achieved in the second quarter, up by 8.1%. The positive November backlog trend up by 25%, will support positive trend for next quarters. Digital Green VAS reported EUR 210 million up by 26% compared to the first half '25 pro forma, driven by the extension of the double-digit growth achieved in the first quarter '26 and thanks to a strong performance in the copper market, driven by the increasing energy demand associated with digitalization and AI adoption, system integration and software sector reported EUR 420 million, up by 4% year-on-year, showing resilient performance despite the slowdown of demand in some made in Italy districts and the reengineering process affecting some business units. And finally, Business Services achieved EUR 74 million, up around 7% year-on-year, extending its entirely organic job driven by the development of applications for the financial services industry. Consolidated EBITDA increased by 11.4% year-on-year, up 6% in comparison with the pro forma reaching EUR 114.4 million compared to EUR 102.7 million as of October 2024, with an EBITDA margin of 7.1%, broadly stable year-on-year, thanks to the growth trend in the VAS sectors, both Green and ICT and the Business Services one. ICT VAS reported EUR 42.7 million, up 6.6% with an EBITDA margin equal to 4.5%, up from 4.4% year-on-year. Digital Green VAS recorded EUR 14 million EBITDA, up 30% compared to the first half '25 pro forma with a 6.7% EBITDA margin compared to 6.5% year-on-year. System integration achieved EUR 43.4 million, down 1.9% with an EBITDA margin equal to 10.3%, reflecting the reengineering operations in some business units of the sectors with an expectation of EBITDA margin stabilization FY '26 at similar levels to FY '25. Business Services reported EUR 11.6 million, up 6.6% year-on-year and 15.8% EBITDA margin stable compared to the previous year. In the second quarter 2026 alone, Business Services revenues accelerated with an 11% growth driven by the start of some multiyear contracts not yet translated into a positive impact on profitability. Consolidated EBIT adjusted amount to EUR 86 million, up 9.2% year-on-year, up 2.5% compared to the pro forma after depreciation and amortization for EUR 26 million, up around 14% year-on-year, and provision for EUR 2.7 million. Consolidated EBIT reached EUR 65 million, up 8.8% year-on-year after amortization of intangible assets relating to customer lists and know-how for EUR 17.5 million in line with the 2026, '27 industrial plant, net financial expenses show a significant decrease equaling 11% compared to first half '25 improving by 15.5% in the second quarter 2026 alone compared to the second quarter '25. Thanks to lower interest rates and the actions to enhance the group's financial management efficiency. Consolidated EAT adjusted amounted to EUR 50 million, up 17.1% year-on-year and 7.1% compared to the pro forma, reflecting the growth in operating profitability and the reduction in financial expenses. Group net profit adjusted reached EUR 45 million, up 13% year-on-year from EUR 40 million in the first half '25, up 7.6% year-on-year compared to the pro forma 2025, while consolidated reporting profit to reached EUR 34 million, increasing by 19.4% compared to around EUR 29 million in the first half '25, up by 5.6% year-on-year compared to the pro forma figures. In the period under review, Sesa Group selected its M&A investment and improved its payout ratio in accordance with the new industrial plan. Group reported net financial position as of October '25, including EUR 208 million of IFRS debt was negative. That means net debt for EUR 119 million improving compared to EUR 122 million compared to the pro forma figures. Following last 12 months investment for EUR 140 million, of which EUR 37 million in the first half alone, including EUR 80 million of M&A investments, of which EUR 23 million in the first half. And after last 12 months buyback and dividend distribution of around EUR 35 million, which EUR 30 million in the first half 2026. Now I give the floor to Caterina for presenting our M&A strategy and the main resolution of the last shareholders' meeting and Board of Directors of today. Caterina Gori: Thank you, Alessandro. After years of significant M&A activities, our new FY 2026, 2027 industrial plan represents a strategic shift with a clear focus on simplifying the group and accelerating organic growth. We will capitalize on the capabilities and business model we have developed over the years to drive sustainable growth, supported by target CapEx in AI, automation and skill development to enhance efficiency, scalability and market penetration. As a result, annual M&A investments are expected to decline to around EUR 30 million, following a selective valid driven strategy, while CapEx is expected to be roughly EUR 50 million per year. In the first half of FY '26, we further strengthened our international presence through 4 strategic acquisitions, all within the SSI sector. Two M&As consolidated in the first half of FY '26 with total investments of approximately EUR 7 million. The first Visicon GmBH in Germany and SAP Consulting Specialists with EUR 5.3 million of revenue. And the second, Delta Tecnologías de Información in Spain, an AI-driven player in digital identity, we used 2 million in revenue. Both companies delivered EBITDA margin above 10% and 2 additional M&As with total investment of approximately EUR 7 million. Albasoft, a EUR 2.2 million software company, specialized in treasury and finance manager solution; and 4IT, a Swiss cloud and managed service company with EUR 9 million of revenue. Both companies will be consolidated from November 2025, delivering EBITDA margin above 10%. The deal structure is designed to ensure the long-term commitment of key people in target companies with an entry valuation of around 5x EBITDA, adjusted for net financial position and consistent with our standard approach. These acquisitions confirm our strategy. a selective approach to high-value M&A in Europe, together with continued strong investments in digital transformation areas such as AI, automation and digital platforms. As outlined in 2026,2027 industrial plan, we are fully commitment to generating strong cash flow and delivering solid returns to our shareholders. As demonstrated at our latest shareholder meeting on August 27, 2025, where we approved a dividend of EUR 1 per share, in line with the previous year with EUR 15.5 million distribution completed last September. A significant increase in the share buyback program from EUR 10 million in FY '25 to EUR 25 million for FY 2026 to further strengthen shareholder value by raising the payout ratio from 30% last year to 40% this year. The shareholder meeting on August 27, 2025, approved a new EUR 25 million buyback program structured in 2 phases. The first EUR 15 million phase completed October 9 and the second EUR 10 million phase beginning on November 6, 2025. Sesa held 142,706 treasury shares of October 1, 2025 and 246,868 as of December 12, 2025. Equal to 1.609% of share capital. Today, the Board of Directors approved the cancellation of an additional 157,522 shares, representing 1.03% on share capital which is part of the 1.609% treasury share mentioned above. And finally, the cancellation of treasury shares up to a maximum of 2% of Sesa share capital over the next 18 months. As of August 27, 2025, approximately 1% of shares has already been canceled. And today, we completed the plan of the cancellation of an additional 157,522 shares. Additionally, last October, we signed a binding agreement for the sales of the controlling stake held by DV Holding in Digital Value SPA subject to the fulfillment of certain conditions precedent, including Golden Power and antitrust approvals. Upon completion of the transaction, Sesa plans to disinvest a 6.6% stake in DV Holding for an expected gross amount of around EUR 11 million compared to an initial investment of around EUR 4 million. This transaction is expected to generate a positive impact of around EUR 7 million on [indiscernible] consolidated net profit. This investment is fully consistent with the 2026, 2027 industrial plan. which focuses on strengthening core activities and provides for the possible disposal of nonstrategic assets, in line with the disciplined and optimized approach to capital allocation while leaving us room to evaluate selected nonstrategic disposals in FY '26. I now invite Jacopo to present our ECG (sic) [ ESG ] results for the first half of FY '26. Jacopo Laschetti: Good morning again, and thank you, Caterina. During the first half of the fiscal year 2026, we continue to focus on integrating sustainability in our strategy. monitoring at the same time, key ESG KPIs to measure progress and the achievement of the target set out in our sustainability plan. This approach allows us to keep a constant view on our environmental, social and government performance. and to guide our operational and strategic choices. Our sustainability plan for '26, '27 approved by Sesa Board of Director on last July, defines priorities targets and specific actions to integrate sustainability in our business model, contributing to the creation of long-term value for our stakeholders. The generation, long-term valuation, sustainability and digitalization continues to be the core pillars of our strategy, defining the group's purpose. In this context, we are also delighted to announce that we have retained the EcoVadis Platinum rating, the highest level in the assessment model, which recognizes the group's commitment and achievements in the ESG field. This milestone further confirms the strength of our approach and reinforces Sesa's position as a reliable and responsible partner for customers, investors and stakeholders. In terms of HR management, we are facing a phase of consolidation with an increased focus on work and collaboration, and the progressive integration of digital enablers in our organization and the way we work. After a great improvement of our human capital over the last 4 years in the first half of fiscal year 2026, we increased the headcount by 1.7% compared to April 30, 2025 in line with our strategic industrial plan. We continue to work to further improve our loyalty rate, reinforcing at the same time, our education, hiring and welfare programs. We provided specific measures to support parenting, diversity well-being and work-life balance, thanks to dedicated programs in favor of diversity and inclusion. Now I give the floor again to Alessandro for the final conclusions. Alessandro Fabbroni: Many thanks, Caterina and Jacopo, I will now share the final remarks and conclude our session. Six months ago, we presented our new industrial plan aiming at group transformation by focusing on organic growth of core businesses, organizations streamlined, growing operating efficiency and market penetration by reinforcing our role as leading digital integrator and partner of the customers' digital transformation. In the first half of 2026, we worked strongly to deliver the main strategic targets of the industrial plan, driving organic growth across the group sectors, streamlining legal entities and in particular, adopting AI automation and digital enablers to boost operating efficiency, and group transformation both internally and towards our customers. Thanks to our strategy, we strengthened our position as a leading digital integrator with a strong focus on cybersecurity, AI, automation, vertical application and digital platforms for the business segment. In particular, in the first half of 2026, we achieved a mid-single-digit growth in revenues and profitability, driven by the great acceleration of the second quarter 2026 with revenues improving by 9.4% year-on-year, EBITDA by 8.4% and group EAT by 17% like-for-like. A 20% organic growth in both revenues and profit of Digital Green VAS fueled by strong business demand, rising energy needs resulting from digitalization and AI adoption. The back to growth of ICT VAS up by 2.1%, revenue, 6.6% in EBITDA and by 15% in group EAT, of which in the second quarter only, a growth by 8.1% revenue, 16% in EBITDA, and around 13% at group EAT level, and 6.8% organic growth in revenues and 15% growth in profitability of the Business Services sector, with a decrease in marginality during the second quarter only due to the start of several multiyear new orders with major customers. A significant reduction in net financial expenses has been achieved [indiscernible] down by 11.6% in first quarter 2026 and by 15.5% in the second quarter 2026, reflecting the ongoing recovery trend driven by lower market interest rates, and the efficiency measures implemented in full year '25. In light of our second quarter 2026 strategic achievements, and a disciplined way we have been executing in the new industrial plan, today, we confirm our commitment to deliver all growth targets we have outlined last July for the new fiscal year '2. That means 5% to 7.5% regarding of revenues, a 5% to 10% organic increase in EBITDA and around organic 10% increase in net consolidated profit confirming that we are on track to achieve our key value generation targets for our stakeholders. Considering the positive trend of our net financial position and cash flow generation, we have been delivering the planned 40% payout ratio by executing the new EUR 25 million buyback program approved by the last shareholders meeting and a 2% share capital cancellation. The goal for the remainder of the fiscal year is to execute with great commitment, the new 2026 and '27 industrial plan, in line with the targets and guidance we already communicated by focusing on organic growth, operating efficiency, the adoption of digital enablers and in particular, inspired by a corporate vision oriented towards sustainable growth and digital innovation. Thank you very much for your attention. Now we open as usual, the Q&A session. Operator: [Operator Instructions] The first question comes from Aleksandra Arsova of Equita. Aleksandra Arsova: One question on my end. Maybe some color on the guidance. So you seem confident to confirm the guidance, but maybe can you clarify which could be the elements that could potentially drive the guidance and the actual numbers, let's say, in the upper end or in the lower end? And then maybe, again, on the guidance in terms of EPS or net income adjusted that you said approximately plus 10% organic. If I remember correctly, in the original guidance, it was between 10% and 12%. So maybe just to clarify, where do you see this slightly lower expectation coming from? Alessandro Fabbroni: Thank you, Aleksandra. So the full set of results that we achieved in the first half and in particular in the second quarter, show that we are absolutely on track to achieve the guidance. So that means considering the second quarter trends and the positive outlook on the backlog at the beginning of the Q3, we may consider the upper end of the guidance, the right target today. So that means not only for revenues and EBITDA, but also for net profitability. In terms of outlook, in comparison with the start of our fiscal year, we are absolutely overperforming in the ICT distribution on one hand and in the Digital Green. We are more or less in line with the Business Services. So that means that for 60% to 70% of our group perimeter, we are overperforming. We are slightly lower in the guidance in the first half for software system integration, but the improvement that we achieved in the second quarter and the outlook on the trend of the backlog seems positive. So that means we are on track to recover a positive trend in the second half of the year. So that means we may consider the average to upper end of the guidance, the reliable target for our fiscal year 2026. Operator: The next question is from Andrea Randone from Intermonte. Andrea Randone: I wonder if you can comment on the ICT VAS trend in the current quarter that is seasonally important. You mentioned the backlog up 25% in November. If you can comment on the trends you see if they are sustainable, consistent also for the remainder of the year. This is the first question. The second question is about CapEx. If you can confirm about EUR 80 million guidance, including M&A for the full year? Alessandro Fabbroni: Thank you, Andrea. So first of all, about the trend of ICT VAS, we may confirm we entered very well in the Q3. We closed a very positive Q2 with growing revenues by 8.1%, an increase of EBITDA by 16% and around 15% in net profitability. We enter with a 25% growth in the backlog for Q3. So that means the beginning of December and in particular the month of November. So that is very positive indication to be able to work with a guidance of mid-single-digit growth for the full year. In terms of CapEx, we confirm our guidance of EUR 80 million investment overall, including EUR 35 million of M&A and EUR 52 million to EUR 55 million CapEx. In the first half of 2026, we invested around EUR 40 million of which more or less EUR 20 million in M&A. So that means we are on track for this kind of trend. Andrea Randone: If I may, just a quick follow-up on SSI. Can you -- it's a normal question, but can you comment once again the implications from AI on this business line? Alessandro Fabbroni: So yes, the AI automation represents a driver that we are embedding in each of our delivering and also inside software system integration that is sector mainly focused on technology, digital business integration with the mix of consulting, software and digital services. So what we are doing is to increase our efficiency to introduce AI in some delivering. For example, the cyber security services and to, as a result, increase our efficiency to make available this efficiency for our customers. Obviously, our exposure to AI erosion is not high, considering that we operating with proprietary software and technology and consulting services. And from our point of view, that is an opportunity more than risk to increase our EBITDA margin. And some of our investments will be focused on skill development and digital enabled adoption in that direction. Operator: [Operator Instructions] Mr. Laschetti, at this time, sir, there are no questions registered. Jacopo Laschetti: Thank you very much, everybody, for participating in this conference call and we wish you Merry Christmas, and we stay available as usual for any additional information about our results. Thank you very much. Operator: Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.
Operator: Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0, and a member of our team will be happy to help. Your meeting will begin shortly. Of our team will be happy to help. Thank you for your continued base. Please standby. Your meeting is about to begin. Ladies and gentlemen, thank you for standing by. Welcome to the Third Quarter Fiscal Year 2026 CarMax Earnings Release Conference Call. At this time, all participants are in a listen-only mode. There will be 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 your speaker today, David Lowenstein, Vice President, Investor Relations. Please go ahead. David Lowenstein: Thank you, Nikki. Good morning, everyone. Thank you for joining our fiscal 2026 third quarter earnings conference call. I'm here today with Tom Folliard, interim executive chair of the board, David McCraight, interim president and CEO, Enrique Mayor-Mora, executive vice president and CFO, and Jon Daniels, executive vice president, CarMax Auto Finance. Let me remind you our statements today that are not statements of historical fact, including but not limited to, statements regarding the company's future business plans, prospects, and financial performance, are forward-looking statements we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on our current knowledge, expectations, and assumptions and are subject to substantial risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, we disclaim any intent or obligation to update them. For additional information on important factors and risks that could affect these expectations, please see our Form 8-K filed with the SEC this morning, our annual report on Form 10-K for fiscal year 2025, and our quarterly reports on Form 10-Q previously filed with the SEC. Please note, in addition to our earnings release, we have also prepared a quarterly investor presentation, and both documents are available on the Investor Relations section of our website. Should you have any follow-up questions after the call, please feel free to contact our investor relations department at (804) 747-0422, extension 7865. Lastly, let me thank you in advance for asking only one question and getting back in the queue for more follow-ups. Tom? Tom Folliard: Thank you, David, and good morning, everyone. Thanks for joining us. Today, I'm gonna provide some perspective on our leadership changes and CEO search. Then turn the call over to David, who will review our initial observations and the actions we are taking in response. After that, Enrique and Jon will speak to our third quarter results before we open the line for your questions. As many of you know, I've been part of CarMax for more than thirty years. Over that time, we've developed a beloved brand with national scale, unmatched physical and digital infrastructure, and an award-winning culture. However, recent results have been unacceptable and do not reflect the company's potential. As a result, even though the Board was already working on a succession plan, we determined that more immediate change was required and that direct involvement from David and myself was the best approach to strengthen the business in the near term. The board has been searching for a permanent CEO with urgency. We are seeking a proven leader who can drive sales, maximize the benefits of our omnichannel experience, strengthen our brand, improve operations, and champion our culture. Conversations are underway. And we have some promising candidates. What is most important is that the next CEO captures the tremendous opportunity that we have in front of us. As interim executive chair of the board, I'm focused on supporting David and the leadership team. David is in Richmond five days a week. And I'm spending a significant amount of time here myself. We are operating with a renewed sense of urgency to drive the business forward. I wanna thank David for stepping into the interim president and CEO role. As you know, he has served on our board since 2018. David has more than twenty years of executive leadership experience, at prominent retail brands in highly competitive and fast-paced markets. He has led several successful brand transformations, new omnichannel strategies, and growth initiatives for digitally native brands. What made him a great addition to our board has also been a tremendous asset in this transition. Before I turn it over to David, I also wanna thank Bill Nash for his more than thirty years of service with CarMax. David McCraight: Thanks, Tom, and good morning, everyone. I'm honored to serve as the interim president and CEO at this important juncture in CarMax's history. While our top priority is to find a terrific next leader, in the interim, Tom and I are committed to lead and take the steps needed to set up the next CEO for success. After three decades in the retail industry, and having led multiple companies through turnarounds, I am familiar with the rigor and critical thinking required to succeed. The good news is CarMax already possesses many of the vital attributes needed to turn the business and regain momentum for growth. Including a well-known and trusted brand, a strong culture supported by a base of 28,000 talented associates, and an expansive digital and physical infrastructure including over 250 premium locations that put us near 85% of the US population. Despite these advantages, and after decades of industry leadership, based on recent results, it is clear CarMax needs change. And while it has been only a few weeks in our interim roles, here are some of our observations. Prices. Our average selling prices have drifted upward and appear to be less attractive to customers. To ensure that CarMax is a preferred choice, we will work to shrink the gap between our offering and the marketplace. We are lowering margins and supporting this action with marketing spend. While also building out more effective ways to communicate our value to the consumer. We are also comprehensively reviewing all the costs associated with bringing a car to market. We're gonna find ways to eliminate the unproductive while maintaining our reputation for having a high-quality fleet. Around the consumer, we need to bring an even sharper focus on the customer throughout the organization. In guiding decisions, we will reawaken our intellectual curiosity and challenge long-held institutional beliefs as we work to discover the most important elements to the customer in closing the sale. We will emphasize customer insight in decision-making rooted in fact-based consumer research. Digital. We have the opportunity to incorporate a clear and more effective selling voice in our digital experience. While we have spent several years building out capabilities for customers to shop, how they want and where they want. We must now focus our energies on making the digital shopping experience easier. And shift our digital voice from one that earnestly delivers abundant information to one that focuses on delivering sales. This will drive conversion and further improve customer satisfaction. Just as we do so successfully in our stores. SG and A. Similar to our approach in tackling the cost of bringing our cars to market, we believe our expense structure is too high. It is clear that we have the opportunity to leverage our technological platforms and process enhancements to reduce our spend. We are committed to sharpening our business model and eliminating unproductive costs. And in just a moment, Enrique will provide a progress update on the decisive actions we are taking to reduce at least $150 million in SG and A. Profitability. We will more aggressively tap into opportunities in the selling experience to enhance our profitability. We're excited about the outstanding growth potential we have across CAF and our ancillary products. You will hear more from Jon today about our progress in full spectrum lending, as well as the steps we are taking to capture incremental flow through in our extended protection plan business. Culture. We've always been a company intensely focused on operations. But with the advent of disruptive technologies, we now need to reignite the entrepreneurial spirit that made CarMax the industry leader for decades. Simply put, we will move faster, and operate leaner while taking smart risks. We are optimistic that our immediate pricing and marketing actions will improve our sales performance. But pressure earnings in the near term. As we consider the business model more holistically moving forward, we anticipate that earnings pressure will be offset by unit growth, expanded profitability in CAF, and ancillary products, and through reductions in SG and A and COGS. Tom, the board, and I believe that CarMax has many of the requisite attributes for a successful turnaround. We are confident the actions we're taking will begin to strengthen performance while the board identifies the right permanent CEO to lead CarMax for the future. Now I'd like to turn the call over to Enrique to discuss our third quarter financial performance in more detail. Enrique? Enrique Mayor-Mora: Thank you, David. During the quarter, we delivered total sales of $5.8 billion, down 6.9% compared to last year, reflecting lower volume. In our retail business, total unit sales declined 8% and used unit comps were down 9%. Pressure performance across our age zero to five inventory was partially offset by increased sales of older, higher mileage vehicles, which represented over 40% of our sales for the quarter. An increase of approximately five percentage points compared to the second quarter and last year's third quarter. Average selling price was $26,400, a year-over-year increase of $230 per unit. The increase was due to higher acquisition costs driven by year-over-year increase in market prices, and partially offset by the increase in toward older, higher mileage vehicles. Wholesale unit sales were down 6.2% versus the third quarter last year. Average wholesale selling price declined by $40 per unit to $8,100. We bought approximately 238,000 vehicles during the quarter, down 12% from last year. We purchased approximately 208,000 vehicles from our consumers. With more than half of those buys coming through our online instant appraisal experience. With the support of our admin sales team, we sourced the remaining approximately 30,000 vehicles through dealers, down 9% from last year. Third quarter net earnings per diluted share was $0.43 versus $0.81 a year ago. This quarter was impacted by $0.08 of restructuring expenses related primarily to our CEO change and the workforce reductions in our customer experience centers. Total gross profit was $590 million, down 13% from last year's third quarter. Used retail margin of $379 million decreased by 11% driven by lower volume and profit per used unit of $2,235. In line with historical averages, down approximately $70 per unit from last year's record high. Wholesale vehicle margin of $115 million decreased by 17% from a year ago with lower volume and wholesale gross profit per unit of $899, a decline of approximately $120 year over year. Both wholesale volume and margin were impacted by steep depreciation. Other gross profit was $96 million, down 16% from a year ago. This was driven primarily by the impact of lower retail unit volume on each CarMax auto finance income was $175 million, up 9% over last year. Jon will provide detail on CAF's growth in a few moments. On the SG and A front, expenses for the third quarter were $581 million, up 1% from the prior year. Driven by our previously communicated investment in marketing as we supported our new brand positioning launch and the restructuring expenses that I previously noted. These were partially offset by a reduction in the corporate bonus accrual. As David noted, we are on track to achieve at least $150 million in exit rate savings by the end of fiscal year 2027. We took our first significant step toward these savings this quarter with an approximately 30% reduction in our CEC workforce. This reduction was supported by our continued process and technology enhancements. Which are making our associates more efficient as well as empowering our customers to perform more of their shopping activities themselves. Turning to capital allocation. During the third quarter, we continued our share repurchases. Buying back 4.6 million shares, a total expenditure of $2 million. As of the end of the quarter, we had approximately $1.36 billion of our repurchase authorization remaining. Looking forward, I'll cover two items. We are optimistic the actions of lowering margins and increasing marketing will improve our sales performance trends. But may pressure near-term earnings. We expect marketing spend on a total unit basis to be up year over year in the fourth quarter, though to a lesser degree than during the third quarter. With a focus on investing in acquisition to drive buys and sales. Secondly, we expect pressure on our service margins in the fourth quarter. Due to seasonal sales and as we annualize over cost coverage leverage taken last year. At this time, I will now turn the call over to Jon to provide more detail on CarMax Auto Finance and our continuing focus on full credit spectrum expansion. Jon? Jon Daniels: Thanks, Enrique, and good morning, everyone. During the third quarter, CarMax Auto Finance originated $1.8 billion resulting in sales penetration of 42.6% net of three-day payoffs, versus 43.1% last year. Weighted average contract rate charged to new customers was 11% versus 11.2% last quarter as we continue to adjust consumer rates in reaction to the broader rate environment. Third-party tier two volume for which we collect a fee and tier three volume for which we pay a fee combined 24.9% of sales versus 24.4% last year. Weakness in tier two application volume, along with the impact from CAF's expansion in the Tier two space, was more than offset by growth from our Tier three partners. CAF penetration continues to benefit from underwriting and pricing adjustments implemented since the beginning of the fiscal year estimated to be 100 to 150 basis points the quarter. However, this volume has been offset primarily by lower application volume in the prime credit segment along with the aforementioned Tier three partner lender overperformance. CAF income for the quarter was $175 million, up $15 million from the same period last year. Included in the quarter is a $27 million gain on sale along with an additional $5 million of servicing fees attributed to the closing of the 25 b deal in September. Note that while the gain on sale is fully recognized at the time of sale, servicing fee income will continue over the remaining life of the deal and will be proportional to the receivable volume remaining. Net interest margin on the portfolio was flat year over year and down to 6.2% from 6.6% last quarter, and largely reflects the higher margin receivables removed from the balance sheet as a part of 25 b. Gas had a loan loss provision of $73 million resulting in a total reserve balance of $475 million or 2.87% of auto loans held for investment. Losses observed during the quarter in line with our expectations upon which we based our reserve at the end of Q2. With regard to growing the cat business, I'm immensely proud of our accomplishments to date. Over the last eighteen months, we have greatly expanded our funding options, including this quarter's off-balance sheet transaction, which have been critical prerequisites to this growth. In addition, we continue to add underwriting capabilities and modeling refinements that support profitable expansion. Separately, I am also excited about the significant future earnings potential from both our redesigned MaxCare plan, which focuses on mechanical coverage and our new MaxCare Plus plan, which focuses on cosmetic protection. These products have already migrated from test phase to pilot in multiple markets, We expect to achieve near nationwide rollout during '27. I'd like to turn the call back over to David. David McCraight: Thank you, Enrique. Thank you, Jon. Today, we outlined our initial observations and near-term priorities to drive improvement. Shrinking the price gap between our offering in the marketplace, with a stronger focus on customer experience increasing digital monetization capabilities, reducing costs, enhancing profitable growth drivers, and improving the speed of decision-making. And while we are realistic about the near-term challenges, CarMax's competitive foundation remains strong. We have a trusted brand, national scale that is difficult to replicate, leading omnichannel capabilities, and growing digital infrastructure, a strong financing platform in CAF, and an award-winning culture. Our execution has not matched the potential of these assets, but that's what's changing. Tom, the board, and I are focused on strengthening performance and creating a solid foundation for the permanent CEO to build upon. We appreciate your continued confidence in CarMax, and are committed to being transparent about our progress. With that, we'll open the line for questions. Operator? Operator: To leave the queue at any time, press 2. Once again, that is star and 1 to ask a question. And your first question comes from the line of Sharon Zackfia with William Blair. Your line is open. May now ask your question. Sharon Zackfia: Morning. Good to hear you again, Tom. I'm a conference call, and welcome, David, to the world of CarMax conference calls. Tom Folliard: Thank you, Sharon. Sharon Zackfia: Yeah. I guess, you know, maybe if you could give some color on the magnitude of the GPU reset that you're looking to see here in the February. And then you look at the business kind of, I guess, with a fresher perspective, are there any customer cohorts that you can delve into where you think somehow CarMax has become a bit less competitive or a bit less attractive and you know, what's the game plan to win those customers back? Enrique Mayor-Mora: Yeah, Sharon. Hey, it's Enrique. Let me let me jump in. You know, the the margin reductions gonna be supported with acquisition spend on marketing, will be meaningful in our design just to narrow the gap that we talked about with the broader marketplace. And we're optimistic those can actually improve our retail sales trends. Into the quarter. But they're, you know, they're big enough for us to talk about. And we're gonna see how they roll out. We're gonna see the impact within this quarter. And then when we have our year-end call in April, we'll provide insight and an outlook on on what those margin reductions and marketing spend increase mean to us. Jon Daniels: Yeah. Sharon, this is Jon. I'll jump into your customer cohort question. Now, yeah, I think there's obviously places across the spectrum that we're, you know, looking to improve and and grow sales. One in particular that stands out for me is if you look at maybe the higher FICO segments, we mentioned in the prepared remarks sort of, in CAF and the tier two section, that maybe six fifty to seven fifty space Feels like we've lost, volume there. We can track that through application volume coming through the door and then progression further on. So lot of speculation around what that could be. Certainly, we're gonna look at all things David mentioned a number of things, pricing. Obviously, we try and keep our rates competitive. Just overall, the offering that we provide the consumer I think that's one spot in particular that I think there's a lot of chance to to recapture and and fuel our growth. Sharon Zackfia: Can I ask a follow-up? You have a competitor who will be kind of lowering finance rates proactively in in the current quarter to reinvest some of the their GPU to the customer. I think, historically, you followed the market. On on finance rates. Would there be something you'd be willing to do on interest rates to be to to kinda weaponize that a bit more to get gain more conversion. Jon Daniels: Sure. I appreciate that question. Yeah. I think we're always keeping the pulse on the market. Looking at how we compare to obviously credit unions and banks what have you and certainly competitors as well to the degree we can measure that. Yeah. Not gonna speak to what what they're gonna do, but we think our our APRs are quite competitive with the Fed making the moves that they've had to make. We will adjust accordingly. We always have a test and learn methodology there. You know, I'm not gonna say we're gonna try and get further ahead of the market, but I still think in in maybe this space, there is a gap in interest rates that still exist, although it might be closing. But I think it's the broader offering question. You know, how do we compare from a an interest rate standpoint, certainly, and maybe term, but, obviously, couple that with what's the price of the car and all the answer all the other fees associated with that. So I think the bigger offering picture is the one that's really gonna be the the focus here. And, Sharon, what I'd say, you know, looking at it a bit more broadly as well is that the reductions SG and A, so these are levers that we've talked about. The reductions in SG and A, the focus on COGS, growth opportunities in CAF, in full spectrum, as well as EPP products that Jon talked about and we're happy to elaborate on. Those are all levers that bring to bear an ability to be more competitive in the marketplace. At the same time, we're reevaluating, as David talked about, reevaluating how we go to market. Right? And how we go to market, as Jon mentioned, it's the kind of cars, it's the price of the cars, how we communicate on our website, it's all of those items. And so we do think we have levers at this point that are lining up be materially more competitive and to go to market with. Operator: K. Thank you. Thank you. Our next question comes from Scott Ciccarelli with Truist. Please go ahead. Your line is open. Scott Ciccarelli: Good morning, everyone. So historically, I'm I'm gonna take another shot at this GPU question. Historically, I believe the management teams have talked about needing to lower prices by about $500 per unit to see a real inflection in the sales pace. So that would obviously be meaningful to use Enrique's words. Is that in the range of how you guys are thinking about reducing your GPU? Enrique Mayor-Mora: Yeah. What I'd say is don't think we've said $500 as as a meaningful or a needed amount to to drive sales. You know, we we do price elasticity testing. We're always in the market doing price elasticity testing. I'd tell you the number to to to move sales is is well south of that. You know? And in terms of what we're doing this quarter, look, we're trying different things. We are going out. It was, again, sizable for us. To talk about on this call. Gonna test the impact on sales, again, in combination with an increase in marketing to kind of get the a boost there. Overall. And we're gonna report out in the fourth quarter call in April. And and communicate what we saw in the market. We're optimistic it's gonna change the trend in sales, but I I wouldn't say that $500 is what need to to to move sales, that's what you're saying. Scott Ciccarelli: Got it. Thank you. And then just just a follow-up if I can. I guess it's a a bigger picture question. For Tom and David. Like, what do you think CarMax represents to consumers today, like, you know, in late twenty twenty five, you know, given some of the alternatives that are out there? And where do you think you would like to end up in, call it, two to three years? Thank you. David McCraight: Hey there. Nice to talk to you. David here. Know, we think many of the things that CarMax has meant to the customers in the past can continue to be. We believe we're a leading used car destination for customers. We've invested a lot of money and time and in building and broadening those capabilities to be able to let them shop where they want and how they want. And, ultimately, we believe we're the most trusted brand out there. The difference is where we've been and and the performance we need to adjust to and adjust our model towards getting to and have confidence we're gonna be able to get there in the near term. Tom Folliard: Hey, Scott. It's Tom. Good to good to talk to you again. You know, from my perspective, and I'm a little biased, the last thirty years, we've built an iconic brand. And I don't think that's changed at all. I think the consumer knows what we represent. They know the quality that we represent. I think our associates in our stores and in our CECs and across the board are are completely engaged and and ready to serve the customer. We've spent a lot of money investing so that we could serve the customer however they wanna served, whether it's online or in our stores. And I just think we we need to activate that. We need to do a better job of presenting that to the customer upfront. But in terms of the brand and the strength and the quality of our vehicles, all that stuff is fully intact, and I think it's the the the the basis for us moving forward. And a basis from which we can we can grow again. Scott Ciccarelli: Thank you, and happy happy holidays. Tom Folliard: Thank you, Scott. Thank you. Operator: Thank you. We will move next with Craig Kennison with Baird. Please go ahead. Your line is open. Craig Kennison: Hey, good morning. Thanks for taking my question. On the SG and A, topic, what is the baseline SG and A from which you expect to cut a $150 million? Just curious so that we can track your performance against that goal. Enrique Mayor-Mora: Yeah. No. Absolutely. And so when we talk about our SG and A goal of a $150 million it's a reduction of SG and A. Opportunities. That's really comparing it to last year, if you will. So if you wanna use you know, our base was $2.5 billion. Right? Roughly. And so that's what we're using as a baseline and those are the reductions that that we're going after. Craig Kennison: And that is an exit run rate as of '27. Enrique Mayor-Mora: Exactly. Craig Kennison: K. Thank you. Thank you. Operator: Our next question comes from Rajat Gupta with JPMorgan. Please go ahead. Your line is open. Rajat Gupta: Great. Thanks for taking the question, and thanks for the the candid assessment the prepared remarks. I had a follow-up on just the margin versus same store expectation. Could you could you give us, like, any any sort of early read? Because we got the sense that last quarter also, there was some effort to become more price competitive. Anything you can give us in terms of, like, early reads in December, and how those actions have already started to show some results, or is it still very early, or have you not implemented them yet? And what kind of, like, equation are we looking at, you know, in terms of you know, dollar versus same store volume, you know, trade off. Dollar GPU versus same store volume trade. Any any any more insights you can give us on how you see this equation playing out? I have a very quick follow-up. Thanks. Enrique Mayor-Mora: Hey, Rajat. So we just rolled out the price changes. So it it is too early to provide any kind of insight into that. And, again, we will provide a a view into that in a Q4 call, but we literally just rolled out those changes. So we're rolling them. They're underway. Yeah. And they're underway. Actually, they're not that's a good point. They're not fully rolled out. They're underway, but we just started this week. So Rajat Gupta: Is it hope to, like, go back to share gains or pause unit growth? I mean, what kind of, you know, the the expected outcome, in the near term? Enrique Mayor-Mora: Yeah. And look, like, we are optimistic that this this lever that we're pulling and again, it's really the combination, right, of having lower margins, lower prices out there being more price competitive. Supporting it with acquisition marketing, So think of, like, paid search, other direct levers like that, like directly to support sales is gonna change the trend. Of our performance. So we just reported a negative nine comp Last quarter was a little better than that, but not great. And our goal is to change the trend and to get the sales flywheel going. And that that's what we're looking to do. And at the same time, we're working really hard on getting other profitability metrics or levers, I should say, in place. And, again, those things are SG and A reductions, COGS reductions, ETP growth, cap full spectrum, so cap income growth over time. These are all levers that we're pulling. Because our goal is to drive sales over time, absolutely, and to drive earnings power over time as well. Rajat Gupta: Understood. And just just a quick follow-up on CAF. You know, it looks like, you know, as you mentioned, like, third party, tier three penetration went up. Is this is there is there, like, any meaningful, like, tightening going on right now? I'm curious know how those reserves will change going forward once you go back to having more in house you know, tier three, tier two type penetration. Maybe, like, any color you can give us on this CAF provision in the fourth quarter would be helpful as well. Thanks. Jon Daniels: Sure. Yeah. Appreciate the question, Rajat. Yeah. I I don't think there's a tremendous story in the tier two, tier three. We always just provide the numbers and provide a little guidance as to the delta there. But, you know, there's always, you know, swapping between know, maybe a tier two lender that is choosing to be a little more aggressive or doing tightening. Again, they're gonna make their own individual decisions. Versus the tier three partner that, again, may be the recipient of that tightening higher up upstream or, again, being a a little looser on their side. So don't think there's a meaningful story there, just to clarify. Just really providing the numbers. And and ultimately, to your second question, I don't think that I I wouldn't read much into that in terms of know, CAF provision. Again, we're as we stated very, very excited about our opportunity as we go go down into the tier two spectrum. You know, just for point a point to note, know, this is we were over 10% of the tier two volume. Came to cast this quarter. We went after it, and so we're really excited about that. And, you know, as we continue to go further spectrum, we're generally operating in the higher 50% of tier two, but we think, you know, we can get the entirety of that credit spectrum as we methodically roll out refinements to our model. We're excited about the, the funding solutions we have in place. And so you know, we will preserve for it accordingly, and we will enjoy the income, and we will get there. Rajat Gupta: Okay. Perfect. Thanks for all the color, and good luck. Thank you. Operator: Thank you. Our next question comes from Brian Nagel with Oppenheimer. Please go ahead. Your line is open. Brian Nagel: Hey, guys. Good morning. Tom, welcome back to the Falls. Tom Folliard: Hey, Brian. Thanks. Brian Nagel: You know, look. This is gonna be a potentially repetitive I wanna make just get this point across. So we're talking about, know, pricing and, you know, and and and being more aggressive on pricing here. For as long as I can remember, and I apologize for some time now. You know, you've done these pricing tests. And the message from CarMax has always been the same is that it it they they really lower prices, so the the debt result is nothing you know, not been favorable. So I I guess, like, that one ask is you're talking about once again you know, is either testing or moving forward with lower prices except in lower GPUs. What's what's different this time? You know, why why do you think that this will you know, this time around is be different than the past, which actually can drive better better know, unit volume. Enrique Mayor-Mora: Yeah. I think in the past, look, when we've lowered our prices and we do price the less all the time. Right, Brandon? We talk about that. I think the equation in the past has been know, you lower your prices, and then when you flow it through to the business, do you make Right? enough money to offset the lower margin with increase in sales? It absolutely drives sales. The equation was, well, it didn't always drive enough profit. I think the difference absolutely right now, there's a clear difference. The clear difference is that we have strong levers that are now supporting to look at the business more holistically. So, again, you know, think of the reduction in SG and A, that aggressive Tesla going after. You think of COGS and the aggressive we're going after COGS. You think of EPP growth. If think of CAF full spectrum income growth. These are all levers that are going to offset some of that pressure we had seen when we looked solely at the impact of lowering prices. So there's absolutely a difference and we're just looking at the business a bit more holistically, and we have those levers at hand here. Tom Folliard: Yeah. And, Brian, I I would just add that as Enrique mentioned, we've always talked about it in terms of total profitability. The the when we do price changes, we definitely see some sales movement. And then we've always had kind of the guardrails around what total profitability is. I would just tell you that our focus in the in the near term, given our current performance, is to drive sales and get things moving in the other direction. The other thing to remember is when we say we're at a lower price as a $100 or $200, it doesn't mean we're taking a $100 across the board on cars. It's more like if we say a $100, it it's think of it as percent of our cars a thousand dollars. Or 5% of our car is $500. So it it does it meaningfully impacts the trajectory of sales because because of the way we execute price changes. But back to our near term priority is to get things turned around and get sales moving in the other direction. Brian Nagel: Thank you. And you. And then just a follow-up. Sorry sorry, David. But, you know, with regard to marketing, know, so you talked about know, if I understand correctly, you stepped up marketing now. You know, you know, it's so same. That's not the gas a little more. Is it when you think about it, is it more of the same, or or or is is Carmex really working on coming with, you know, to market with a new marketing message? David McCraight: So yeah. Good question. Thank you. So what we're doing is taking the the new campaign was launched recently. As the team took you through. And what we're focusing on now now in the near term is sort of optimizing the campaign we have with the results and tests we have. So shifting things that are gonna into driving more conversion, messaging, perhaps some of the and dialing back perhaps some of the brand longer term spend on it. Ultimately, we think the review and positioning of the campaign is really something for the new CEO who's gonna align it with the new strategy, and we're working with the existing campaign and resources we have right now. But the team has been working to optimize the results based on media, based on geographies, and based on messaging. Brian Nagel: Thanks. I appreciate all the color. Thank you. David McCraight: Thanks, Brian. Operator: Thank you. Our next question comes from Daniela Hagian with Morgan Stanley. Please go ahead. Your line is open. Daniela Hagian: Thank you. Good morning, Tom, David. Appreciate your color in the prepared remarks. My first question is on that digital redefining the digital platform. What specifically within that needs to change to drive more of a selling experience? And how does that impact the operating cost structure with your store base? What would be early indicators of progress in in that redefinition? David McCraight: Yeah. The so we'll take the first part of the question first. We have worked very diligently and over the years to build the capability set. But we have not been as focused yet on the next stage, which is to make it easier. Look. Shopping online with us is not easy. We have ways to streamline it, and we have ways to make the digital selling voice really, just like our sales associates in the stores, make it easier to bring to get them to the ultimate sale, and the ultimate satisfaction is finding a car they like that they can afford. But and we recognize that with all the good work that's been done, it's still not an easy experience. We've and so in our earnest efforts to provide information and countless still have opportunity to streamline it, bring it there. And then in terms of the impact downstream, we'll we'll work in lockstep with the organization and the field to figure out what those best options are. As both Jon mentioned and Enrique mentioned earlier, we have an opportunity to look holistic at our business model from the from our COGS, our SG and A, our messaging, and all those components and that includes how we make decisions, not necessarily individually, but more holistically and what that means for an offer for the customer. We don't lose sight of what's most important to them. But I would expect you're gonna see some of the changes. Tom and I would expect you'll see some of the changes and it'll be iterative. In the next month or two. You'll see it, and we'll continue after that. But you should see the the efforts are underway and the team's very excited about this next step and that digital journey and how important it is in linking with the field team. Very symbiotic. Daniela Hagian: Got it. Got it. That's helpful, and I appreciate your transparency there. My follow-up is on COGS. Right? You and Enrique, you keep calling out COGS as a key lever. What's the strategy with reducing that line item, and are you still progressing towards that regional reconditioning center approach? Enrique Mayor-Mora: Yeah. I'd tell you, look, we have been focused on COGS for I mean, we're always focused on COGS. What we've done is that we've called it out over the past couple years. Like, last year, we communicated a goal of a $125. Per unit. We hit that goal. This year, we had communicated again another goal. A $125 per unit. I would tell you, given where sales are, or have been for the past two quarters, we probably a little bit behind. That goal. Not not because the initiatives aren't there, the teams aren't doing great work. It's just because you delever. In a tough tough sales environment. But we will continue to put even more accelerated goals internally to go after COGS opportunities. Some of that is through the reconditioning centers. Right? Some of that I'll give you, like, a real example. We just rolled out a parts selection tool. In our stores. We're already seeing benefits. From that, right, really kind of forcing our associates in the stores to pick balance speed with quality with cost and making it really easy for our associates to do that. And we're seeing results fairly immediately, and that's just an example of items we're focused on in COGS. In terms of the re reconditioning centers, yeah, we've rolled out at this point in time five Only two of them have been open for about a year. It's still kinda early to tell what the goals are. I mean, the the ultimate goal is absolutely to get them more efficient. We're already seeing logistics savings in the system because we've rolled these things out. And we expect that those will perform in line with some of our larger reconditioning units that we have in stores like Murrieta. In LA that we've seen. They're highly efficient store because of the volume that we pump through. And we have the same expectations with these more regional reconditioning centers. But again, we've only rolled out a few at this point in time. Yeah. Operator: Thank you. Our next question comes from David Bellinger with Mizuho Securities. Please go ahead. Your line is open. David Bellinger: Hey, good morning, everyone. Tom, nice to talk to you again. In the prepared remarks, guys mentioned reassessing the cost of bringing a car to market. What about the time to turn vehicles? CarMax has been a leader in that area for a long time. Looks like some competitors have increased their speed to market pretty dramatically. Is there anything you guys can do around AI implementation cut down that timeline, use your thirty plus years of data, and potentially avoid some of those sharper depreciation swings that have disrupted the business over the last few quarters. How should we think about that opportunity? Enrique Mayor-Mora: Yes. I think, look, we're always focused on reconditioning, on speed, on lowering our WIP You know, for example, this quarter, you know, we increased our sellable inventory, decreased our overall inventory. Right? So that's really a strong focus on WIP. That actually this quarter helped per turns relative to last year despite comps being down. 9%. So you can see the organizational focus on just getting better in terms of turning vehicles. I think our off-site reconditioning locations will help as well because it would be even more efficient. So just a couple of examples there in terms of the focus moving forward. David Bellinger: And then Enrique, maybe a a second question. Just can you update us on the real estate strategy? Anything that's changing there? You guys own a lot of your real estate. Is that a potential area where you could monetize and use that to fund more investment in the business if you need to? Enrique Mayor-Mora: Yeah. Look. I think it it always is a potential we own a lot of our sites out there for our store locations. I'd tell you we have better axe better sources of capital versus doing, a sale leaseback or something. So we have great banking relationships. Great partners out there, capital providers, and, you know, we have a revolver, $2 billion revolver we can dip in there. And you know, just more efficient ways to to get capital for us. Rather than kinda monetize our our stores. Or the land. Under our stores. David Bellinger: Got it. Thank you. Operator: Thank you. Our next question comes from Chris Bottiglieri with BNP Paribas. Please go ahead. Your line is open. Chris Bottiglieri: Hey, guys. Thanks for taking the question. First one, more clerical, I suppose, and then just a bigger question. Did you give the service profit? I think it was $4 million last quarter. Curious what that was for Q3. Is that a good run rate for Q4 given volumes are pretty similar Q4 versus Q3? Then my actual can you just elaborate what's happening with the credit penetration? It sounds like the prime side, I suppose, you're seeing less appraisal traffic or less traffic coming in. Is there would think that with a hay shaped economy, that's probably the healthier side of the market. Just kinda curious what's causing that, what you're seeing there. Thank you. Jon Daniels: Wanna do that with Chris? I'll check. Yeah. That's fine. Chris, this is Jon. I'll I'll take your the the credit side. Yeah. As we've noted in the in the remarks and, yeah, even reflecting on Sharon's question, when we look across the credit spectrum, yeah, we really can gauge who's coming and shopping with us through our, you know, our our prequel product is a is a great place to do it. You know, customers love it. They take full advantage of it. Know, eighty eighty plus percent of our customers start with credit online. Yeah. I think we see definitely an opportunity in that sort of six fifty to seven fifty credit space. And as I mentioned earlier, hard to speculate what's driving that, you know, is that, you know, we think our rates are are quite competitive there. But it's always a question of inventory, price, availability, all of that. I think as we mentioned on this call, holistically, all of that is up for discussion, and we're gonna look at, again, improving our overall offering there. So while you would say k shaped economy, know, all ultimately, we do see the others folks probably are less stressed by affordability. We wanna make sure we have the right product at the right price at the right time for them when they're when they're ready to purchase. So I think there's improvement there. That's really what the what the comments, I think, are in that space are. Enrique Mayor-Mora: Yeah. And regarding service in the quarter, there there definitely was pressure in services, as you know, and as we talked about, it is a line item service margin that deleverages when sales are are more challenged. Look, it's like, over the past couple of years, the teams have made material strides. In service margin over the past couple of years, and we had even talked at the beginning of this year that we expect it to be, I think, slightly positive for the year in service margin. Certainly, our sales expectations at that point in time were not where we are currently actualizing. But I'll tell you, for the full year, our outlook right now, is, you know, maybe a little unprofitable or a little profitable. Depending on sales performance in the fourth quarter. And that just tells you the the the incredible work the teams are doing in for service margin there. But we did have a negative margin in the third quarter, and we do expect, as I talked about in my prepared remarks, some pressure in the fourth quarter. We'll be comping over some cost coverage cost coverage that we took last year. But, again, if I take a step back and I look more holistically at it, the teams have done tremendous work You know, it's gonna be borderline whether or we hit that positive margin for the full year. But, again, sales have been definitely more pressured than what we had anticipated. Versus the beginning of the year. Chris Bottiglieri: Gotcha. Thank you. Operator: Thank you. We will move next with John Babcock with Barclays. Please go ahead. John Babcock: Hey, good morning, and thanks for taking my questions. I guess, just first of all, was wondering if you could talk a bit more about what the Board looking for in its next CEO and also how we should think about timing in terms of, you know, when something might be announced there? Tom Folliard: Recognizing that might be variable. Yeah. I I would just tell you it is it's the board's highest priority right now. It's my personal single highest priority as I'm leading the search along with the rest of the search committee. You know, we're looking for somebody that has led a complex business with you know, a diverse set of assets. We're we're hoping to find somebody that's also led some type of a digital transformation Doesn't have to come from automotive necessarily. Doesn't necessarily have to come from retail. But, you know, one of the most important things is that somebody who understands our culture and can can can lead this team onto the next phase of our success. In terms of timing, we're we're moving as as as quickly as we can, but I I don't really an upgrade an update on timing. John Babcock: Okay. Totally fair. And and then next, least based on the work that you've been doing over, you know, the last couple months and and even, you know, in knowing the business, was just wondering, how are you thinking about the omnichannel business? I mean, do you think this is kind of the setup that you wanna keep longer term? Do you think you wanna shift more towards digital over time? You know, what what's the benefit of omnichannel versus digital or or pursuing more of a brick and mortar strategy? Tom Folliard: I I think for us, it's it's really it's all of the above. Know, over the last several years, as the team has been communicating, we've spent hundreds of millions of dollars in our infrastructure and giving us the capabilities to meet the customer wherever they wanna I think having a national physical footprint is an advantage for us, over 250 locations as David mentioned in the beginning of the call. Near 85% of The US population. So I I think it's more of an all of the above strategy. I think some of the comments you've heard today is that we're not happy with how we present to the customer from a digital standpoint. And I think we're gonna you'll see us make some significant improvements there. But we think our stores are extremely valuable, and our and our store team do a great job meeting the doing converting customers once we get them in the store. But we we clearly need to get better on the digital side. David McCraight: Yeah. And just to add a little color to Tom's comments on that, We again, CarMax has built out so many capabilities And now when we are talking about holistically looking at our business model, we've built out so many potential capabilities, and many of them are helpful, but some of them probably are adding clearly decisions we've made, things we're trying to do in our best efforts to please everything for every customer. We have an opportunity to streamline, make some decisions, prioritize some things, based on real quantified insight from the consumer in ways that we can streamline and optimize the advantages that Omni should provide versus getting caught in some of the complexities that Omni also provides. So we'll think you'll see that in the near term as the team sort of finishes that infrastructure build out, but then gets really sharpen it and hone it into a competitive advantage. John Babcock: Alright. Thank you. That's very helpful. Operator: Thank you. We will move next with Jeff Lick with Stephens Inc. Please go ahead. Jeff Lick: Good morning. Thanks for taking my question. Tom, it is absolutely awesome to hear your voice. Tom Folliard: Thank you. Jeff Lick: So listen, David. A question for you. You know, you've been a senior leader at retail organizations that were digitally native and also retail organizations that kind of a hybrid. They have, you know, a physical business and a digital business. I was wondering if you can speak to the challenges of a you know, CarMax is a hybrid business where you know, there are people that are went into the physical part of the business and there's some natural tension which makes it more difficult to have you know, an ideal digital business. David McCraight: Yeah. Jeff, great insight, and, thank you for that Yeah. There there are examples of that, and that's a little bit of what I was alluding to. Now recognize Tom and I have been in the chair for two and a half weeks or so, but, what the most important things I see is that it's a really ex team's very excited about breaking through, and it's incredibly talented and dedicated group. We just need to work across those channels to make sure we're putting the customer at front of those decisions and not having the operational biases or legacy approaches come through. So there is not a battle one version versus another, but what we need to do is provide some leadership and focus the team so we can start executing more with that. What's most important to the customer? Streamline. Make sure it's a competitive offer. Because we know we own the brand and we know we own the trust. In a great part of the American consumer. But you're absolutely right. Many organizations Omni causes them to trip up. I would say we're just going through finish sort of like an off road adolescence, and we'll be moving into a much more refined effort in the coming time. Now that being said, you wanna confirm that answer with the new CEO when they come but in the interim, we're that's why we're so optimistic about the improvement. We have so many of the components already in place. Jeff Lick: And I was just wondering if we could quick double back to Sharon's first question about potential cohorts that you might have lost or been, you know, be less effective with. You know, I don't think she was thinking about necessarily the FICO score. You know? And this kinda gets into the advertising strategy. You know, when you know and, Tom, just wondering, you know, back in the day, it it always seems like you over indexed with that young professional, likely a female, that didn't wanna go into the franchise dealer and do battle. Know, you provided a much more easy professional experience. Do you think that your primary competitor has maybe cut you off the path at the past and hasn't even done a better job of providing an experience for that person where it's like, look. It it now it's super easy. Tom Folliard: You know, it's it's that where Your your question about cohorts, the know, second quarter, we were down 6%. Last quarter, we were down 9%. So we need to improve across the board. In turn, I I would just go back to the comments we've already made. We're not as easy as we need be for the consumer. We need to simplify our processes. We need it's so easy to buy stuff online. It doesn't matter what it is these days. And it's it's true for automotive. It's not just true for one or two competitors. It's across the board. And, again, we've invested the money to put ourselves in a position to be the best at this. And we got some work to do to get there. But we need to simplify for the consumer how they go through the process with us, whether it's on our website or in our app or in our stores. Jeff Lick: Enough. Best of luck, and, look forward to hearing from you again. Tom Folliard: Thanks, Jeff. Operator: Thank you. We will move next with Chris Pearce with Needham. Please go ahead. Your line is open. Chris Pearce: Hey, sort of following up, good morning, on Jeff's thought there. Guess, do you do you think you have the customer base that wants to do more of the work online to sorta drive an OpEx offset? In in GPUs, or do you need to reposition the brand to get younger? Or would you sort of reject that framing? Enrique Mayor-Mora: You say that again? Sorry. Yeah. Sorry. We missed that. Chris Pearce: Yeah. I'm just curious. Do you think you have the customer base that wants to do more of the work online? Like, do you think you need to get younger with this new ad campaign? Or do you think it's just about pricing and the experience you're offering? Tom Folliard: I absolutely think we have the customer base that wants to do more of the process online. The way, the younger you go, the less money you have and the less likely you are to have have the credit required to buy a car that's $26,000. So but yeah, I think we have plenty of customer flow, and we we need to take better advantage of Enrique Mayor-Mora: And as David and and Tom talked about, look, we we have we have enviable assets. Right? We have an awareness level that's off the charts. We have consumers that are extremely loyal and that love our brand. We have associates that are outstanding. We have more than 250 stores across the country that operate extremely well. You know, we have a strong we've invested in the digital capabilities. We just need to kinda fine tune how those things mesh together. But in terms of whether or not we have customers out there that wanna buy us, I would tell you absolutely. That's not the concern that we have. Opportunity that we have is to make our offering based on a consumer most compelling that we can make it, and that's what we're focused on. Chris Pearce: Okay. Thank you, good luck. Tom Folliard: Thank you. Operator: We will move next with Michael Montani with Evercore. Please go ahead. Michael Montani: Yes. Hi. Good morning. Thanks for taking the Tom, good to hear from you again as well. Just wanted to dig into, I guess, it's a three parter, but it's kinda all related, which was depreciation trends just some incremental color about what you're seeing. The the competitive backdrop you know, is the intensity ratcheting up. And then lastly was on the reinvestment into GPU. Just how how much of a reinvestment we ought to be thinking about moving ahead? Enrique Mayor-Mora: Yeah. Let's separate depreciation. You know, my comments were really in the wholesale area. Right? We did see very sharp depreciation within the quarter. A greater than 10% depreciation within the quarter. So very sharp, and that impacted performance within the quarter. And, you know, as that abates, then we would expect that performance would have turned around. In terms of GP, you know, we we did talk about that. Look. It's material in that us to talk about it on the call. But at the same time, we just rolled out you know, different levels of pricing changes. We're gonna see kind of how it performs within the quarter. And then in our Q4 call, we'll come back and, you know, we'll we'll talk about what we saw. And also what that means for our our plan moving forward. You know, I say that, but we're also optimistic that it's gonna change the the sales trend that we've had, you know, negative six, negative nine comps. Sequentially. And that's what we're looking to change. We're looking to change that trend, and we'll come back with that. And forget your number two question, but that the three part. Michael Montani: Competitive intensity. Number one and number three. Don't know. Tom Folliard: Yeah. Let me ask let me add to the pricing part, which is our our pricing is not it's not like we have a static pricing model where we lower all of our prices and leave them there. This is gonna be very dynamic throughout the quarter. You know, I think one of the things David and I and the rest of the team here assessed in a short period of time is you wanna get things moving in the other direction. There's there's some significant levers you can push, but the two biggest are clearly pricing and marketing. So we're making moves there to try to get the trend moving in the other direction. But it'll be very dynamic throughout the quarter. It's why you know, we're not trying to be evasive with what we think the margin impact will be, but we're trying to be as impactful as we can And, again, we're eighteen days into the quarter, so this will be a dynamic process throughout the next three months. Michael Montani: Thank you. Operator: And we don't have any further questions at this time. I will hand the call back to David for any closing remarks. David McCraight: Thank you. We'd like to thank the thousands of CarMax associates who helped build the business that we have today and will be part of our next leg of growth in the future. Thank you all for joining our call today, and then before we sign off, Tom has some closing remarks. Tom Folliard: Yeah. I just thank all of you guys for your support. Many of you I I know and have heard your voice in the past, and although it's good to be back, I wish it was under slightly different circumstances. But what I would tell you is from the board perspective, we are absolutely committed to getting this right. David is the perfect person to to sit in this role while we search for our next CEO. I'm happy to spend more time on the business. What I've been most enthusiastic about in the last two weeks is how engaged all of our employees are and how excited they are to win. And as we've mentioned multiple times and Enrique just kind of covered in total, we have incredible assets in this company. We have a great balance sheet. We have an iconic brand. We have two fifty locations. And most importantly, what has always separated us from everybody else is the engagement of our more than 28,000 associates. And none of that has wavered. So I just wanted to close by saying the board is absolutely committed to getting this right. And I wanted to also thank David for the role that he is playing while we're in the middle of this search. And lastly, I wish everybody a happy holiday season. Thank you for joining us. And, we'll talk to you next time. Operator: Thank you. Ladies and gentlemen, that concludes the third quarter fiscal year 2026 CarMax Earnings Release Conference Call. You may now disconnect.
Operator: Good day. Thank you for standing by. After the speakers' presentation, there will be a question and answer session. Welcome to the FactSet First Quarter Earnings Call. At this time, all participants are in a listen-only mode. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kevin Toomey, Head of Investor Relations. Please go ahead. Kevin Toomey: Thank you, and good morning, everyone. Welcome to FactSet's first quarter fiscal 2026 earnings call. Before we begin, the slides we reference during this presentation can be found through the webcast on the Investor Relations section of our website at factset.com. A replay of today's call will be available on our website. After our prepared remarks, we will open the call to questions. The call is scheduled to last for one hour. To be fair to everyone, please limit yourself to one question. You may reenter the queue for additional follow-up questions which we will take if time permits. Before we discuss our results, I encourage all to review the legal notice on slide two. Discussions on this call may contain forward-looking statements. Such statements are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. Additional information concerning these risks and uncertainties can be found in our forms 10-K and 10-Q. Our slide presentation and discussions on this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures are in the appendix to the presentation and in our earnings release issued earlier today, both of which can be found on our website at investor.factset.com. During this call, unless otherwise noted, relative performance metrics reflect changes as compared to the respective fiscal 2025 period. Joining me today are Sanoke Viswanathan, Chief Executive Officer, Helen Shan, Chief Financial Officer, and Goran Skoko, Chief Revenue Officer. I will now turn the discussion over to Sanoke. Sanoke Viswanathan: Thank you, Kevin, and good morning, everyone. I'm very pleased with how we've started our fiscal year. We are reporting strong ASP growth and healthy operating margins, coming from broad adoption of our solutions and some key customer wins. ASP grew 5.9% to $2.4 billion. Adjusted operating margin was 36.2% and adjusted diluted EPS is at $4.51, up 3% year on year. 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While other providers offer conversational interfaces or point solutions, they lack the governed data foundations and enterprise integration that regulated financial workflows require. And because FactSet is so deeply integrated across buy, wealth, and banking clients, we are uniquely positioned to navigate their technology architecture, consolidate fragmented data environments, and tailor AI and agentic solutions to their needs. As the flywheel compounds, it directly translates into faster product innovation, deeper user personalization, and measurably better client outcomes. Let me give you a sense of the volume running through this flywheel today. Just in the past thirty days, our clients have actively used a million custom models and screens to run data queries pulling hundreds of billions of data points. We believe AI will accelerate this flywheel. We are still in the early stages of enterprise AI adoption, but to give you an example, across the AI products we launched earlier this year, we've seen broad-based user adoption, with sequential growth of more than 45%. Put simply, AI doesn't replace what makes FactSet essential; it amplifies it. While I'm pleased with our first quarter results and the positive feedback from our clients, there's much work to be done to unlock the tremendous value within our business. This starts with decisive action to accelerate growth and operating leverage. I have three priorities: driving commercial excellence, delivering productivity improvements across the business, and solidifying our long-term strategy to ensure FactSet is positioned for sustainable growth. First, commercial excellence. With our strong products and trusted client relationships, we are sharpening sales execution to reinvigorate top-line growth. We are driving new business development, using analytics to prioritize new prospects, scaling marketing to increase awareness and recall of flagship solutions, putting AI tools to work for personalized outreach and follow-up, and managing the pipeline with rigor. We are simplifying packaging and pricing, organizing clients by persona and usage, refreshing bundles with data-driven insight, fully integrating recent acquisitions, pricing to value, and tightening controls to reduce leakage. We are focusing on improving retention and expansion within our clients, aligning customer success metrics and incentives to drive adoption and upsell, using analytics to flag and reduce churn, and elevating our strategic dialogue at top clients. And we're modernizing sales operations, raising performance expectations, applying best practices to sales incentives, reducing friction with advanced forecasting and analytical tools, and instituting robust productivity tracking. We are executing with urgency while laying the groundwork for world-class commercial performance. For example, we've changed sales incentives to better align them with the outcomes we want: new business, cross-selling, and upselling. This has already led to faster sales motions and a richer pipeline. My second priority is driving productivity gains. I've initiated a disciplined review of our technology, processes, and client service model to identify and act on opportunities to reduce complexity, apply modern tools, and streamline operations. We've initiated a program of transforming and consolidating our legacy technology applications onto a centrally managed modern platform. This is expected to significantly reduce complexity for our developers and deliver efficiencies. One tool having immediate impact is our new text-to-formula agent, which reduces routine support traffic, resolving requests in an average of six seconds versus minutes for a human interaction. On average, approximately 35% of formula support questions daily are now handled by this agent. By offloading these repetitive requests, our service teams are able to focus on higher-impact client work. Each interaction also adds to a reinforcement learning loop that continuously improves product performance. Leveraging new data modeling, visualization, and programming approaches, our data operations team is now able to ingest third-party data at 10 times the speed, vastly expanding our content coverage without adding headcount. These examples illustrate the scope of opportunity there is to drive productivity and efficiency across the organization. My third priority is solidifying our long-term strategy to ensure FactSet is positioned for sustainable growth. I'm engaged closely with the board and my management team to shape FactSet's future, and we are holding ourselves accountable to make hard decisions around allocating resources and capital. I know you're all eager to hear my thoughts about medium-term guidance. It's too early for me to comment on that, but I want you to know that I'm working actively on new growth initiatives, anchored on content and technology innovation, that drive real competitive differentiation and deliver durable ASP growth and operating leverage. As I reflect on my first few months, I have greater conviction in FactSet's position today because the structural advantages are real, the client reliance is deep, and the opportunities to expand our impact are tangible. We have three clear priorities that we are acting on with urgency to drive a culture of excellence across the company. Over the coming quarters, we'll continue to provide more details as we execute against these priorities. Now I will hand over to Helen to discuss our Q1 performance in more detail. Helen Shan: Thank you, Sanoke, and great to be here with all of you on this call. Our Q1 FY 2026 results mark a solid start to the year driven by disciplined execution and deepening traction with our clients. For the first quarter, organic ASV growth accelerates sequentially to 5.9%, an increase of $66 million. Expansion with our existing clients was the key component, with strong demand in trading, workstations, and markets data across the buy side, banking, and wealth. With that, let's review the quarterly results in more detail. Starting with our regional performance, in The Americas, organic ASV grew 6% this quarter driven by asset managers and wealth. Within this region, we are seeing increased demand for our portfolio life cycle solutions and AI-ready data, both from existing hedge funds and new ones coming on board. In EMEA, organic ASV grew 4% this quarter. We had higher expansion with Performance Solutions and improved retention overall, both helping to offset some softness we experienced with asset owners in the region. In Asia Pacific, organic ASV grew 8%, up from 7% last quarter. Middle office solutions and AI-ready data were the key drivers here, as we're seeing regional firms increasingly investing in modernizing their tech stacks to compete globally. Now turning to our results by firm type. On the institutional buy side, we delivered 4% organic ASV growth, with broad-based strength across firm types. Asset managers led the way with multiple 7-figure wins and improved expansion with existing clients. Growth here was fueled by our trading solutions, performance, and managed services. Hedge funds accelerated again this quarter with strong demand for our data capabilities and front office offerings. Asset owners' growth was softer this quarter as we lapped the large outsourced CIO win in Q1 last year. We do continue to see selective opportunities where our Performance Solutions and client relationships are gaining traction. In wealth, we delivered 10% organic ASV growth in Q1, displacing incumbents with 6-figure wins spanning workstations, pricing, reference data, and analytics. This quarter, off-platform solutions, data feeds, APIs, and analytics integrations comprise an increasing portion of expansion. This validates our land and expand strategy as existing workstation clients embed FactSet content into their broader technology stacks. In deal makers, organic ASV grew 6% year over year. Banking drove the majority of the growth as clients expanded their use of our data feeds, APIs, and off-platform solutions. Across our banking franchise, we are seeing higher net seasonal hiring, driven by a strong M&A market globally. Corporates and PEVC also contributed to growth with both new business wins and improved retention. Integrated solutions are resonating and driving expansion within existing clients. This quarter, we are renaming partnerships and CGS to market infrastructure to better reflect the exchanges, data providers, and market participants we serve. Organic growth was 7% with robust data demand and continued strong issuance activity. We're expanding our client base and deepening relationships. Client count grew to over 9,000, up 9% year over year, driven by corporate and wealth additions. Retentions remained healthy at 91% for clients and above 95% for ASV. Our user base is now approaching 240,000, with wealth and asset managers leading user growth in the quarter, up 10% versus the prior year. Turning now to our financial results. First quarter revenues grew 6.9% year over year to $608 million, or 6% organically, excluding foreign exchange and M&A impact. Adjusted operating margin came in at 36.2% for the quarter. Adjusted earnings per share was $4.51, up 3% year over year, driven by growth in revenues and a lower share count, offset by a higher tax rate. Operating expense increased 9% year over year on an adjusted basis with a few key drivers. People-related expense rose $15 million or 7%, driven by higher annual merit increases and year-over-year lapping dynamics. Specifically, employees hired or acquired after Q1 of last year, including from Erwin and Liquidity Book, are now reflected in our full quarterly run rate. Sequentially, total headcount grew less than 1% in the quarter, concentrated in low-cost locations. Technology expense grew $13 million or 23%, driven by higher internal use software amortization and cloud expense. As we've discussed, we are concentrating investments in both growth and structural capabilities to expand our market leadership through product innovation. Our other expense categories remained well controlled. Third-party content costs increased $4 million to support new datasets for research workflows, while real estate expense rose $2 million due to lease renewals and a return to office expense. For a detailed breakdown of our expense progression and reconciliations, please reference the appendix in today's earnings presentation. I will now walk you through our investment priorities, which remain consistent with what we've outlined last quarter. We're allocating roughly two-thirds to growth and one-third to our internal infrastructure. The growth investments are targeted across firm types. First, we are building a more differentiated data universe, including enterprise data such as real-time feeds, pricing and reference data, as well as our own deep sector content. Second, we are deepening our client workflows, such as extending our strength on the adviser desktop into the home office functions for wealth clients, broadening our managed services offering, and connecting the trade life cycle through our modern EMS and OMS solutions. The structural investments are aimed to enable growth. First, we are upgrading our go-to-market tools and processes to accelerate our sales motion and increase activity levels. Second, we are modernizing core infrastructure, cybersecurity enhancements, AI-powered productivity tools, and performance-based incentives. These are intended to drive operational efficiency as we scale. These investments should strengthen retention and expand our opportunities with existing clients while positioning us to grow with new clients. To help fund these activities, we are executing on productivity actions Sanoke noted earlier, reallocating resources from maintenance to growth initiatives, managing headcount and third-party spend more rigorously, and implementing AI to automate routine processes. Together, these actions should produce sustainable expense savings. On capital allocation, we maintain a balanced framework, but in our priorities, growth comes first. We are deploying capital into product development, go-to-market capabilities, and infrastructure modernization to drive future growth. Our strong balance sheet gives us the flexibility to pursue these investments while also returning capital to shareholders. We ended the quarter with a gross debt leverage ratio of 1.4 times, and our consistent free cash flow generation supports both our growth agenda and capital returns. With our financial strength as a foundation, we are also committed to shareholder returns. Earlier today, we announced an increase to our share repurchase authorization from $400 million to $1 billion. During our first quarter, we purchased approximately 478,000 shares, leaving $860 million of capacity under the program. This increased authorization reflects confidence in FactSet's long-term fundamentals. We also paid a quarterly dividend of $1.10 per share today to shareholders of record as of November 28. In total, we've returned $554 million to our shareholders over the last twelve months through dividends and buybacks, and we remain committed to delivering strong returns while investing for growth. Let me finish with guidance. We are reaffirming our previously issued FY '26 guidance across all metrics, both GAAP and adjusted. Clearly, Q1 was a solid start, and we are encouraged by continued client demand. So this sets us up well to deliver on full-year targets. Looking ahead, our pipeline remains healthy, and we are confident in our ability to convert opportunities and successfully close on key renewals. With much of the year still ahead of us, we are maintaining a prudent and conservative approach to guidance. We are focused on executing against these commitments and will provide updates as we gain additional visibility. On quarterly phasing, we expect Q2 operating margins to reflect the step-up in investment outlined earlier as we bring on headcount and technology resources. This is deliberate and keeps us on track for a full-year margin target. In summary, we achieved a strong Q1 with a healthy demand environment, disciplined investments in growth, and financial strength to deliver sustainable shareholder returns. Thank you for your time today. Operator, please open for questions. Thank you. Operator: As a reminder, to ask a question, please press 11 on your telephone. Our first question comes from the line of Alex Kramm with UBS Securities. Your line is now open. Alex Graham, your line is open. Please check your mute button. Our next question comes from the line of Kelsey Xu with Autonomous Research. Your line is now open. Hi, good morning. Thanks for taking my question. Kelsey Xu: I feel like recently there's been a lot of discussion around FactSet's competitive positioning versus AI startups. I'm actually more curious to hear your perspective on how FactSet is positioned amongst the Big Four data incumbents. I think everyone is investing in AI infrastructure. Everyone's launching new AI products. And FactSet is a smaller one of the bunch. So just curious to hear your strategy to maintain share or gain share with an incumbent. Sanoke Viswanathan: Thank you, Kelsey, for that question. I'll reiterate what we said earlier, which is that we are very confident, very, very confident in what we view as proprietary assets that we have. Both in terms of data as well as tools and analytics, what we bring to bear, there is a significant amount of capability that we bring that is not disruptable by others. At the same time, we also partner very actively with the full range of the AI ecosystem from the hyperscalers to startups. And we view the distribution through those as complementary to our existing distribution. I'll just take a couple of examples and talk about how we think about our strategy. When you look at our workstation, we view the workstation as a channel that distributes our data just like we distribute data through data feeds and through APIs. At the same time, as clients are starting to move into production workloads with AI, they demand security. They demand entitlements. They want a container through which they can consume their AI in a safe and secure way. All of which the workstation does and has been done for decades. So what we are really seeing, and this is evident in our strong quarter you just saw, and in the pipeline that we see, there is a huge amount of demand from clients. From our core existing clients, who've been through, I would say, months, if not years of trialing and experimenting with different AI solutions, coming to us and asking us to be a consolidator of these solutions. And really driving demand. And we've seen multiple five-year and seven-year contract renewals from some of our largest clients where AI is a key component of what we are going to be delivering for them. And let me ask Goran to add a little bit more color to this. Goran Skoko: Yeah. Kelsey, just in terms of how do we stack up versus the established competitors, we feel strongly about our competitive position. We are well-positioned to take share. We keep investing in our content assets, and, you know, we are pleased with the progress of some of those that really are the key to taking share, especially if we have time, you know, price reference data and things of that nature. And data solution was a big driver of the Q1 results. I hope that answers your question. Operator: Thank you. Our next question comes from the line of Faiza Alwy with Deutsche Bank Securities. Your line is now open. Faiza Alwy: Hey. Thank you so much. Good morning. Sanoke, thank you for your detailed comments regarding your priorities. A few things stuck out to me regarding, you know, commercial excellence. You talked about sort of simplifying pricing, packaging, pricing to value. And some of the changes around, you know, sales incentives. And it sounds like you're saying it's already led to, you know, faster sales motion and a richer pipeline. So we'd love to hear a little bit more, sort of bring to light some of the changes that you have either already incorporated and, you know, the early results that you're seeing. Sanoke Viswanathan: Thanks, Faiza. Yes. We are actively at work on a whole set of levers across the entire sort of sales enablement and Salesforce effectiveness. Incentives were one of the first things we worked on in this last quarter. And we've really aligned our incentives across the board, certainly in sales, but even more broadly across the company. To focus on the motions that we are looking to achieve. So first, just, new business development. There's a real renewed vigor and energy with which we are attacking new business development all the way up and down the funnel. And we are seeing significant expansion in our top-of-the-funnel lead generation coming out of that. The second area is obviously cross-selling and upselling, so driving retention and expansion in our core clients. This, we are seeing a big pickup, and the energy in our sales teams is palpable. We are seeing faster sales motion. It is definitely aided by the fact that our AI products are resonating. And there is an urgency in clients as well to move faster in terms of capturing the value from those products. And in terms of some of the other levers I spoke about, we have a lot of work ahead of us. We are investing in our systems. We are applying more analytics to understanding where we are trending in terms of client usage of our products. And being able to flag and ultimately reduce the risk of churn. So we see good upside from this coming through in the future quarters. And, certainly, the idea is to build a sustainable long sort of high-performance commercial engine. Operator: Our next question comes from the line of Alex Kramm with UBS. Your line is now open. Alex Kramm: Hey, guys. Hopefully, you hear me now on this line. Seems like you are. You hear me? Sorry. Yes. Yes. All clear. Sanoke Viswanathan: Alright. Good. Sorry. Technical difficulties today. Alright. Anyways, I think this was asked when I disconnected, but the other question I'm getting related to AI a lot when it comes to you guys is also how the hiring picture is gonna look for your customer base in the future because obviously, not only you, but your customers are talking about using AI for efficiency. And, you know, I think 50% of your business is still a desktop business. So maybe you with your discussions you've been having with clients, where do you hear that the most? Like, what client types do you think you can actually see some maybe a customer reductions in terms of the seat? So and how do you stack up in those areas? Meaning, you know, where do you see the biggest reduction of force, and how does this impact your kind of desktop-related businesses? Sanoke Viswanathan: Oh, good. Thanks, Alex. Yeah. Look. As I said, I've met with dozens of clients now around the world and across all our firm types. And, certainly, I'd say there's a huge amount of experimentation and testing out and piloting of various AI solutions. What we're seeing on the ground in terms of real commitment and, you know, commitment of the larger dollars though, is to folks like ourselves. Ultimately, clients are looking for ways in which they can augment their FactSet solutions. And our own AI products are resonating. We are not seeing yet any real reduction in headcount. Frankly, not even in banking where there has been a significant amount of discussion about it. What we are actually seeing this season is a strong recovery driven by the M&A recovery more broadly. We're actually seeing increased headcount, increased hiring of bankers, and, by the way, increased usage of all of the digital tooling including our AI products. So our banking AI products, for instance, have seen over a 100% in terms of usage growth just quarter on quarter. So I actually think what is really likely to play out is that we are gonna see consumption growth, which we are very well prepared for because of the way in which we have structured our contracts with clients. And an increase in headcount as well. Again, I don't have a crystal ball, but so far, we're not seeing any reductions. Certainly discussions about it, and there is an expectation that there'll be greater efficiencies. We are seeing those efficiencies, if they are already coming through, being put back into attempts to gain market share by our clients in our end markets. Operator: Our next question comes from the line of Manav Patnaik with Barclays Capital. Your line is now open. Manav Patnaik: Thank you. Good morning. I just had a question on the slide you had on the margin impact for the 2026 investments. Just kind of following up, what is the cadence, I guess, by quarter we should be expecting on that 250 basis point gross investment? Like how much is done this quarter, for example? And then, you know, are these one-time investments? Or should we anticipate, like, 2027, 2028, etcetera, having more of these as well? Sanoke Viswanathan: So, Manav, I'll take the second part of that question, and then I'll ask Helen to cover the cadence through this year. So just to recap the sort of the nature of our investments, we have a good chunk of investments going into foundational elements. Broadly put, the foundational elements into two types. We are investing in our sales incentives as well as broad incentives across the organization. So we can attract and retain top talent. And the second, we are investing in technology infrastructure. So both cybersecurity as well as resilience for the critical infrastructure that we are providing for our clients. Both very essential to the core business that we deliver. So these are strong foundational enablers that set us up well for future operating leverage and for scale. The bulk of the investments then is growing into very specific targeted growth areas. Both on the content side, so explicitly expanding our datasets, whether it's pricing and reference data, real-time data, deep sector data, and, frankly, continuing to invest in the AI readiness of our data and on the other hand, on deepening our workflows across the portfolio life cycle both in the wealth space as well as in investing in areas like our trading and, you know, OMS and EMS systems. So these investments all have clear line of sight into direct line demand. So we feel very good about this level of investment. And we are not planning to change this level of investment the rest of this year. I think the idea is to, you know, we have a solid investment plan. And we expect that the benefits of this will play out in future years. You know, about the longer-term investment path, that's linked intrinsically to our long-term strategy development, which we are working actively on. I will come back and share more about that in future quarters. So let me turn it over to Helen to hit the cadence for 2026. Helen Shan: Thanks. And thanks for that question, Manav. So we're pretty pleased with the progress we've made on our cost management program thus far. Those are the productivity benefits that we referred to earlier. And when we think about the full-year phasing, when we look at, for example, technology costs, which we would expect to continue to increase, amortization of capitalized software is increasing through the year, and that really reflects our prior investments. And then also the full-year run rate from recent acquisitions are gonna start to lap going forward as well. So those are things that are impacting the phasing. When we think about the strategic investments, they're really back-half weighted across three areas: the incremental headcount, software infrastructure, and then also professional services, which are really more largely one-time in nature. So we don't usually provide quarterly guidance as you know, but you can sort of expect that similar pattern that we saw last year. That being said, Q4 can be impacted, positive or negatively, depending on our performance, which is what happened last year. But that's how I would think about the impact of margin over the rest of the year. Operator: Our next question comes from the line of Shlomo Rosenbaum with Stifel. Your line is now open. Shlomo Rosenbaum: Hi. Thank you very much. I had a broader question just on the environment. It seems like during the quarter, the company took a step forward in the organic growth in each of the geographic units. And what I'm trying to understand is how much of that is from the, you know, Sanoke, maybe you're lighting a fire under people more, you know, over the near term in terms of closing some of the business and getting things done. And how much of it is that you're really seeing an improvement out there in the environment in general? And I know that's not it's very hard to quantify it, but maybe, you know, you can give us some thoughts on, you know, what you're seeing with the environment versus how much of it is company-specific success. Sanoke Viswanathan: Yeah. I'll ask Goran to comment on this and add to it. But let me start by saying that we're seeing very good positive sentiment across the board. This high conviction we are seeing from our clients in our products and solutions. And the pipeline is certainly much stronger at this point in the year than it was this time last year. So we're quite pleased with the sales cycle. We're seeing a very diversified pipeline across firm types, which is giving us confidence that, you know, we don't see any risk to any particular type of situation. And frankly, it's the some of the initiatives we are undertaking is leading to better retention. So to your question, it's a complementary situation where, you know, there's certainly a bunch of things we are doing, which is helping our own organic pipeline both in terms of retention and expansion. The market environment is strong, and we see that in customer sentiment. There's lots of demand for new data products. There's expansion in the ways in which clients are looking at consuming our data and applying it to work. We're seeing a growing demand from the technology offices of clients, data science teams, teams that were traditionally not perhaps, you know, in front of a FactSet workstation, but are starting to consume our data in significant quantities through new channels, whether it is APIs, direct data feeds, cloud connectors, MCP servers, etcetera. Goran Skoko: So, Shlomo, yeah, as Sanoke said, it's a little bit of both. You know? So the environment is more positive, more constructive. But, you know, I think it's also the things that we are doing. Investments that we have made are resonating. So we have seen an improvement in retention in banking, for example, and, you know, I would attribute that to our investment in aftermarket research and deep sector, which is certainly helping. Our trading solutions are contributing significantly, so we are seeing better diversification across the product lines in terms of contribution. And then, you know, the client demand is increasing. We have seen some positive impact from regulations in China, and we are seeing, you know, deals closing pretty fast. And, you know, and I think demand for our content is increasing in that region significantly. So it's, you know, well diversified in terms of contributions, and we are pleased with the progress so far. Operator: Our next question comes from the line of Andrew Nicholas with William Blair. Your line is now open. Andrew Nicholas: Good morning. This is Tom Rodsdon for Andrew Nicholas. Thank you for taking my question. I was wondering if you could speak to how AI contributed to your AI product contributed to ASV growth in the quarter. And kind of any color you could add on how it's driving new wins, displacing incumbents, or just helping retention? Thank you. Sanoke Viswanathan: Thank you for that question. As we said last time, we've stopped calling out our AI products separately as a line item. And, candidly, it was because we are seeing AI just deployed everywhere. So across the board, we look at our solutions that we're delivering both for the institutional buy side and wealth management as well as on the sell side. We're seeing AI consumption just being a real complement and an accelerator. It's a real tailwind to the conversion of our core products as well. So it's definitely adding to the mix. And I'd say I'll point to adoption as probably the best way to describe the effect it's having on our clients. Just the AI products we launched in this year, so if you look at what we launched in the first quarter of back in January, February, March, sequentially, they've been growing at a very nice pace. Just this quarter, we saw the growth rate and adoption of all of that at over 45% just quarter on quarter. And we're just at the start of this journey, and we are both investing in new products as well as continuing to distribute and enhance these products. So we see it as a real tailwind for the overall business. Operator: Thank you. Our next question comes from the line of George Tong with Goldman Sachs. Your line is now open. George Tong: Hi, thanks. Good morning. You talked about leaning into product initiatives like ingesting data better, modernizing your tech platform, and driving service team efficiencies. At the same time, you're investing in the sales and tech infrastructure, and that's causing operating margins to decline about 150 bps for full-year fiscal '26 just based on guidance. How do you think about balancing investments with your ability to drive margin expansion? Sanoke Viswanathan: Thanks, George. The investments we are making are, you know, of two types. The structural investments we are making are going to help us in terms of operating leverage. So the example I gave about really organizing all our applications into a new form where they are able to leverage a common technology infrastructure is centrally run. This takes a lot of the toil away from our developers at the front end and puts time back in their hands, which they can focus on really cutting-edge product development, which then creates that sort of flywheel effect for us of being able to ship products faster. So that investment, the structural investments are key to driving operating leverage. The growth investments, as I said earlier, are directly aligned to client demand. We are investing in our content. We are investing in our delivery mechanisms and our work, and we're investing in AI. Right? So the combination of all of this is gonna directly resonate with clients as it has, as you've seen in the quarter. And we see a strong pipeline throughout the year. So we're really balancing these two investments. And we see value from both, both in the short term, but even more so in the medium to long term. Operator: Thank you. Our next question comes from the line of Toni Kaplan with Morgan Stanley. Your line is now open. Toni Kaplan: Thanks so much. The organic ASV growth has been accelerating for the past three quarters and is better than I was expecting in this quarter. And so just based on the guide, it looks like you're expecting it to decelerate from the current level, and this is despite sort of the confidence and momentum, good pipeline, and the investments. And so I was just wondering, is this just conservatism or is there something that you're seeing that would imply that growth slows towards the end of the fiscal year, maybe it's the tough comp. Just wanted to understand what would drive the, you know, the guidance or, you know, not to be a little bit higher and sort of what factors might go into, you know, sort of getting to the low end of the range versus the high end of the range on organic ASV? Thanks. Sanoke Viswanathan: Thanks, Toni. We remain very confident, as we've said, in the strength of the pipeline. Having said that, it's really early in the year. And there is a significant amount of business to be, you know, acquired throughout the rest of the year. So, you know, we want to be prudent, and we are, obviously, you know, remaining very focused on winning deals, you know, executing well in the market. And we hope to come back in future quarters and, you know, continue to support this sort of growth trajectory that we have been on in the last three quarters. Operator: Thank you. Our next question comes from the line of Jeff Silber with BMO Capital Markets. Your line is now open. Jeff Silber: Thanks so much. I really appreciate, I think it was slide seven in your deck where you try to calculate what the, you know, of your products and services are proprietary versus non-proprietary. Can you give us a little bit of color how you came up with what exactly went in each bucket? Sanoke Viswanathan: Sure. Thanks, Jeff. As we show in the slide, you know, we have the vast majority of our business as proprietary. And I'll spend a couple of minutes just explaining, you know, how we've gone about the analysis. So as you can tell on the slide, 40% of our business is intrinsically linked to client proprietary data. We bring our proprietary models, our analytics, our solutions to work on their data, which is obviously proprietary, and we feed it back in terms of high quality that then feeds a number of downstream workflows. A good example is portfolio analytics. It's what we do with our adviser dashboards on wealth management advisers' desktops. We're here, we are really supporting millions of portfolios of end clients that our advisers are managing and advising on. We are enabling them to do their jobs better. So that's 40% clearly proprietary. The remaining 60% of the work we do and of our business is data that we distribute through multiple formats, the workstation being a flagship channel. But we also deliver through APIs, through other feeds, and through more and more modern channels. When you look at the far right on that page, the 10% that we are really saying, you know, we are holding a high bar and saying that it's not proprietary, this 10%, we are labeling it enhanced and curated. You could technically access the core data from public sources. But as you can see on the page, there are some very strong branded products there with a high degree of client loyalty to FactSet. An example would be StreetAccount, an example would be Shark. It would be GeoRev. Even these are enhanced with a lot of FactSet methodologies and content and humans, for example, street account reporters, who are working every day to deliver these services. But we're being intellectually very rigorous in saying these can technically be accessed through other sources because the raw data is publicly available like news and filings and so on. That brings us to the 50%, what we are calling proprietary and enriched. So why do we say this is proprietary? This really is either because the data is proprietary, as in the case of QSIP, or that the data is enriched significantly with our proprietary methodologies and know-how. I'll give you a very simple example. Some of our strongest franchises, whether it's identifier assignment, benchmarks, normalized fundamentals, instrument-level cap structures, event-driven data, regulatory data sets, all of these, these are not just historical artifacts. We rely on ongoing skilled domain expert labor and proprietary methodologies that are applied to this every day, every minute, and often in milliseconds to actually deliver very high-quality structured intelligence to our customers. So examples are the Revere, you know, business industry classification, right, our BICs, which is the industry gold standard for industry classification. It's our real-time exchange and pricing and reference data feeds. Our private capital data on private companies. Deep sector data. And, obviously, our absolute flagship products are standardized and point-in-time fundamentals and estimates, which is the gold standard for fundamentals in the market. Operator: Thank you. Our next question comes from the line of Surinder Thind with Jefferies. Your line is now open. Surinder Thind: Thank you. Sanoke, I just wanted to kind of ask about kind of the idea around medium-term targets here. So as you work towards establishing them and you think about the growth in the margins, like, what are some of maybe the key considerations you're exploring here? It just seems that, like, with the pace of change, it's accelerating, you know, how things might look out two or three years. There's just a lot of uncertainty. So would you be even able to build a medium-term outlook that you can have confidence in? Sanoke Viswanathan: Absolutely, Surinder. This is our, as you looked at my priorities that I described earlier, spending a lot of our time working on our strategy and our long-term vision. Of course, there's uncertainty in the marketplace. We like this uncertainty because we see the trend of opportunity in it. We are very well positioned to take advantage of the changing dynamics, the form factor changing, the addition of new content sets, opening up of new end markets. We are excited by the opportunity set in front of us. And our strategy is working the way we are developing it, which we'll, of course, come back and share in future quarters, is designed to find ways in which we can differentiate ourselves better from competition, from our traditional and new competition, and finding ways in which we can capture new vectors of growth and continue to sweat our existing assets and capabilities better and capture more upside from those. So I do feel very confident that we can come back with medium-term guidance in the future quarters. Operator: Thank you. Our next question comes from the line of Jason Haas with Wells Fargo. Your line is now open. Jason Haas: Hey, good morning, and thanks for taking my question. Based on some of my comments, it sounds like you're selling more AI-ready data through feeds and APIs and presumably, your clients are gonna be using that data with their own AI solutions. And I think there's a thought out there that this would be a first step to potentially those clients not needing as many workstation subscriptions. So I'm curious if you could comment on that. And then, it's related, so I wanna also ask are you able to talk about how the margin on those, like, feeds business compares to the margins when you sell a workstation product. Thank you. Sanoke Viswanathan: Thanks, Jason. So a couple of things. The distribution of our high-quality data that is now ready for AI consumption, so AI models can really read the data and make sense of the data because of all the enrichment we've done with the metadata to it, is certainly a growing opportunity for us. We don't see it as a risk of cannibalizing our existing channels. For a couple of reasons. As I said earlier to one of the earlier questions, we see the workstation as a channel. It's a flagship channel. But ultimately, it's a channel for distribution of the content. And we are well prepared with any new channel of consumption. And therefore, we will meet our clients' demand where they want us to meet them. If it is an MCP server, we'll deliver data through the MCP server. If it is the workstation, it is the workstation. What we ourselves expect is that there's going to be more of both. Because anytime we see digital adoption scaling, as we have seen historically with other sort of technology trends, one plus one equals three. There's even more demand. The end markets consume the data in multiple different ways. Now the other point I'd like to point out about the workstation is the workstation is deeply, deeply embedded in the workflows of our clients across the sell side and the buy side. So it's not just a portal where you look at the data. It is deeply intertwined in the investment workflows that our clients pursue, and we see the components of consumption through other channels actually complementing it and being ultimately brought back into the workflow that the workstation is anchoring today. So that's how we see this evolving. And, of course, we are well positioned in whichever way the market evolves. As far as the margins are concerned, you know, we see strong margin opportunity on both sides. Right? The workstation is a high-margin product. But so are these data feeds through other channels. And we continue to anticipate that both will continue to deliver very strongly for us on the operating margin front. Operator: Thank you. Our next question comes from the line of Scott Wortzel with Wolfe Research. Your line is now open. Scott Wortzel: Thank you for taking my question. Just wanted to ask on sort of private market data offering. And there's been a lot of, I think, investment in the space from yourselves and your peers as well in terms of increasing the magnitude of data that you have on private companies. So just wondering how you sort of feel about your competitive position with your private markets data and if it is an investment priority for you over the course of the next twelve months here. Thanks. Sanoke Viswanathan: Thanks, Scott. Private capital is clearly an area that we cannot ignore. And we've been investing in it already now for multiple years. And we have a very strong position now in the quality of our datasets that we're delivering. We cover over 10 million companies in our, you know, private company database at a very high-quality level similar to the quality standards I talked about earlier when we talked about our proprietary data. And that way, if you think about how we operate and how we aim to support the client base, we think of it from the pre-deal stages through the deal-making stages and into the post-deal sort of spectrum of activities. On the buy side, obviously, because of our strong position in portfolio analytics, we have a very privileged position to support clients as they look at their total portfolio views across public and private assets. And, you know, the data that we are today providing on private capital is enabling our asset owner clients and our asset manager clients and insurers to look at the risk in a normalized fashion, which historically has been very difficult. And with some of the market events that are happening, there is a growing need for risk assessments at a much greater frequency, which is playing well to our strengths in the space. Operator: Our next question comes from the line of David Motemaden with Evercore ISI. Your line is now open. David Motemaden: Hey. Thanks. Good morning. I wanted to just ask. It sounded like the pipeline's good. The environment is getting more constructive. Some of the changes to sales incentives and product investments have been gaining traction. But could you just help me reconcile that with the only seven net new clients that were added this quarter? Sanoke Viswanathan: Sorry. Can you repeat that, a bit? We didn't hear it clearly. David Motemaden: Yeah. I just it sounded like the pipeline is good. The environment is constructive for your clients. The product investments have been gaining some traction. But when I look at the net new clients this quarter, it's up by only seven. That's the, you know, the lowest amount of net new client adds you guys have had in quite some time. So, you know, is there, you know, so it seems like retention is solid, but the new logo adds might be lagging a little bit. So I was wondering if you could just explore that a little bit. Sanoke Viswanathan: Sure. Sure. Thank you. The first I would say the client count is broadly in line. It tends to be a little bit lower in the early part of the year. And we are not worried about the client count number itself. We actually have a very strong pipeline of new business opportunities. And if you look at our ASP growth from new business, it's actually very, very strong. So I wouldn't worry much about the client count number. And we actually see a really strong pipeline on that front through the rest of the year. And maybe, Goran, you can add a little bit to that. Goran Skoko: Yeah. David, then if you look at historically, Q1 is a slower, you know, slower in terms of net client growth, but I would just reiterate what you're saying. We're seeing lots of positivity. We're seeing a strong pipeline and, you know, really expect to deliver for the rest of the year. Operator: Thank you. This concludes the question and answer session. I would now like to turn the call back over to Sanoke Viswanathan for closing remarks. Sanoke Viswanathan: Thank you, operator. And thank you, everyone, for joining the call today. We are still early in this next chapter, as you can see, for FactSet. And while there's much work ahead of us, the opportunity in front of us is very clear. Our structural advantages give us a strong foundation, and we are mobilizing with urgency to execute against these priorities. You will hear more from us in the coming quarters as we move forward with speed and discipline. I want to thank once again all our FactSetters for your continued commitment to our clients. Operator, that ends today's call. Operator: This concludes today's conference. Thank you for your participation. You may now disconnect.
Operator: Hello. And welcome to the FuelCell Energy Fourth Quarter of Fiscal 2025 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Keypad. I would now like to turn the conference over to Michael Bishop, CFO. You may begin. Michael Bishop: Thank you, operator. Good morning, everyone, and thank you for joining us on the call today. This morning, FuelCell Energy released our financial results for the fourth quarter and fiscal year 2025, and our earnings press release is available in the Investors section of our website at www.fuelcellenergy.com. In addition to this call and our earnings press release, we have posted a slide presentation on our website. This webcast is being recorded and will be available for replay on our website approximately two hours after we conclude. Before we begin, please note that some information that you will hear or be provided with today consists of forward-looking statements within the meaning of the Securities and Exchange Act of 1934. Such statements express our expectations, beliefs, and intentions regarding the future, and include statements concerning our anticipated financial results, plans and expectations regarding the continuing development, commercialization, and financing of our fuel cell technology, our anticipated market opportunities, and our business plans and strategies. Our actual future results could differ materially from those described or implied by such forward-looking statements because of a number of risks and uncertainties. More information regarding such risks and uncertainties is available in the safe harbor statement in the slide presentation and in our filings with the SEC, particularly the Risk Factors section of our most recent Form 10-Ks and any subsequently filed quarterly reports on Form 10-Q. During this call, we will be discussing certain non-GAAP financial measures, and we refer you to our website, our earnings press release, and the appendix of the slide presentation for the reconciliation of those measures to GAAP financial measures. Our press release and a copy of today's webcast presentation are available on our website under the Investors tab. For this call, I'm joined by Jason Few, our president and chief executive officer. During our prepared remarks, the leadership team will be available to take your questions. I'll now hand the call over to Jason for opening remarks. Jason? Jason Few: Thank you, Mike, and good morning, everyone. Thank you for joining us on our call today. Our fourth fiscal quarter closed a year of meaningful progress for FuelCell Energy. Starting around twelve months ago, we began a series of thoughtful restructuring measures to sharpen our focus and strengthen the fundamentals of our business. Through this series of tough decisions to streamline and focus our organization, today, we are operating with greater discipline, lower cost, and strategic clarity. We are further along on our path to profitability. The work is not finished. But we believe we are on the right track. During this time, the surrounding market environment has undergone significant change as well. Presenting what we see as one of the greatest business opportunities of our generation. The demand for more power to accommodate data centers, industry, and communities, we believe that demand plays directly to the strength of our technology: clean, resilient, near-silent continuous power. We continue to focus on converting our pipeline into executed contracts, scaling our manufacturing capacity at our Torrington facility, and advancing product improvements that differentiate us from our competitors. We are committed to this work and we are doing it with urgency and with clear focus. That focus is delivering distributed, always-on, low-emission power through our carbonate fuel cell platform. Our technology is proven at scale and we are aligning our business around this singular strength. As you all know, demand for power is accelerating quickly, driven by the exponential growth of AI data centers, and digital infrastructure that is outpacing the capabilities of the existing grid. This demand is reshaping the market and it requires solutions that can provide clean, reliable power where it is needed. The need is clear, urgent, and investable. With decades of operating experience, and a differentiated electrochemical platform, we believe we are well-positioned to meet this need and successfully compete for the opportunities emerging in this rapidly growing market segment. Please turn to slide four. As you view our fourth quarter, and full fiscal year results, please keep the following five points in mind. Number one, we are focused on our data center strategy. AI-driven demand is reshaping power requirements across the data center and digital infrastructure ecosystem. We are actively engaged with participants across the ecosystem to make them aware of our capabilities and that we are prepared to provide utility-scale reliable, and cost-competitive clean power for these types of energy-intensive applications. With our collaboration with Diversified Energy, the potential future collaboration with Inuverse announced earlier this year, and a growing pipeline of potential data center opportunities in The US and Asia, we believe we have strong momentum heading into 2026. Number two, we are scaling manufacturing capacity. We believe that our path to profitability runs through higher utilization at our manufacturing facility in Torrington, Connecticut. As we increase production, we expect our cost structure to become more efficient. And we expect this to translate into positive adjusted EBITDA once we reach an annualized production rate of 100 megawatts per year. Entering fiscal year 2026, our focus is on margin expansion driven by disciplined operations and greater production throughput. I will provide additional detail on our scalable manufacturing capacity later in the presentation. Number three, we are building financing capacity to enable growth. We believe that the $25 million financing provided by XM to support our GGE project in Korea demonstrates a model that can be used for future projects both in Korea and worldwide. The current US administration has expressed its intention to use Ex I'm to support the global adoption of American technologies like ours, and we believe this financing signals Ex I'm belief in our utility-scale power generation technology. We are pleased to have XM as a financing partner. We are entering 2026 with a strong balance sheet and we expect to achieve financing flexibility through proven models like the XM financing and other financing alternatives. Number four, we believe we are positioned to win in emerging power markets. Policy certainty under the One Big Beautiful Bill Act improves project economics, supports long-term adoption, and allows current and potential customers to make investment decisions. Furthermore, our core carbonate platform provides reliable, clean power that can be dispatched when needed. And can be situated close to users. An advantage for customers prioritizing dependable energy, lower emissions, and flexible site options for crucial operations. And number five, we are entering fiscal year 2026 with strong momentum. Commercial momentum, policy clarity, and an expanding opportunity set gives us confidence. Our success in fiscal year 2026 will depend on execution, converting our pipeline into executed contracts and backlog into revenue. With the discipline and focus we've been building across the company. Transitioning to slide five. We succeed when we stay focused on solving problems for our customers. Customers turn to us when they need to pursue business growth without compromise. And when power constraints threaten timelines, economics, or operational reliability. Increased demand is not the only challenge they encounter. There are numerous obstacles facing customers today that can hinder their economic growth. Utility interconnections now routinely take five to seven years or more, and new substation builds follow a similar timeline. Traditional gas turbines face three to five years of procurement and construction before they can deliver behind-the-meter power. Our carbonate fuel cells avoid these bottlenecks. They can be deployed without requiring new high-voltage interconnections, can be brought online more quickly, and can deliver a cost of energy comparable to turbines and other engine alternatives with reduced permitting risk. These delays are further compounded by emission restrictions and limited site availability. Our core carbonate platform addresses those issues directly. They produce virtually no NOx or SOx, and offer unique carbon capture capability. In addition, our 1.25 megawatt power blocks allow customers to scale capacity as their needs grow. Traditional generation projects often trigger resistance, adding years of uncertainty. Our distributed carbonate fuel cell platform sidesteps these issues. It requires a smaller footprint, operates quietly, and can operate near the point of use, which may help to mitigate opposition and accelerate time to power. Let's move to slide six. These challenges and the way our customers need to solve them shape how we operate. We have concentrated our efforts on our Carbonite FuelCell platform because it not only is ready now, but also directly addresses the constraints I just outlined. It is proven across commercial deployments of varying scale, and we continue to refine it through real-world operating experience. Our platform also benefits from a strong US policy tailwind, including the reinstatement of the investment tax credit and incentives for carbon capture, an important point of differentiation compared to other generation technologies. And while we are doubling down on what is a commercially ready platform, we are also investing selectively in innovations that we believe will better position us for what comes next. These emerging technologies have the potential to drive the next phase of our growth and strengthen our long-term competitiveness. Now on to Slide eight. I wanted to highlight one example of the momentum we are carrying into 2026. We have established FuelCell Energy as a leading partner in South Korea's growing fuel cell energy economy, the largest in the world. Today, we have more than 100 megawatts of power projects in South Korea in our backlog, with another 100 megawatts under MOU. Our ongoing work with GGE continues to advance, supported by the $25 million in new Ex I'm financing for the next phase of the project, including additional module shipments and service. We also see a clear path for additional repowering opportunities, and we are proud to contribute to Korea's evolving energy landscape. Let's go to slide nine. As we look ahead to fiscal year 2026, we continue to see a compelling case for fuel cells in data center applications. Grid constraints, rising workloads, and pressure to manage energy costs are all increasing demand for reliable, efficient, and scalable on-site power. Our carbonate fuel cell platform addresses these needs directly by delivering baseload reliability, modular scalability, and meaningful permitting advantages. And as data centers push more computational power, our integrated absorption chilling and heat offtake could help manage thermal load while maintaining system performance. It is our assessment that our carbonate fuel cell platform additionally offers extended stack longevity, reliable biogas functionality, minimal performance degradation, and sophisticated containment management. These features collectively facilitate cost-effective carbon capture solutions, particularly in large-scale applications. Additionally, as NIMBY concerns grow and data center operators are under pressure to expand, our fuel cells offer a low-profile, clean solution that provides greater flexibility for siting, that can help them move forward faster amidst community concerns. Let's move to slide 10. With this opportunity in front of us, we also believe we have the manufacturing foundation to meet it. Once we reach an annualized production rate of 100 megawatts per year at our Torrington facility, we expect to achieve positive adjusted EBITDA. Today, we are roughly 40% of the way there. And our backlog continues to build. Looking further ahead, we believe that the Torrington facility could accommodate an estimated annualized production capacity of up to 350 megawatts per year with additional capital investment in machinery, equipment, tooling, labor, outsourcing of certain processes, and inventory. As we entered the new year, we are executing with focus and momentum. We are focused on advancing meaningful opportunities in the data center market, scaling a manufacturing platform built for utility-level deployments, and moving steadily toward profitability with operational discipline. With that, I'd like to turn the call over to our CFO, Mike Bishop. Michael Bishop: Thank you, Jason, and good morning to everyone on the call today. Overall, we are pleased with the progress made during the year with revenue expansion, largely driven by repowering activities in Korea, expense reductions as a result of our restructuring plans implemented in fiscal year 2025, and balance sheet strength as a result of spending reductions and financing activities. Let's review the operating performance for the fourth quarter and fiscal year 2025 shown on Slide 12. In 2025, we reported total revenues of $55 million compared to revenues of $49.3 million in the prior year quarter, representing a 12% increase. We reported a loss from operations in the quarter of $28.3 million compared to $41 million in 2024. The loss from operations in 2025 was impacted by a noncash impairment expense of $1.3 million as a result of our previously announced restructuring plan. The net loss attributable to common stockholders in the quarter was $30.7 million compared to a net loss attributable to common stockholders of $42.2 million in 2024. The resulting net loss per share attributable to common stockholders in 2025 was $0.85 compared to $2.21 in the prior year period. The decrease in net loss per share attributable to common stockholders is due to the benefit of the higher number of weighted average shares outstanding due to the share issuances since 10/31/2024 and the decrease in net loss attributable to common stockholders. Net loss was $29.3 million in 2025 compared to a net loss of $39.6 million in 2024. Adjusted EBITDA totaled negative $17.7 million in 2025 compared to adjusted EBITDA of negative $25.3 million in 2024. Now shifting to the full year results, in fiscal year 2025, we reported total revenues of $158.2 million compared to revenues of $112.1 million in the prior year, representing a 41% increase. This increase was largely driven by module deliveries to Goji Green Energy Company Limited or GGE under our long-term service agreement. During fiscal year 2025, we delivered a total of 22 modules to GGE. We reported a loss from operations for the year of $192.3 million compared to $158.5 million in fiscal year 2024. This increase is mainly attributable to noncash impairment expenses of $65.8 million and restructuring expenses of $5.3 million incurred in fiscal 2025 resulting from our previously announced restructuring plan. The net loss attributable to common stockholders for the year was $191.1 million compared to a net loss attributable to common stockholders of $129.2 million in fiscal year 2024. The resulting net loss per share attributable to common stockholders in fiscal year 2025 was $7.42 compared to $7.83 in the prior year. Adjusted net loss attributable to common stockholders, which excludes the noncash impairment expenses, restructuring expenses, and certain other noncash items, was $4.41 compared to $6.54 in fiscal year 2024. Net loss was $1.914 billion in fiscal year 2025 compared to a net loss of $156.8 million in fiscal year 2024. Adjusted EBITDA totaled negative $74.4 million in fiscal year 2025 compared to adjusted EBITDA of negative $101.1 million in fiscal year 2024, a reduction of 26% and over $25 million. We believe this improvement in adjusted EBITDA and adjusted net loss attributable to common stockholders reflects the early benefits of our cost savings actions and our sharper focus on our core carbonate platform under our restructuring plan. Please refer to the appendix in the earnings release, which provides a reconciliation of the non-GAAP financial measures, adjusted net loss, per share attributable to common stockholders, and adjusted EBITDA. Next, on slide 13, you will see additional details on our financial performance during the fourth quarter and backlog as of 10/31/2025. In the graph on the left-hand side of the slide, revenue is broken down by category. Product revenues were $30 million compared to $25.4 million in the comparable prior year period. This increase was primarily driven by revenue recognized under the company's long-term service agreement with GGE for the delivery and commissioning of 10 fuel cell modules. Service agreement revenues increased to $7.3 million from $5.6 million. The increase in service agreement revenues during the three months ended 10/31/2025 was primarily due to revenue recognized under the company's long-term service agreement with GGE. Generation revenues increased to $12.2 million from $12 million, reflecting higher output from plants in the company's generation operating portfolio during the quarter compared to the prior year period. Advanced technology contract revenues decreased to $5.5 million from $6.4 million. Now looking at the right-hand side of the slide, I will walk through the changes in gross loss and operating expenses. Gross loss for 2025 totaled $6.6 million compared to a gross loss of $10.9 million in the comparable prior year quarter. The decrease in gross loss for 2025 was primarily related to decreased gross loss from generation revenues, product revenues, and service agreement revenues, partially offset by reduced gross margin on advanced technology contract revenues during 2025. Operating expenses for 2025 decreased to $21.7 million from $30.1 million in 2024, primarily due to a $6.2 million decrease in research and development expenses, partially offset by a noncash impairment expense of $1.3 million. Administrative and selling expenses decreased to $15.2 million during the period from $15.9 million during 2024, primarily due to lower compensation expense resulting from the restructuring actions taken in September and November 2024 and June 2025. Research and development expenses decreased to $5.5 million during 2025 compared to $11.6 million in 2024. This decrease was primarily due to lower spending on commercial development efforts related to our solid oxide power generation and electrolysis platforms and carbon separation and carbon recovery solutions. On the bottom right of the slide, you will see that backlog increased by approximately 2.6% to $1.19 billion compared to $1.16 billion as of 10/31/2024, primarily resulting from the additions of the Hartford project and the long-term service agreement with CGN, Yocheng, Generation Company Limited or CGN, partially offset by revenue recognition during the year. Slide 14 is an update on our liquidity position. As of 10/31/2025, we had cash, restricted cash, and cash equivalents of $341.8 million. During the three months ended 10/31/2025, approximately 16.4 million shares of the company's common stock were sold under the company's amended open market sale agreement at an average sale price of $8.33 per share, resulting in net proceeds to the company of approximately $134.1 million. Subsequent to the end of the quarter, approximately 1.6 million shares of the company's common stock were also sold under the amended open market sale agreement at an average sale price of $8.37 per share, resulting in net proceeds to the company of approximately $13.1 million. Additionally, after the quarter ended, we announced a new $25 million debt financing transaction with the Export-Import Bank of the United States or XM, marking a continued commitment from XM to support the company's growth ambitions to deliver utility-grade power in international markets such as the collaboration with GGE in Korea. In closing, we continue to take disciplined steps to strengthen our financial foundation while focusing on a growing set of new commercial opportunities. Our strategy centers on commercial momentum, with the acceleration of data center opportunities, operational leverage through utilization and expansion at our Torrington facility with the goal of achieving positive adjusted EBITDA results while maintaining balance sheet strength through capital efficiency via financing structures including frameworks like those utilized with XM. I will now turn the call over to the operator to begin Q&A. Operator: Thank you. If you would like to withdraw your question, simply press 1 again. We ask that you please limit yourself to one question and one follow-up. Thank you. Your first question comes from the line of Dushyant Ailani with Jefferies. Your line is open. Dushyant Ailani: Hi, team. Thanks for taking my questions. One on just wanted to kinda think about how do you guys frame 2026 growth outlook. Do you think there's a potential to bake in any data center opportunity in 2026, or do you think more of you know, between 2027 and beyond? Story. Jason Few: Thank you for joining us today, and thank you for the question. As we look at 2026 and the overall data center opportunity, you know, today, we set we've got hundreds of megawatts of pricing proposals out across the whole digital infrastructure ecosystem, and that ranges from hyperscalers, utilities, power land developers, infrastructure players, and sponsors, kinda so kind of across the whole gamut of opportunities. And, you know, each of these opportunities are on their own timeline from a development and getting to an FID or closure. But we certainly believe that those opportunities will present in 2026 for the company. And be part of our growth story. Dushyant Ailani: Lovely. And then, just wanted to kind of talk about the capacity expansions. I think you said that you could increase the capacity to two fifty megawatts. Right? How how long would it take scale once you make that decision? Just trying to think that through. Yeah. So if you think about where we are today, we've always talked about our ability under our existing construct and what's there to do a 100 megawatts capacity. We're at 41 megawatts today run rate. So our ability to get to to a 100 megawatts is is really no real new capital investment to make that happen. What we talked about on the call today is getting to 350 megawatts. That's still in that same footprint. Of our existing Torrington facility. So although there will be some capital investment, we think it's fairly modest to get to the three hundred and and fifty megawatts, and we think that we can do that in a pretty short cycle window. And our expectation is that scale can happen in, you know, in the time frame of less than, you know, eighteen months or so to get that build out and get it done. Dushyant Ailani: Got it. Thank you. Jason Few: Thank you. Operator: The next question comes from George Gianarikas with Canaccord Genuity. Please go ahead. George Gianarikas: Hi. Good morning all, and and thank you for my taking my questions. So maybe just to pull that through a little bit with regard to data center traction. Can you just sort of maybe go into a little bit more detail as to how the conversations, with your DPP partners are are going? Like, any bottlenecks to to maybe signing a deal? Any and where you see maybe the most opportunity over the next six to twelve months? Thank you. Jason Few: Yes, George. No, thank you for the question. So I think maybe the way that I would answer that is I break it up into maybe two buckets. If you look at the work that we're doing with Diversified Energy, that's really our play or angle to provide a powered land solution to customers because they bring gas We bring power. And so it's all about offering whether it's a you know, a real estate developer or if it's another you know, data center developer or even a hyperscaler. That's looking to take advantage of that opportunity across the markets where diversified has gas infrastructure we're well positioned to deliver against that opportunity set. We don't see any constraints in our ability to deliver against that because we we have really good knowledge around what the gas position is, and we certainly know what our position to deliver power is from from a manufacturing capacity standpoint. With respect to kind of the broader data center opportunities and the conversations we're having, you know, it cuts across some direct conversations with hyperscalers. Also, with utilities, We also are having, like I said, you know, those conversations with infrastructure players and sponsors as an example. And what we're finding in those conversations is really a a strong interest in our distributed generation platform. Time to power is definitely a major thematic and and one that which we can meet. And thirdly, we're seeing really strong interest in what I would call the benefits of our level of modularity. Meaning that our 1.25 megawatt power blocks gives us the ability scale with those data center customers as they scale And it you know, as you know, that's not linear growth, necessarily in the way those data center scales, so having the modularity is really important. And the other big area that we're seeing is because of our operating temperature of our platform, we're seeing really strong interest to take advantage of our ability to integrate with Steam absorption chilling. To provide a really efficient way of cooling the data center. If you think about about third of the load in a data center goes overhead, So if we can you know, in a 50 megawatt data center, I think we can roughly take about five megawatts or so of power load off that requirement. That's material. And that's very attractive to those customers, and those are the kind of conversations we're having. George Gianarikas: Thank you. And may maybe as a follow-up, any update what's happening with ExxonMobil and your carbon capture opportunity? Jason Few: There. Thank you. Yeah. So on Exxon, you know, we've completed the construction of the modules that are set to be shipped to Rotterdam in support of the in Rotterdam with Exxon at their SO refinery in which we'll demonstrate capturing 90 plus percent c o two while simultaneously producing power in hydrogen. Which is unique No other technology can do that. And it's our expectation in the latter half of twenty twenty six that project will be up and running, and we'll be demonstrating that technology. And upon successful demonstration of the technology, which have a lot of confidence in, you know, we will you know, certainly work with Exxon to to think about how to go after and pursue commercial opportunities with carbon capture. George Gianarikas: Thank you all. Happy holidays. Jason Few: Thanks, George. Happy holiday to you too. Operator: The next question comes from Saumya Jain with UBS. Please go ahead. Saumya Jain: Hey. Good morning, guys. So what are the big changes, if any, that you'd seen across the South Korean market over the past year? And what's your outlook for that market specifically heading into 2026? And then on the data center side specifically, how are you seeing the South Korea market or Asian market in general vary from The US? Jason Few: Yes. Good morning, and thank you for the question. You know, in Korea, we obviously are are seeing really strong momentum across our opportunity to drive powering on our existing installed base there over, you know, a 100 megawatts of installed base. So we're fully taking advantage of that, and we're seeing strong, demand for that. We seek the Korea market, which continues to be the largest fuel cell market in the world, will remain attractive. As you know, we announced a an MOU earlier with InuVerse to, work with them on what they anticipate or trying to do will be the largest data center in the Korea market. And, you know, we're we're talk our efforts with them we think, will will help seed their growth in the market from a data center perspective. I think if you think more broadly about Asia, and and, you know, outside of The US, I think you're seeing very strong interest and demand in data center growth. And we think that the Asia market you know, in its spots, you know, between markets like Korea and Singapore and Japan and Malaysia, you're gonna see really strong data center growth. And and we're you know, you know, excited about the opportunities we're having in those or conversations we're having in those markets. Saumya Jain: Great. Thank you. And then could you provide more color on any carbon capture opportunities you are pursuing with other players like the one with Exxon or any other similar partnerships? Jason Few: Sure. So maybe you think about it in two ways. There's the work that we're doing with ExxonMobil, which is specifically focused on capturing carbon from external sources. So think about that refinery in Rotterdam where we're gonna capture carbon that is being admitted today from that refinery. Right? And in that effort, what we're doing in terms of capturing that external carbon Our commercial activities in that particular application will really start to take full post start demonstration of this technology with Exxon? Outside of that, though, we have you can think about it the way we about it internally is carbon recovery. And that's our ability to recover the carbon from the the fuels that we use to produce clean electricity. And there, we're having those conversations actually with many of these data center customers who are still very committed to decarbonizing. And so our ability to provide a very low emission profile with no SOX, NOx, or other particulates operating at a, you know, very low decibel level. All the things that you're hearing that are causing a lot of problems for these data center customers today. We address with our technology. And then we have the extra added benefit of being able to recover the carbon and then we can do lots of different things with that, with that carbon. Up to, you know, providing and selling it to an industrial gas company, to if we're a data center that's somewhere near a c o two, you know, pipeline, that c o two could ultimately be sequestered or used in some other way. And so we're actively engaged in those conversations with our industrial customers as well from a recovery standpoint. Saumya Jain: Great. Thank you for all the color, and happy holidays. Jason Few: Happy holidays to you too. Thank you for the question. Operator: The next question comes from Ryan Pfingst with B. Riley. Please go ahead. Ryan Pfingst: Hey. Good morning, guys. Thanks for taking my questions. Maybe a follow-up on the data center discussions in The U. S. Is it fair to say that customer readiness is the main hurdle for FuelCell to secure a data center customer at this point? Or are there other factors, we should be thinking about? I don't I don't really think it's a customer readiness issue, Ryan. What I would say is that it's a shift in the way these data center customers have procured power you know, throughout their history. And, you know, they've been they've been able previously to procure power from the grid. And that model has worked for them. It's the shift in the model that requires them to think about on-site generation And as they shift their business model, you know, they're being thoughtful about the way to do that. There's still, you know, thoughts around, you know, going completely behind the meter, or running grid parallel We're comfortable in operating in both of those environments, and and have done that and can demonstrate our capabilities in that regard. I I don't think it's a customer readiness issue. It's it's I think customers have now bought off on the fact that if they're gonna build new data centers and they wanna build those new data centers now, they're gonna need on-site generation to meet that demand. Ryan Pfingst: Appreciate that. And then shifting over to South Korea. Can can you talk about your expectations around timing for the Inverse MOU to the extent you're able to when we might see that convert to a firm order or even first revenue there? Jason Few: Yeah. I I won't get specific on on timing, but we think, we go throughout 2026, we'll have more to say about that opportunity as it developing. Appreciate it, Jason. I'll turn it back. Thanks. Thank you, Brian. Operator: The next question comes from Jeffrey Osborne with TD Cowen. Please go ahead. Jeffrey Osborne: Hey. Good morning. Just, maybe two lines of questioning on my side. One is on the data center side. Is there anything, Jason, that you need to still develop as it relates to the use case or the application? Yeah. I'm thinking, like, low selling or other features relative to, hospitals, college campuses, things like that. You know, as we think about our solution set to address the data center opportunity, don't really have anything that we need to develop because our our ability to integrate in a microgrid configuration to support load following, whether that be through batteries or super caps. We're very comfortable with being able to do that as as you know, we operate in a number of microgrid configurations today. So that's not a concern for us. And and we don't have plans on developing you know, best systems or or those kind of things as a company. And there's plenty of op you know, choices in the market, and we're gonna leverage those those market choices to integrate those solutions for customers. Jeffrey Osborne: Got it. If I'm hearing you right, then then pricing for data centers should be similar ish to what you've seen in in years past for other smaller applications? Given there's no additional equipment? Yeah. I think look. I think when we think about what we're offering to these customers although we aren't gonna be the the if you will, of the best system there are instances where we're bringing that full integrated solution to a customer so the pricing in some of those instances is gonna be all inclusive of of that. So I think you'll see different pricing based on what the customer is asking us to do in a straight just deliver power to me scenario, yeah, I think you'll see similar pricing than what we've been priced in the past, but we've done a lot of things to improve our our cost position. And and so, you know, we we think that we're very price competitive relative to other on-site generation alternatives you know, and that goes across, you know, the landscape including, you know, engines. And and maybe just to add on, and and I know you know this, Jeff, but, with the extension of the investment tax credit, this year, that provides, pricing, strength for us as well. The investment tax credit was extended in the big beautiful bill in July. That goes through at least 2032, and that's a 30% investment tax credit off of the capital cost. Perfect. Maybe just a a quick one for you, Mike. Two parter, but, to expand from a 100 megawatts in Torrington to the three fifty, I think you mentioned, do you have a ballpark of what that would cost? And then I think the ATM is fully utilized, share count's up. I don't know, 80% or so. Year on year. Is now a period of sort of relaxation on adding capital to the balance sheet and then waiting for the orders to come? Then maybe you need to revisit the ATM. Can you just walk us through the the cash consumption in fiscal twenty six and, you know, what what it would cost to add capacity and what what happens if you get some of these major orders that you're targeting? Sure. So maybe I'll go in reverse order, and thank you for the question, Jeff. So as far as as the balance sheet today, the company is quite comfortable with the cash position that we ended the fiscal year with. We ended with about $342 million of total cash on balance sheet. And then subsequent to the end of the year, we also announced a $25 million facility with XM. A follow on to the facility that we had done with them last year, which is really supporting deployment, internationally. And we obviously like those types of structures, and we'll look to do more more of that as we do more deployments internationally, but quite comfortable with our our current liquidity position as we sit here today. As far as the expansion, as Jake said and as we included in in the deck, we do have plans to expand Torrington up to three fifty megawatts That will obviously be paced by customer demand. Demands, but we, we have completed the planning for that. We are starting steps to, to enable us to do that expansion and are making capital investments this year. We include in our disclosures in 2026 that we plan to spend between $20 million to $30 million of CapEx, which gets us started on on that expansion path. And and as as we secure additional backlog and and go down that path of expansion, we will provide additional color around any additional investments. Jeffrey Osborne: I got it. So no no need for an ATM for now, or do you just have a good housekeeping add that just to be clear on that part? So as far as the ATM, the company has historically kept an at the market sales program on file. I don't anticipate that changing and we're not going to forecast potential potential financings beyond what I've already described. Makes sense. Appreciate it. Thank you. Michael Bishop: Thank you. Operator: Once again, if you have a question, it is star one on your telephone keypad. Your next question comes from Noel Parks with Tuohy Brothers. Please go ahead. Noel Parks: Hi. Good morning. You know, talking about the data center market, sort of what we see happening in the broader markets overall is just little bit more realization of there is some devil in the details that it seems the market needs to understand just to to really understand the the pace of the data center you know, rollout. And you know, at scale. And so I I guess one thing I was wondering, I think during the earlier in the call, you you mentioned sort of the emergence of, NIMBY issues. Which is I think, sort of a fairly new topic in in the last quarter or two. And I just wonder if or how those issues are are coming up in your potential customer discussions. And I'm also interested in particularly with utilities, you know, how some of them are are looking ahead to trying to insulate their maybe residential customer base from the the cost that they'll probably incur from ramping up the power supply to data centers. Noel, good morning. Thank you for for the for the question. You know, if you think about the maybe I'll I'll start with maybe the the NIMBY issue. So what are the things that cause challenges? Right? Things that cause challenges are are generation platforms that create poor air quality. We do just the opposite. Right? Because we don't combust the fuel. So that's a significant advantage. What's the other thing that causes the challenge? Noise. We operate at a very low decibel level. Think about maybe your air conditioner running at your home. Right? So we solve that issue. We're very efficient from a space perspective at 30 megawatts an acre. So we can be very efficient in terms of the power density that we deliver to these data center customers. In addition to that, we we do things that help offset even the the power demand. Like, we talked about our ability to deliver absorption chilling. So we can help reduce the amount of power that's needed for that data center. You know, beyond that, we we talked a little earlier on this call about ability to do carbon recovery to even further reduce the emission profile of the platform. And that remains you know, very important for many of these data center, customers or certainly the off takers of these data centers. So we think that our platform does a really good job of addressing the NIMBY issue And in fact, you know, we have examples of our platform being deployed right next to, you know, where people live. And it's not an issue. And we think that, you know, we can clearly deliver a solution to a data center developer or off taker that will minimize, if not eliminate, those issues that they see from the NIMBY standpoint. Right. Right. But it does lead me to wonder, whether there are any advantages regionally in your thinking about pursuing customers, I'm not sure if there's a connection area, what the the data center demand pickup is is looking like there, but just just sort of recognizing that you've done so many projects for sort of communities within your your fairly close radius, And so is that a possibly positive factor in getting new business? Look. I think being able to demonstrate to these data center customers where we have deployments close into communities and we don't have community complaints, is a real strength. So, you know, don't know that that's driving just a close in regional focus for us as our primary focus area, but it's certainly a leverage point for us as we tell our story to those data center customers. Beyond that, I think when you what we when we think about regionality and advantage advantages, you know, across The US, we have the ability to take advantage of the ITC, and we think that's a real positive. In some markets where we are also considered as a platform technology, the equivalent of a class one renewable, we think that just adds to the economic benefit that we can deliver to these customers by deploying our platform. So you know, we think the way in which we've deployed our distributed technology and it's been deployed in urban areas and close in communities, just serves as a great example of a way to do this and not have the consumer backlash. Great. Great. And just the the last one for me again. Sort of about the discussions with potential customers. I'm I'm curious with you know, so many crosscurrents going on, so many different know, issues to evaluate. It as you as you talk to you know, utility or hyperscalers, say, from one conversation to the next, say, you're talking with somebody at one point, and then a couple months later, you kinda reconvene and and go from there. Do is are you are you talking with customers about a pretty stable static set of projects that they have in their sites. Or is it more sort of dynamic and volatile? Like, the conversation is going one direction, and then a couple months later, utility talks about, no. We're thinking about a different region or a different customer type. So I'm I'm just sort of curious whether you're sort of following the same trail with these, and it's just a matter of getting to the endpoint. Or whether sort of the the cable kinda keeps getting reset as you as you progress with these guys. No. Look. I think if you think about at least our experience, you think about a development cycle As you go through the process, there are always puts and takes that happen throughout that development process. What we're what we aren't seeing is kind of a this episodic or very sporadic kind of you know, activity from the customers that we're engaged with And and we think that, you know, as you think about utilities, since you talked about utilities directly, I mean, I think the utilities are are pretty you know, thoughtful in their planning process and what they wanna do. And and I think they you know, they have tremendous insight to where customers want to be and where they wanna develop projects. So I think they've got a pretty good handle on that. And we're working with them to help solve the big constraints they have, which is additional, you know, power capacity, They've got constraints around, you know, transmission, mean, if you look at what just happened in PJM, I mean, PJM they just closed their auction. I think it was yesterday, They're sitting at a 14.8% reserve margin, which is, like, their lowest res reserve margin in a decade. Right? So the way you're gonna solve this problem is with technologies like ours and deploying distributed generation. Great. Thanks a lot. That's a interesting example. Thanks. Thank you. Operator: There are no further questions at this time. I will turn the call to Jason Few for closing remarks. Jason Few: Thank you, Sarah. For everyone on the call, thank you for joining us today. We look forward to updating you on our progress as we move into calendar year 2026. I wish you all a safe, joyful holiday season, and a very happy New Year. Thank you. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.
Operator: Hello. And welcome to the FuelCell Energy Fourth Quarter of Fiscal 2025 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Keypad. I would now like to turn the conference over to Michael Bishop, CFO. You may begin. Michael Bishop: Thank you, operator. Good morning, everyone, and thank you for joining us on the call today. This morning, FuelCell Energy released our financial results for the fourth quarter and fiscal year 2025, and our earnings press release is available in the Investors section of our website at www.fuelcellenergy.com. In addition to this call and our earnings press release, we have posted a slide presentation on our website. This webcast is being recorded and will be available for replay on our website approximately two hours after we conclude. Before we begin, please note that some information that you will hear or be provided with today consists of forward-looking statements within the meaning of the Securities and Exchange Act of 1934. Such statements express our expectations, beliefs, and intentions regarding the future, and include statements concerning our anticipated financial results, plans and expectations regarding the continuing development, commercialization, and financing of our fuel cell technology, our anticipated market opportunities, and our business plans and strategies. Our actual future results could differ materially from those described or implied by such forward-looking statements because of a number of risks and uncertainties. More information regarding such risks and uncertainties is available in the safe harbor statement in the slide presentation and in our filings with the SEC, particularly the Risk Factors section of our most recent Form 10-Ks and any subsequently filed quarterly reports on Form 10-Q. During this call, we will be discussing certain non-GAAP financial measures, and we refer you to our website, our earnings press release, and the appendix of the slide presentation for the reconciliation of those measures to GAAP financial measures. Our press release and a copy of today's webcast presentation are available on our website under the Investors tab. For this call, I'm joined by Jason Few, our president and chief executive officer. During our prepared remarks, the leadership team will be available to take your questions. I'll now hand the call over to Jason for opening remarks. Jason? Jason Few: Thank you, Mike, and good morning, everyone. Thank you for joining us on our call today. Our fourth fiscal quarter closed a year of meaningful progress for FuelCell Energy. Starting around twelve months ago, we began a series of thoughtful restructuring measures to sharpen our focus and strengthen the fundamentals of our business. Through this series of tough decisions to streamline and focus our organization, today, we are operating with greater discipline, lower cost, and strategic clarity. We are further along on our path to profitability. The work is not finished. But we believe we are on the right track. During this time, the surrounding market environment has undergone significant change as well. Presenting what we see as one of the greatest business opportunities of our generation. The demand for more power to accommodate data centers, industry, and communities, we believe that demand plays directly to the strength of our technology: clean, resilient, near-silent continuous power. We continue to focus on converting our pipeline into executed contracts, scaling our manufacturing capacity at our Torrington facility, and advancing product improvements that differentiate us from our competitors. We are committed to this work and we are doing it with urgency and with clear focus. That focus is delivering distributed, always-on, low-emission power through our carbonate fuel cell platform. Our technology is proven at scale and we are aligning our business around this singular strength. As you all know, demand for power is accelerating quickly, driven by the exponential growth of AI data centers, and digital infrastructure that is outpacing the capabilities of the existing grid. This demand is reshaping the market and it requires solutions that can provide clean, reliable power where it is needed. The need is clear, urgent, and investable. With decades of operating experience, and a differentiated electrochemical platform, we believe we are well-positioned to meet this need and successfully compete for the opportunities emerging in this rapidly growing market segment. Please turn to slide four. As you view our fourth quarter, and full fiscal year results, please keep the following five points in mind. Number one, we are focused on our data center strategy. AI-driven demand is reshaping power requirements across the data center and digital infrastructure ecosystem. We are actively engaged with participants across the ecosystem to make them aware of our capabilities and that we are prepared to provide utility-scale reliable, and cost-competitive clean power for these types of energy-intensive applications. With our collaboration with Diversified Energy, the potential future collaboration with Inuverse announced earlier this year, and a growing pipeline of potential data center opportunities in The US and Asia, we believe we have strong momentum heading into 2026. Number two, we are scaling manufacturing capacity. We believe that our path to profitability runs through higher utilization at our manufacturing facility in Torrington, Connecticut. As we increase production, we expect our cost structure to become more efficient. And we expect this to translate into positive adjusted EBITDA once we reach an annualized production rate of 100 megawatts per year. Entering fiscal year 2026, our focus is on margin expansion driven by disciplined operations and greater production throughput. I will provide additional detail on our scalable manufacturing capacity later in the presentation. Number three, we are building financing capacity to enable growth. We believe that the $25 million financing provided by XM to support our GGE project in Korea demonstrates a model that can be used for future projects both in Korea and worldwide. The current US administration has expressed its intention to use Ex I'm to support the global adoption of American technologies like ours, and we believe this financing signals Ex I'm belief in our utility-scale power generation technology. We are pleased to have XM as a financing partner. We are entering 2026 with a strong balance sheet and we expect to achieve financing flexibility through proven models like the XM financing and other financing alternatives. Number four, we believe we are positioned to win in emerging power markets. Policy certainty under the One Big Beautiful Bill Act improves project economics, supports long-term adoption, and allows current and potential customers to make investment decisions. Furthermore, our core carbonate platform provides reliable, clean power that can be dispatched when needed. And can be situated close to users. An advantage for customers prioritizing dependable energy, lower emissions, and flexible site options for crucial operations. And number five, we are entering fiscal year 2026 with strong momentum. Commercial momentum, policy clarity, and an expanding opportunity set gives us confidence. Our success in fiscal year 2026 will depend on execution, converting our pipeline into executed contracts and backlog into revenue. With the discipline and focus we've been building across the company. Transitioning to slide five. We succeed when we stay focused on solving problems for our customers. Customers turn to us when they need to pursue business growth without compromise. And when power constraints threaten timelines, economics, or operational reliability. Increased demand is not the only challenge they encounter. There are numerous obstacles facing customers today that can hinder their economic growth. Utility interconnections now routinely take five to seven years or more, and new substation builds follow a similar timeline. Traditional gas turbines face three to five years of procurement and construction before they can deliver behind-the-meter power. Our carbonate fuel cells avoid these bottlenecks. They can be deployed without requiring new high-voltage interconnections, can be brought online more quickly, and can deliver a cost of energy comparable to turbines and other engine alternatives with reduced permitting risk. These delays are further compounded by emission restrictions and limited site availability. Our core carbonate platform addresses those issues directly. They produce virtually no NOx or SOx, and offer unique carbon capture capability. In addition, our 1.25 megawatt power blocks allow customers to scale capacity as their needs grow. Traditional generation projects often trigger resistance, adding years of uncertainty. Our distributed carbonate fuel cell platform sidesteps these issues. It requires a smaller footprint, operates quietly, and can operate near the point of use, which may help to mitigate opposition and accelerate time to power. Let's move to slide six. These challenges and the way our customers need to solve them shape how we operate. We have concentrated our efforts on our Carbonite FuelCell platform because it not only is ready now, but also directly addresses the constraints I just outlined. It is proven across commercial deployments of varying scale, and we continue to refine it through real-world operating experience. Our platform also benefits from a strong US policy tailwind, including the reinstatement of the investment tax credit and incentives for carbon capture, an important point of differentiation compared to other generation technologies. And while we are doubling down on what is a commercially ready platform, we are also investing selectively in innovations that we believe will better position us for what comes next. These emerging technologies have the potential to drive the next phase of our growth and strengthen our long-term competitiveness. Now on to Slide eight. I wanted to highlight one example of the momentum we are carrying into 2026. We have established FuelCell Energy as a leading partner in South Korea's growing fuel cell energy economy, the largest in the world. Today, we have more than 100 megawatts of power projects in South Korea in our backlog, with another 100 megawatts under MOU. Our ongoing work with GGE continues to advance, supported by the $25 million in new Ex I'm financing for the next phase of the project, including additional module shipments and service. We also see a clear path for additional repowering opportunities, and we are proud to contribute to Korea's evolving energy landscape. Let's go to slide nine. As we look ahead to fiscal year 2026, we continue to see a compelling case for fuel cells in data center applications. Grid constraints, rising workloads, and pressure to manage energy costs are all increasing demand for reliable, efficient, and scalable on-site power. Our carbonate fuel cell platform addresses these needs directly by delivering baseload reliability, modular scalability, and meaningful permitting advantages. And as data centers push more computational power, our integrated absorption chilling and heat offtake could help manage thermal load while maintaining system performance. It is our assessment that our carbonate fuel cell platform additionally offers extended stack longevity, reliable biogas functionality, minimal performance degradation, and sophisticated containment management. These features collectively facilitate cost-effective carbon capture solutions, particularly in large-scale applications. Additionally, as NIMBY concerns grow and data center operators are under pressure to expand, our fuel cells offer a low-profile, clean solution that provides greater flexibility for siting, that can help them move forward faster amidst community concerns. Let's move to slide 10. With this opportunity in front of us, we also believe we have the manufacturing foundation to meet it. Once we reach an annualized production rate of 100 megawatts per year at our Torrington facility, we expect to achieve positive adjusted EBITDA. Today, we are roughly 40% of the way there. And our backlog continues to build. Looking further ahead, we believe that the Torrington facility could accommodate an estimated annualized production capacity of up to 350 megawatts per year with additional capital investment in machinery, equipment, tooling, labor, outsourcing of certain processes, and inventory. As we entered the new year, we are executing with focus and momentum. We are focused on advancing meaningful opportunities in the data center market, scaling a manufacturing platform built for utility-level deployments, and moving steadily toward profitability with operational discipline. With that, I'd like to turn the call over to our CFO, Mike Bishop. Michael Bishop: Thank you, Jason, and good morning to everyone on the call today. Overall, we are pleased with the progress made during the year with revenue expansion, largely driven by repowering activities in Korea, expense reductions as a result of our restructuring plans implemented in fiscal year 2025, and balance sheet strength as a result of spending reductions and financing activities. Let's review the operating performance for the fourth quarter and fiscal year 2025 shown on Slide 12. In 2025, we reported total revenues of $55 million compared to revenues of $49.3 million in the prior year quarter, representing a 12% increase. We reported a loss from operations in the quarter of $28.3 million compared to $41 million in 2024. The loss from operations in 2025 was impacted by a noncash impairment expense of $1.3 million as a result of our previously announced restructuring plan. The net loss attributable to common stockholders in the quarter was $30.7 million compared to a net loss attributable to common stockholders of $42.2 million in 2024. The resulting net loss per share attributable to common stockholders in 2025 was $0.85 compared to $2.21 in the prior year period. The decrease in net loss per share attributable to common stockholders is due to the benefit of the higher number of weighted average shares outstanding due to the share issuances since 10/31/2024 and the decrease in net loss attributable to common stockholders. Net loss was $29.3 million in 2025 compared to a net loss of $39.6 million in 2024. Adjusted EBITDA totaled negative $17.7 million in 2025 compared to adjusted EBITDA of negative $25.3 million in 2024. Now shifting to the full year results, in fiscal year 2025, we reported total revenues of $158.2 million compared to revenues of $112.1 million in the prior year, representing a 41% increase. This increase was largely driven by module deliveries to Goji Green Energy Company Limited or GGE under our long-term service agreement. During fiscal year 2025, we delivered a total of 22 modules to GGE. We reported a loss from operations for the year of $192.3 million compared to $158.5 million in fiscal year 2024. This increase is mainly attributable to noncash impairment expenses of $65.8 million and restructuring expenses of $5.3 million incurred in fiscal 2025 resulting from our previously announced restructuring plan. The net loss attributable to common stockholders for the year was $191.1 million compared to a net loss attributable to common stockholders of $129.2 million in fiscal year 2024. The resulting net loss per share attributable to common stockholders in fiscal year 2025 was $7.42 compared to $7.83 in the prior year. Adjusted net loss attributable to common stockholders, which excludes the noncash impairment expenses, restructuring expenses, and certain other noncash items, was $4.41 compared to $6.54 in fiscal year 2024. Net loss was $1.914 billion in fiscal year 2025 compared to a net loss of $156.8 million in fiscal year 2024. Adjusted EBITDA totaled negative $74.4 million in fiscal year 2025 compared to adjusted EBITDA of negative $101.1 million in fiscal year 2024, a reduction of 26% and over $25 million. We believe this improvement in adjusted EBITDA and adjusted net loss attributable to common stockholders reflects the early benefits of our cost savings actions and our sharper focus on our core carbonate platform under our restructuring plan. Please refer to the appendix in the earnings release, which provides a reconciliation of the non-GAAP financial measures, adjusted net loss, per share attributable to common stockholders, and adjusted EBITDA. Next, on slide 13, you will see additional details on our financial performance during the fourth quarter and backlog as of 10/31/2025. In the graph on the left-hand side of the slide, revenue is broken down by category. Product revenues were $30 million compared to $25.4 million in the comparable prior year period. This increase was primarily driven by revenue recognized under the company's long-term service agreement with GGE for the delivery and commissioning of 10 fuel cell modules. Service agreement revenues increased to $7.3 million from $5.6 million. The increase in service agreement revenues during the three months ended 10/31/2025 was primarily due to revenue recognized under the company's long-term service agreement with GGE. Generation revenues increased to $12.2 million from $12 million, reflecting higher output from plants in the company's generation operating portfolio during the quarter compared to the prior year period. Advanced technology contract revenues decreased to $5.5 million from $6.4 million. Now looking at the right-hand side of the slide, I will walk through the changes in gross loss and operating expenses. Gross loss for 2025 totaled $6.6 million compared to a gross loss of $10.9 million in the comparable prior year quarter. The decrease in gross loss for 2025 was primarily related to decreased gross loss from generation revenues, product revenues, and service agreement revenues, partially offset by reduced gross margin on advanced technology contract revenues during 2025. Operating expenses for 2025 decreased to $21.7 million from $30.1 million in 2024, primarily due to a $6.2 million decrease in research and development expenses, partially offset by a noncash impairment expense of $1.3 million. Administrative and selling expenses decreased to $15.2 million during the period from $15.9 million during 2024, primarily due to lower compensation expense resulting from the restructuring actions taken in September and November 2024 and June 2025. Research and development expenses decreased to $5.5 million during 2025 compared to $11.6 million in 2024. This decrease was primarily due to lower spending on commercial development efforts related to our solid oxide power generation and electrolysis platforms and carbon separation and carbon recovery solutions. On the bottom right of the slide, you will see that backlog increased by approximately 2.6% to $1.19 billion compared to $1.16 billion as of 10/31/2024, primarily resulting from the additions of the Hartford project and the long-term service agreement with CGN, Yocheng, Generation Company Limited or CGN, partially offset by revenue recognition during the year. Slide 14 is an update on our liquidity position. As of 10/31/2025, we had cash, restricted cash, and cash equivalents of $341.8 million. During the three months ended 10/31/2025, approximately 16.4 million shares of the company's common stock were sold under the company's amended open market sale agreement at an average sale price of $8.33 per share, resulting in net proceeds to the company of approximately $134.1 million. Subsequent to the end of the quarter, approximately 1.6 million shares of the company's common stock were also sold under the amended open market sale agreement at an average sale price of $8.37 per share, resulting in net proceeds to the company of approximately $13.1 million. Additionally, after the quarter ended, we announced a new $25 million debt financing transaction with the Export-Import Bank of the United States or XM, marking a continued commitment from XM to support the company's growth ambitions to deliver utility-grade power in international markets such as the collaboration with GGE in Korea. In closing, we continue to take disciplined steps to strengthen our financial foundation while focusing on a growing set of new commercial opportunities. Our strategy centers on commercial momentum, with the acceleration of data center opportunities, operational leverage through utilization and expansion at our Torrington facility with the goal of achieving positive adjusted EBITDA results while maintaining balance sheet strength through capital efficiency via financing structures including frameworks like those utilized with XM. I will now turn the call over to the operator to begin Q&A. Operator: Thank you. If you would like to withdraw your question, simply press 1 again. We ask that you please limit yourself to one question and one follow-up. Thank you. Your first question comes from the line of Dushyant Ailani with Jefferies. Your line is open. Dushyant Ailani: Hi, team. Thanks for taking my questions. One on just wanted to kinda think about how do you guys frame 2026 growth outlook. Do you think there's a potential to bake in any data center opportunity in 2026, or do you think more of you know, between 2027 and beyond? Story. Jason Few: Thank you for joining us today, and thank you for the question. As we look at 2026 and the overall data center opportunity, you know, today, we set we've got hundreds of megawatts of pricing proposals out across the whole digital infrastructure ecosystem, and that ranges from hyperscalers, utilities, power land developers, infrastructure players, and sponsors, kinda so kind of across the whole gamut of opportunities. And, you know, each of these opportunities are on their own timeline from a development and getting to an FID or closure. But we certainly believe that those opportunities will present in 2026 for the company. And be part of our growth story. Dushyant Ailani: Lovely. And then, just wanted to kind of talk about the capacity expansions. I think you said that you could increase the capacity to two fifty megawatts. Right? How how long would it take scale once you make that decision? Just trying to think that through. Yeah. So if you think about where we are today, we've always talked about our ability under our existing construct and what's there to do a 100 megawatts capacity. We're at 41 megawatts today run rate. So our ability to get to to a 100 megawatts is is really no real new capital investment to make that happen. What we talked about on the call today is getting to 350 megawatts. That's still in that same footprint. Of our existing Torrington facility. So although there will be some capital investment, we think it's fairly modest to get to the three hundred and and fifty megawatts, and we think that we can do that in a pretty short cycle window. And our expectation is that scale can happen in, you know, in the time frame of less than, you know, eighteen months or so to get that build out and get it done. Dushyant Ailani: Got it. Thank you. Jason Few: Thank you. Operator: The next question comes from George Gianarikas with Canaccord Genuity. Please go ahead. George Gianarikas: Hi. Good morning all, and and thank you for my taking my questions. So maybe just to pull that through a little bit with regard to data center traction. Can you just sort of maybe go into a little bit more detail as to how the conversations, with your DPP partners are are going? Like, any bottlenecks to to maybe signing a deal? Any and where you see maybe the most opportunity over the next six to twelve months? Thank you. Jason Few: Yes, George. No, thank you for the question. So I think maybe the way that I would answer that is I break it up into maybe two buckets. If you look at the work that we're doing with Diversified Energy, that's really our play or angle to provide a powered land solution to customers because they bring gas We bring power. And so it's all about offering whether it's a you know, a real estate developer or if it's another you know, data center developer or even a hyperscaler. That's looking to take advantage of that opportunity across the markets where diversified has gas infrastructure we're well positioned to deliver against that opportunity set. We don't see any constraints in our ability to deliver against that because we we have really good knowledge around what the gas position is, and we certainly know what our position to deliver power is from from a manufacturing capacity standpoint. With respect to kind of the broader data center opportunities and the conversations we're having, you know, it cuts across some direct conversations with hyperscalers. Also, with utilities, We also are having, like I said, you know, those conversations with infrastructure players and sponsors as an example. And what we're finding in those conversations is really a a strong interest in our distributed generation platform. Time to power is definitely a major thematic and and one that which we can meet. And thirdly, we're seeing really strong interest in what I would call the benefits of our level of modularity. Meaning that our 1.25 megawatt power blocks gives us the ability scale with those data center customers as they scale And it you know, as you know, that's not linear growth, necessarily in the way those data center scales, so having the modularity is really important. And the other big area that we're seeing is because of our operating temperature of our platform, we're seeing really strong interest to take advantage of our ability to integrate with Steam absorption chilling. To provide a really efficient way of cooling the data center. If you think about about third of the load in a data center goes overhead, So if we can you know, in a 50 megawatt data center, I think we can roughly take about five megawatts or so of power load off that requirement. That's material. And that's very attractive to those customers, and those are the kind of conversations we're having. George Gianarikas: Thank you. And may maybe as a follow-up, any update what's happening with ExxonMobil and your carbon capture opportunity? Jason Few: There. Thank you. Yeah. So on Exxon, you know, we've completed the construction of the modules that are set to be shipped to Rotterdam in support of the in Rotterdam with Exxon at their SO refinery in which we'll demonstrate capturing 90 plus percent c o two while simultaneously producing power in hydrogen. Which is unique No other technology can do that. And it's our expectation in the latter half of twenty twenty six that project will be up and running, and we'll be demonstrating that technology. And upon successful demonstration of the technology, which have a lot of confidence in, you know, we will you know, certainly work with Exxon to to think about how to go after and pursue commercial opportunities with carbon capture. George Gianarikas: Thank you all. Happy holidays. Jason Few: Thanks, George. Happy holiday to you too. Operator: The next question comes from Saumya Jain with UBS. Please go ahead. Saumya Jain: Hey. Good morning, guys. So what are the big changes, if any, that you'd seen across the South Korean market over the past year? And what's your outlook for that market specifically heading into 2026? And then on the data center side specifically, how are you seeing the South Korea market or Asian market in general vary from The US? Jason Few: Yes. Good morning, and thank you for the question. You know, in Korea, we obviously are are seeing really strong momentum across our opportunity to drive powering on our existing installed base there over, you know, a 100 megawatts of installed base. So we're fully taking advantage of that, and we're seeing strong, demand for that. We seek the Korea market, which continues to be the largest fuel cell market in the world, will remain attractive. As you know, we announced a an MOU earlier with InuVerse to, work with them on what they anticipate or trying to do will be the largest data center in the Korea market. And, you know, we're we're talk our efforts with them we think, will will help seed their growth in the market from a data center perspective. I think if you think more broadly about Asia, and and, you know, outside of The US, I think you're seeing very strong interest and demand in data center growth. And we think that the Asia market you know, in its spots, you know, between markets like Korea and Singapore and Japan and Malaysia, you're gonna see really strong data center growth. And and we're you know, you know, excited about the opportunities we're having in those or conversations we're having in those markets. Saumya Jain: Great. Thank you. And then could you provide more color on any carbon capture opportunities you are pursuing with other players like the one with Exxon or any other similar partnerships? Jason Few: Sure. So maybe you think about it in two ways. There's the work that we're doing with ExxonMobil, which is specifically focused on capturing carbon from external sources. So think about that refinery in Rotterdam where we're gonna capture carbon that is being admitted today from that refinery. Right? And in that effort, what we're doing in terms of capturing that external carbon Our commercial activities in that particular application will really start to take full post start demonstration of this technology with Exxon? Outside of that, though, we have you can think about it the way we about it internally is carbon recovery. And that's our ability to recover the carbon from the the fuels that we use to produce clean electricity. And there, we're having those conversations actually with many of these data center customers who are still very committed to decarbonizing. And so our ability to provide a very low emission profile with no SOX, NOx, or other particulates operating at a, you know, very low decibel level. All the things that you're hearing that are causing a lot of problems for these data center customers today. We address with our technology. And then we have the extra added benefit of being able to recover the carbon and then we can do lots of different things with that, with that carbon. Up to, you know, providing and selling it to an industrial gas company, to if we're a data center that's somewhere near a c o two, you know, pipeline, that c o two could ultimately be sequestered or used in some other way. And so we're actively engaged in those conversations with our industrial customers as well from a recovery standpoint. Saumya Jain: Great. Thank you for all the color, and happy holidays. Jason Few: Happy holidays to you too. Thank you for the question. Operator: The next question comes from Ryan Pfingst with B. Riley. Please go ahead. Ryan Pfingst: Hey. Good morning, guys. Thanks for taking my questions. Maybe a follow-up on the data center discussions in The U. S. Is it fair to say that customer readiness is the main hurdle for FuelCell to secure a data center customer at this point? Or are there other factors, we should be thinking about? I don't I don't really think it's a customer readiness issue, Ryan. What I would say is that it's a shift in the way these data center customers have procured power you know, throughout their history. And, you know, they've been they've been able previously to procure power from the grid. And that model has worked for them. It's the shift in the model that requires them to think about on-site generation And as they shift their business model, you know, they're being thoughtful about the way to do that. There's still, you know, thoughts around, you know, going completely behind the meter, or running grid parallel We're comfortable in operating in both of those environments, and and have done that and can demonstrate our capabilities in that regard. I I don't think it's a customer readiness issue. It's it's I think customers have now bought off on the fact that if they're gonna build new data centers and they wanna build those new data centers now, they're gonna need on-site generation to meet that demand. Ryan Pfingst: Appreciate that. And then shifting over to South Korea. Can can you talk about your expectations around timing for the Inverse MOU to the extent you're able to when we might see that convert to a firm order or even first revenue there? Jason Few: Yeah. I I won't get specific on on timing, but we think, we go throughout 2026, we'll have more to say about that opportunity as it developing. Appreciate it, Jason. I'll turn it back. Thanks. Thank you, Brian. Operator: The next question comes from Jeffrey Osborne with TD Cowen. Please go ahead. Jeffrey Osborne: Hey. Good morning. Just, maybe two lines of questioning on my side. One is on the data center side. Is there anything, Jason, that you need to still develop as it relates to the use case or the application? Yeah. I'm thinking, like, low selling or other features relative to, hospitals, college campuses, things like that. You know, as we think about our solution set to address the data center opportunity, don't really have anything that we need to develop because our our ability to integrate in a microgrid configuration to support load following, whether that be through batteries or super caps. We're very comfortable with being able to do that as as you know, we operate in a number of microgrid configurations today. So that's not a concern for us. And and we don't have plans on developing you know, best systems or or those kind of things as a company. And there's plenty of op you know, choices in the market, and we're gonna leverage those those market choices to integrate those solutions for customers. Jeffrey Osborne: Got it. If I'm hearing you right, then then pricing for data centers should be similar ish to what you've seen in in years past for other smaller applications? Given there's no additional equipment? Yeah. I think look. I think when we think about what we're offering to these customers although we aren't gonna be the the if you will, of the best system there are instances where we're bringing that full integrated solution to a customer so the pricing in some of those instances is gonna be all inclusive of of that. So I think you'll see different pricing based on what the customer is asking us to do in a straight just deliver power to me scenario, yeah, I think you'll see similar pricing than what we've been priced in the past, but we've done a lot of things to improve our our cost position. And and so, you know, we we think that we're very price competitive relative to other on-site generation alternatives you know, and that goes across, you know, the landscape including, you know, engines. And and maybe just to add on, and and I know you know this, Jeff, but, with the extension of the investment tax credit, this year, that provides, pricing, strength for us as well. The investment tax credit was extended in the big beautiful bill in July. That goes through at least 2032, and that's a 30% investment tax credit off of the capital cost. Perfect. Maybe just a a quick one for you, Mike. Two parter, but, to expand from a 100 megawatts in Torrington to the three fifty, I think you mentioned, do you have a ballpark of what that would cost? And then I think the ATM is fully utilized, share count's up. I don't know, 80% or so. Year on year. Is now a period of sort of relaxation on adding capital to the balance sheet and then waiting for the orders to come? Then maybe you need to revisit the ATM. Can you just walk us through the the cash consumption in fiscal twenty six and, you know, what what it would cost to add capacity and what what happens if you get some of these major orders that you're targeting? Sure. So maybe I'll go in reverse order, and thank you for the question, Jeff. So as far as as the balance sheet today, the company is quite comfortable with the cash position that we ended the fiscal year with. We ended with about $342 million of total cash on balance sheet. And then subsequent to the end of the year, we also announced a $25 million facility with XM. A follow on to the facility that we had done with them last year, which is really supporting deployment, internationally. And we obviously like those types of structures, and we'll look to do more more of that as we do more deployments internationally, but quite comfortable with our our current liquidity position as we sit here today. As far as the expansion, as Jake said and as we included in in the deck, we do have plans to expand Torrington up to three fifty megawatts That will obviously be paced by customer demand. Demands, but we, we have completed the planning for that. We are starting steps to, to enable us to do that expansion and are making capital investments this year. We include in our disclosures in 2026 that we plan to spend between $20 million to $30 million of CapEx, which gets us started on on that expansion path. And and as as we secure additional backlog and and go down that path of expansion, we will provide additional color around any additional investments. Jeffrey Osborne: I got it. So no no need for an ATM for now, or do you just have a good housekeeping add that just to be clear on that part? So as far as the ATM, the company has historically kept an at the market sales program on file. I don't anticipate that changing and we're not going to forecast potential potential financings beyond what I've already described. Makes sense. Appreciate it. Thank you. Michael Bishop: Thank you. Operator: Once again, if you have a question, it is star one on your telephone keypad. Your next question comes from Noel Parks with Tuohy Brothers. Please go ahead. Noel Parks: Hi. Good morning. You know, talking about the data center market, sort of what we see happening in the broader markets overall is just little bit more realization of there is some devil in the details that it seems the market needs to understand just to to really understand the the pace of the data center you know, rollout. And you know, at scale. And so I I guess one thing I was wondering, I think during the earlier in the call, you you mentioned sort of the emergence of, NIMBY issues. Which is I think, sort of a fairly new topic in in the last quarter or two. And I just wonder if or how those issues are are coming up in your potential customer discussions. And I'm also interested in particularly with utilities, you know, how some of them are are looking ahead to trying to insulate their maybe residential customer base from the the cost that they'll probably incur from ramping up the power supply to data centers. Noel, good morning. Thank you for for the for the question. You know, if you think about the maybe I'll I'll start with maybe the the NIMBY issue. So what are the things that cause challenges? Right? Things that cause challenges are are generation platforms that create poor air quality. We do just the opposite. Right? Because we don't combust the fuel. So that's a significant advantage. What's the other thing that causes the challenge? Noise. We operate at a very low decibel level. Think about maybe your air conditioner running at your home. Right? So we solve that issue. We're very efficient from a space perspective at 30 megawatts an acre. So we can be very efficient in terms of the power density that we deliver to these data center customers. In addition to that, we we do things that help offset even the the power demand. Like, we talked about our ability to deliver absorption chilling. So we can help reduce the amount of power that's needed for that data center. You know, beyond that, we we talked a little earlier on this call about ability to do carbon recovery to even further reduce the emission profile of the platform. And that remains you know, very important for many of these data center, customers or certainly the off takers of these data centers. So we think that our platform does a really good job of addressing the NIMBY issue And in fact, you know, we have examples of our platform being deployed right next to, you know, where people live. And it's not an issue. And we think that, you know, we can clearly deliver a solution to a data center developer or off taker that will minimize, if not eliminate, those issues that they see from the NIMBY standpoint. Right. Right. But it does lead me to wonder, whether there are any advantages regionally in your thinking about pursuing customers, I'm not sure if there's a connection area, what the the data center demand pickup is is looking like there, but just just sort of recognizing that you've done so many projects for sort of communities within your your fairly close radius, And so is that a possibly positive factor in getting new business? Look. I think being able to demonstrate to these data center customers where we have deployments close into communities and we don't have community complaints, is a real strength. So, you know, don't know that that's driving just a close in regional focus for us as our primary focus area, but it's certainly a leverage point for us as we tell our story to those data center customers. Beyond that, I think when you what we when we think about regionality and advantage advantages, you know, across The US, we have the ability to take advantage of the ITC, and we think that's a real positive. In some markets where we are also considered as a platform technology, the equivalent of a class one renewable, we think that just adds to the economic benefit that we can deliver to these customers by deploying our platform. So you know, we think the way in which we've deployed our distributed technology and it's been deployed in urban areas and close in communities, just serves as a great example of a way to do this and not have the consumer backlash. Great. Great. And just the the last one for me again. Sort of about the discussions with potential customers. I'm I'm curious with you know, so many crosscurrents going on, so many different know, issues to evaluate. It as you as you talk to you know, utility or hyperscalers, say, from one conversation to the next, say, you're talking with somebody at one point, and then a couple months later, you kinda reconvene and and go from there. Do is are you are you talking with customers about a pretty stable static set of projects that they have in their sites. Or is it more sort of dynamic and volatile? Like, the conversation is going one direction, and then a couple months later, utility talks about, no. We're thinking about a different region or a different customer type. So I'm I'm just sort of curious whether you're sort of following the same trail with these, and it's just a matter of getting to the endpoint. Or whether sort of the the cable kinda keeps getting reset as you as you progress with these guys. No. Look. I think if you think about at least our experience, you think about a development cycle As you go through the process, there are always puts and takes that happen throughout that development process. What we're what we aren't seeing is kind of a this episodic or very sporadic kind of you know, activity from the customers that we're engaged with And and we think that, you know, as you think about utilities, since you talked about utilities directly, I mean, I think the utilities are are pretty you know, thoughtful in their planning process and what they wanna do. And and I think they you know, they have tremendous insight to where customers want to be and where they wanna develop projects. So I think they've got a pretty good handle on that. And we're working with them to help solve the big constraints they have, which is additional, you know, power capacity, They've got constraints around, you know, transmission, mean, if you look at what just happened in PJM, I mean, PJM they just closed their auction. I think it was yesterday, They're sitting at a 14.8% reserve margin, which is, like, their lowest res reserve margin in a decade. Right? So the way you're gonna solve this problem is with technologies like ours and deploying distributed generation. Great. Thanks a lot. That's a interesting example. Thanks. Thank you. Operator: There are no further questions at this time. I will turn the call to Jason Few for closing remarks. Jason Few: Thank you, Sarah. For everyone on the call, thank you for joining us today. We look forward to updating you on our progress as we move into calendar year 2026. I wish you all a safe, joyful holiday season, and a very happy New Year. Thank you. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.
Operator: Good day, everyone, and welcome to the Cintas Corporation Announces Fiscal 2026 Second Quarter Results Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Jared Mattingley, Vice President, Treasurer and Investor Relations. Please go ahead, sir. . Jared Mattingley: Thank you, Ross, and thank you for joining us. With me are Todd Schneider, President and Chief Executive Officer; Jim Rozakis, Executive Vice President and Chief Operating Officer; and Scott Gurule, Executive Vice President and Chief Financial Officer. We will discuss our fiscal 2026 2nd quarter results. After our commentary, we will open the call to questions from analysts. The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements. This conference call contains forward-looking statements that reflect the company's current views as to future events and financial performance. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss. I refer you to the discussion on these points contained in our most recent filings with the Securities and Exchange Commission. I'll now turn the call over to Todd. Todd Schneider: Thank you, Jared. We had another successful quarter, reflecting the strengths of our value proposition. Cintas delivered record revenues and strong operating margin performance, while we continue to invest in our business to position the company for the future. Second quarter total revenue grew a strong 9.3% to $2.8 billion. The organic growth rate, which adjusts for the impacts of acquisitions and foreign currency exchange rate fluctuations, was 8.6%. Each of our 3 route-based businesses had strong revenue growth in the quarter. Our business continues to operate at a high level as our employee partners deliver strong execution across the board and maintain a clear focus on driving value for our customers and shareholders. Gross margin as a percent of revenue was 50.4%, a 60 basis point increase over the prior year. Operating income grew to $655.7 million, an increase of 10.9% over the prior year, diluted EPS of $1.21 grew 11% over the prior year. Our strong revenue growth is creating leverage and our cost savings initiatives and investments we've made are helping to improve our employee partners productivity and help them deliver better solutions for our customers. Our operating margin for the company was an all-time high. The operating margins for our 2 largest route-based businesses were also all-time highs, reflecting the high level of execution by our employee partners. Turning to guidance. We are raising our fiscal 2026 financial guidance. We expect our revenue to be in the range of $11.15 billion to $11.22 billion, a total growth rate of 7.8% to 8.5%. We expect diluted EPS to be in the range of $4.81 to $4.88, a growth rate of 9.3% to 10.9%. With that, I'll turn it over to Jim to discuss the details of our second quarter results. James Rozakis: Thanks, Todd. This quarter marked another period of solid progress for our business as we continue to advance the rollout of our technology initiatives and build on the strong foundation of organic growth we have established. Our focus on innovation, operational excellence and customer engagement is delivering measurable results. We are strengthening our relationships with existing customers through expanded offerings and superior service, which has led to all-time highs in retention rates while also successfully attracted new customers, who the clear benefits of partnering with us. These achievements reflect the commitment and talent of our employee partners, whose efforts are positioning us for sustained success. Turning to our business segments. Organic growth by business was 7.8% for Uniform Rental Facility Services, 14.1% for First Aid and Safety Services, 11.5% for Fire Protection Services and 2% for Uniform Direct sale. Gross margin percentage by business was 49.8% for Uniform Rental Facility Services, 57.7% for First Aid and Safety Services, 48.2% for Fire Protection Services and 41.9% for the Uniform Direct sale. Gross margin for Uniform Rental Facility Services segment increased 70 basis points from last year. The 49.8% gross margin is the second highest gross margin ever for this segment. The strong revenue growth in this segment is helping to create leverage. In addition, our supply chain team and process improvement initiatives from our engineering and Six Sigma Black Belt teams continue to help expand our margins while navigating the current economic environment. Gross margin for the First Aid and Safety Services segment was 57.7%. This equals a previous all-time high set last year. As we mentioned previously, the mix of revenue and timing of investments can impact this business from quarter to quarter. We are pleased our investments to grow this business are generating strong double-digit revenue growth, while being able to expand our gross margin. We are growing in many ways. We're adding new business with over 2/3 being converted from no programmers. We are cross-selling to existing customers. Our retention rates are at all-time highs, and we continue to experience success in our focused verticals of health care, hospitality, education and state and local governments. Our strong culture of execution, combined with multiple growth levers has positioned us over the years to [indiscernible] multiples of job growth and GDP. All businesses have a need for [ image ], safety, cleanliness and compliance. Our value proposition resonates in all economic cycles as evidenced by our growth in sales and profit in 54 out of the last 56 years. With that, I'll turn it over to Scott to discuss our operating income, capital allocation performance and 2026 guidance assumptions. Scott Garula: Thanks, Jim, and good morning, everyone. As Todd mentioned, we continue to perform at a high level as evidenced by record level revenue and operating margins for the second quarter. Selling and administrative expenses as a percentage of revenue was 27%, which was a 20 basis point increase from last year. Second quarter operating income was $655.7 million, compared to $591.4 million last year. Operating income as a percentage of revenue was 23.4% in the second quarter of fiscal 2026 compared to 23.1% in last year's second quarter, an increase of 30 basis points and an all-time high. Our effective tax rate for the second quarter was 21.2% compared to 20.7% last year. The tax rates in both quarters were impacted by certain discrete items, primarily the tax accounting impact for stock-based compensation. Net income for the second quarter was $495.3 million compared to $448.5 million last year. This year's second quarter diluted earnings per share was $1.21 compared to $1.09 last year, an increase of 11%. For the second quarter, our free cash flow was $425 million, an increase of 23.8% over the prior year. Our strong cash generation allows us to have a balanced approach to the capital allocation in order to create value for our shareholders. In second quarter, we continued to invest in our businesses through capital expenditures of $106.3 million. Also in the second quarter, we were able to make strategic acquisitions totaling $85.6 million in all 3 of our route-based businesses. During the second quarter, we paid dividends in the amount of $182.3 million. Also during the second quarter and as of December 17, we were active in the buyback program with repurchases of $622.5 million of Cintas shares. That is the third largest share repurchase we've made in a quarter. During the first 6 months of fiscal 2026, we have returned $1.24 billion in capital to our shareholders in the form of dividends and share buybacks. Earlier, Todd provided our updated guidance for the remainder of the fiscal year. As you contemplate the guidance, it is important to remember that during the third quarter of fiscal 2025, we recognized a $15 million gain on the sale of an asset. That will not repeat and will be a headwind when comparing the third quarter results year-over-year. In addition, please note the following in the guidance. Both fiscal 2025 and fiscal 2026 have the same number of workdays for the year and by quarter. Our guidance does not assume any future acquisitions. Our guidance assumes a constant foreign currency exchange rate, fiscal 2026 net interest expense of approximately $104 million, a fiscal 2026 effective tax rate of 20%, which is the same compared to our fiscal 2025, and the guidance does not include the impact of any future share buybacks or significant economic disruptions or downturns. With that, I'll turn it back to Todd for some closing remarks. Todd Schneider: Thank you, Scott. Looking ahead to the second half of fiscal 2026, we are right where we want to be, and our focus remains on helping customers meet, and in many cases, exceed their image, safety, cleanliness, compliance needs. We remain committed to leveraging our investments to sustain our positive momentum and deliver exceptional customer service. I want to thank our employee partners for their incredible commitment to our customers and everything they do for Cintas. I'll now turn it back over to Jared. Jared Mattingley: That concludes our prepared remarks. Now we are happy to answer questions from the analysts. Please ask just 1 question and a single follow-up if needed. Thank you. Operator: [Operator Instructions] And our first question comes from Tim Mulrooney from William Blair. Timothy Mulrooney: Only 10 minutes on the prepared remarks. That's what I'm thankful for this holiday season. So just 1 question from me. There continues to be a lot of noise in the labor market data. But I think most would agree that we've seen a softening trend in terms of hiring activity over the last several months, at least on balance. And I'd be curious to hear if you've seen any material change in employment levels across your customer base, if what we are seeing in the broader payroll numbers are playing out in your world or if the reported job losses are more in the white collar world where you're providing some services, but those folks don't typically wear uniforms. I know you've emphasized your ability to grow in all types of environments. But I'd be interested in your take on more of the underlying dynamics here given the number of businesses that you service week to week. Todd Schneider: Well, thank you, Tim. We are Certainly -- we're reading the same things you are. We're watching job reports as we always do. And as we spoke about in our prepared remarks, as a reminder, we've shown the ability to grow in multiples of GDP and jobs growth for a long time now. And we certainly love it when our customers are adding employees and their businesses are really healthy and that's how we love that. But we don't need it in order to grow our business the way we like to. That being said, to your point, I think you have to dig pass the headlines on the jobs report. First off, we've picked our verticals really well, very strategically. . And the employment picture for them is, if you look at it, it's positive, health care, education, hospitality, state, local government, those are good. The services providing sector continues to show growth. And the goods-producing sector isn't performing as well, but the specialty trades within them are doing well, and that's -- those are obvious uniform wearers and users of our services. So there are certainly many jobs that are under pressure, hence, what you see in the headlines and the market reports, but they are certainly more generally, white-collar jobs IT, financial back office that are really not end markets for us, as you pointed out, Tim. Operator: And our next question comes from Manav Patnik from Barclays. Manav Patnaik: I also just had 1 broader question, maybe just following up from that one. I know you've obviously shown that you guys can outperform and execute in any kind of environment. But just maybe help us appreciate like what is your downturn playbook look like? Like if unemployment does crack, how do you still keep up these kind of high single-digit growth levels, which levers typically make up more? Is it all of them? Just any color there would be helpful. Todd Schneider: Yes. Good question, Manav. We certainly have a wide array of products and services that we provide, and we service a wide breadth of customers as well. So our target of mid- to high single-digit organic growth is important to us. And we have so many ways to grow that it gives us flexibility. Certainly, new business is important to us. And when you think about a business that -- when they have less people, that can certainly impact us. But they also have still other needs that they need to address. And in many cases, they don't have enough people to address those and they look to us to outsource for those items. So new business is important. We have -- are still very early in the innings of cross-selling all of our various products and services into us. So trying to gain growth from our current customers is an important lever for us. So that's all valuable. M&A tends to get better during those periods of times as well. But we're -- we have many levers in addition to obviously the ones that I've mentioned that I think give us real optionality. And certainly, when we look at new programmers, that's a big opportunity for us. James Rozakis: Manav, this is Jim. Perhaps I can give just a little more color on how much opportunity really lies within our current customers. And as Todd mentioned in his prepared remarks, our objective is to first supply our customers with a great experience with us. And that starts at the foundational level. And then we are in the right now to be able to ask them for more opportunities and to steer more of their spend that they already have over to us. . And just due to the nature of our service model, we're in their facilities so frequently that we get a really deep understanding of what their needs are and what the opportunities may come from. So I have an example here of a property management company that we service out on the West Coast, and we've been servicing that facility for a number of years for uniform rental for all the folks who work on the property. And during our routine visits, our team uncovered that they were doing bulk orders from an e-commerce solution for all their restroom supplies. And when inquiring with the company, they realized that they were tying up cash flow. They were tying up really precious real estate space and storage space that they did not want to tie up and they were taking a lot of their labor and manpower to go ahead and inventory all of those goods. Our folks went in and introduced the concept of outsourcing that to us and utilizing the Cintas hygiene program. They found out that now their spend is much steadier than it was in the past. It makes it much easier to budget. They're not tying up that space. And maybe most importantly, their team is not involved in taking their precious time away from what they focus on going ahead and managing hygiene inventories. They let us handle that for them. So just a small example of activities that happen across 1 million plus customers every day. Operator: And our next question comes from Andrew Steinerman from JPMorgan. . Andrew Steinerman: I definitely heard the pluses and minuses about the customers' employee base, but I just didn't quite get a compilation if [ ad stops ] are changed year-over-year. I surely heard the separate point that you continue to grow with same customers. So just a comment on ad stops year-over-year? And then my second question is with the acquisitions that were completed in this second quarter, how much will that add to the second half of the year revenues? Todd Schneider: Well, I'll take the first half, Andrew. So thank you for the question. As we mentioned and through Jim's example, we talked about the -- all the various products and services we can provide for our customers and it's broad and growing. So from that standpoint, growth from current customers, I would describe it as very stable, if anything, slightly positive. So we're in a good position. Our current customers see the value proposition that we can offer to them, and that actually helps with retention as well. Scott, if you want to address the second half? Scott Garula: Yes. Thanks, Todd. And Andrew, we've talked in the prepared remarks the acquisition impact during the second quarter was about 70 bps. And if you think about the rest of the year and our guide, we obviously assume no new acquisitions. You can assume that there's a normal tail when it comes to the acquisition volume and generally for the second half of the year, you would assume about half of the second quarter impact, so call it, 30 to 35 bps. Operator: And our next question comes from Josh Chan from UBS. Joshua Chan: Congrats on a really strong quarter. I guess my 2 questions. One, I think both Todd and Jim mentioned that retention rates are at record levels. Usually, you see those in stronger economic time. So maybe could you talk about how you're able to achieve strong retention rates even in these types of climate? And then I guess my second question is on the incremental margins, I think both Q1 and Q2 were within your longer-term range, but maybe towards the lower end. So any way to think about how that kind of transpires in the second half would be great. Todd Schneider: Thank you, Josh. I appreciate that. I'll take the first half and regarding retention, and Jim will address the incrementals. Our retention rates are, they're at all-time levels, and we have been for several quarters now, and it speaks to a number of things. First off, the execution by our team is impressive. They're doing a great job, making sure they're taking great care of our customers that is easy to say, really hard to do, starts with our supply chain team, our operations organization. They're doing a great job. And that all ties back into our culture. And we have spoken over and over again about the fact that our culture is our ultimate competitive advantage, and it shines even brighter in economic environments that are a little bit more uncertain than others. So -- and it's showing up big time for our folks. We're also providing great value for our customers, and they're seeing it with not only the products but the services, the technology that we're utilizing and the technology investments that we've made help accomplish 2 things at a 30,000-foot level. One is it makes it easier for our partners, our employee partners to service and take care of our customers to provide value for them. And the second one is it makes it easier for our customers to do business with us. So when you add those up, all that you mix it in, it adds up to retention rates that we find very attractive. Jim? James Rozakis: Yes, Josh, I'll get to the second question regarding margins. So first of all, we ran [ 27% ] incremental margin by the second quarter, which we really like. And that's right in our stated range of that 25% to 35%. That range is really important for us. That allows us to continue to invest in the future growth of the business, while being able to expand margin along the way. So we really like that, that allows us to make the investments in technology, the necessary investments in capacity, bench strengths, selling resources. All of those are really critically important to us. So that would be really right in the sweet spot of the range. Now a couple of things to keep in mind with regards to incremental this year, and how it plays out for the remainder of the year. First off, we're coming off of a comparison to last fiscal year which is a really tough comp. Last fiscal year, we ran in the second quarter, incrementals of [ 49.7% ] that's an outperformance not what we normally expect. So we're really pleased with the 27% this quarter given that comparison. In fact, if you look at the whole first half of last year, we ran an incremental of 44.3%. So really, really high in the beginning of last fiscal year, settling back into our range this fiscal year. A couple of other things maybe to keep in mind is really what the guide implies with regards to incrementals for this fiscal year. If you look at the whole year across the board, incrementals would imply somewhere between the [ 29 and 30 ] when you adjust for the $15 million asset sale from last fiscal year, so that's right in the heart of where we want to be, a perfect level of investment continuing to fuel the future growth. And if you look at the back half of the year, that would imply incrementals of 30% to 33%. So moving back up towards the high side of that range, so we're really pleased with where we are. We like the outlook of the year, and we think that's a great spot for running the business. Operator: and our next question comes from Jasper Bibb from Truist Securities. . Jasper Bibb: I wanted to get an update on your experience with sourcing costs and tariffs so far this year. I guess, how have things trended relative to your expectations when you initially set guidance for the year? Todd Schneider: thanks for the question. Yes, the tariffs is certainly a dynamic environment as it relates to that. We continue to execute at a high level. As I mentioned earlier, our culture, when the times are challenging, you might have to run at higher RPMs, but we're executing at a high level. We're not immune from impacts of higher costs from tariffs. But our supply chain has always been a competitive advantage. And when you're in this type of environment, it's that much more of an advantage. Now keeping in mind, the ability to -- they're flexible and adaptable and part of how they have that optionality is because we source from all over the world. And we do have really good geographic diversity, and we've spoken in the past that 90-plus percent of our products, we have 2 or more options. So that optionality is incredibly important when it comes to an economic -- excuse me, a sourcing environment than what we're dealing with. The guide does contemplate the current environment for tariffs. So it's coming in very similar to what we expected. You recognize that we do have the ability to -- we amortize most of our goods. So as a result of that, it does give us time to pivot and adapt, but it's coming in about where we expected. But we're certainly staying on our toes because the sourcing environment is dynamic and the tariff environment is there certainly could be changes coming as well. Jasper Bibb: And then really healthy margin in the First Aid business this quarter. Can you provide a bit more detail on what the underlying mix has looked like in that business this year? I know you were a bit heavier on the training side for the end of last year. So curious if that flipped back more recurring revenue. Todd Schneider: Yes. We're -- we love the First Aid business. It is a great business for us. We're very pleased with that. And you've seen that they've had outsized performance for a period of time now. One of the things that -- the mantra that we have and the leadership of our organization there talks about there's nothing more important than the health and wellness of our businesses, employees and customers. We completely agree with that, and you're seeing really good growth in that business. . We see them as a low double-digit grower for the foreseeable future. So that's great. That being said, certainly, the mix of business can have an impact on the margins in that. So we like the range we're in. But if we have a little bit of change in mix, and there's a little change in margin within a range for us. We're okay with that. We're investing for that for the future, providing more value to our customers. And running a business isn't linear. So we're not focused on just a pure, hey, we've got to get another a certain amount of basis points lift in gross margin in that business. We think it's important that we are running a range that's really attractive so we can grow our operating margins, but mix of business really is impacted by that. So Jim, anything else that you'd like to comment on that? James Rozakis: No, Todd, I think you hit all the main points of what really drives this business. The only other thing I might just say is the team did a fantastic job in the quarter of execution, and we're really pleased with the results and where they stand. Operator: and our next question comes from Andrew Wittman from RW Baird. Andrew J. Wittmann: I just thought I would give you guys an opportunity or hear -- I'd like to hear a little bit about the competitive environment. Obviously, over the last couple of years, you've had some competitors that have really gone on volume chasing spree. You guys have obviously executed very well amongst all this, but I was just wondering what you're seeing out there and how that's affecting your price realization. Todd Schneider: Andrew, thanks for the question. Yes, I mean we -- as you know, we operate in a very competitive environment, always have, always will. My entire career, it's always been like that. And we certainly do win some business from competitors, but that's -- as you know, that's not where our focus is, our focus is on signing new customers that weren't programmers when we walked in and when we walk out, they are. And as a result of that, still over 2/3 of our new customers are coming from that sector. And the white space is incredibly large there, with us servicing a little over 1 million customers, but there's still 16-plus million businesses in the U.S. and Canada. So that's really attractive for us. So I mentioned our retention rates are at all-time high. That's helping us as well. But that's really about the value proposition that we're providing for our customers, which starts with our culture and is executed through our employee partners. But it is a -- we're pleased with how our folks are performing competing in the marketplace and really attacking that large TAM out there of that [ no program ] market, which we say we're really excited about. Andrew J. Wittmann: Just for my follow-up, I thought I would just ask a little bit on the M&A side. Obviously, last fiscal year was one of your bigger years that you had since for a while, a pretty big quarter here in terms of capital deployment towards M&A. Maybe, Todd, you could just talk about kind of the funnel here. Do you feel like thinking about the amount of capital deployment last year is again doable this year with the progress that you made this year so far? Todd Schneider: Andrew, great question. First off, just capital allocation in general, we're very pleased with how we're going there. We just we invested over $100 million in CapEx for the quarter, $85 million in M&A. All 3 route-based businesses, we were acquisitive in. And then on top of that, $182 million in dividends paid out and over $600 million in buybacks. So we really like that capital allocation strategy, we've shown to be good fiduciaries with that. But -- and M&A is certainly a part of that. As I mentioned, we had a really good quarter. We had a great year last year. But as you know, it's hard to predict. M&A tends to be a little unpredictable and lumpy, whether it's because they're family-owned businesses that are waiting on their -- the next generation, whether they want to move on or not. And we do love M&A of all shapes and sizes. We love tuck-ins. We like new geographies. And when we make M&A, we always -- we value so much of it, but there's -- the #1 things that we get out of it are the people that are running the business and the customers. And we try to make sure that we can get synergies if it's a tuck-in. And if it's not a tuck-in, then we get extra capacity. And we also then have more customers that we can cross sell. So all that's attractive. The pipe, we are always working on that pipe. Jim and I and our corporate development team are all in that game together. We have relationships that are going back decades, and we're ready and willing to -- for M&A to be an important component of our strategy moving forward. Operator: And our next question comes from George Tong from Goldman Sachs. Keen Fai Tong: You touched on some of this, but can you provide a high-level overview on what you're seeing with sales cycles and broader customer purchasing behaviors. And if you've noticed any meaningful changes from prior quarters? Todd Schneider: George, nothing specific to call out. We've certainly operated in easier environments. As this economic environment, it's a little less certain than we like. But despite that uncertainty, the value proposition continues to resonate. As I mentioned earlier, especially in periods of uncertainty, it can do that. Outsourcing can save money, improving steady cash flow and same time that can be spent on running the business. That was referenced in Jim's example that we talked about earlier. I've already referred to retention rates being at very attractive levels. And our -- and I also mentioned our growth from our current customers was steady and if anything, improved slightly. So we think we're in a good spot, and we like where we're pointing. Keen Fai Tong: Got it. That's helpful. And then just a follow-up. You took up your full year guide for revenue. Can you talk about how much of the increase reflects upside in the quarter versus what you were internally expecting compared to maybe a stronger outlook for the remainder of the year? Todd Schneider: Yes. We're -- first off, our guide for the year is really good. It looks right where we want it to be. If you look at the guide for -- or excuse me, the guide for the year is showing growth of 7.8% to 8.5%, midpoint of 8.2%. It's right where we want. I think it's also important to recognize that the comps do get tougher in the second half for growth. Last year's second half growth was about 90 basis points higher than the first half of last year. So we've booked a good performance, but we're going to be up against tougher comps in the second half on growth than we were in the first half. But we're pleased with where we are, and we're pleased with our guide. And we think that we'll be able to get some leverage as we move forward on that guide, which will help fall to the bottom line, hence the EPS guide as well. Operator: And our next question comes from Jason Haas from Wells Fargo. Jason Haas: I just wanted to follow up to get some more detail on the timing of the tariff costs. It sounds like those have maybe started to flow through the P&L, but there's more impact to come. Is that like a fair understanding. And then how is the industry reacting -- how are you reacting? Have you started to raise prices of your competitors beyond raising prices? How should we think through that? Todd Schneider: Well, a few things. First off, as tariffs come through, I mentioned that we have optionality. So don't think of it as simple as well. Tariffs are a significant impact. We just haven't seen it yet. That's not the case because our culture is such that we don't just accept that we've got to go find ways to improve. We've got to find -- work at higher RPMs to find other additional suppliers to take cost out of our business as well. And we're doing all that. I mentioned we're not immune from it. But we're working really hard to mute that subject as very best we can. As far as pricing is concerned, we're -- we take a long-term approach on pricing. We are at what I'll call historical type levels. But our philosophy is we care about the long-term value of a customer. So we're focused on growing our business via volume growth, not just pricing. We're going to go out and extract out the inefficiencies of our business that will help us allow us to grow our margins at attractive levels, along with the revenue growth to help us get leverage. But we don't simply just pass along those costs to our customers and because we operate in a really competitive environment. And those customers have choices. So we've got to work really diligently to mute the cost impacts of tariffs and other costs that are going through so that -- and we're extracting out those inefficiencies and doing the very best we can to make sure that we're positioned for success to grow our margins. Jason Haas: Great. That's very helpful. And then as a follow-up, can you just refresh us on the timing of the [ SAP Fire ] implementation costs? Are you -- are you still expecting a greater headwind to margins in fire in the second half of the year as that system gets turned on and you start recognizing the amortization? Todd Schneider: Jason, thanks for the question. These ERP implementations take time. And we are experiencing some additional costs now for sure. But there is more cost to come in the future. We're working really hard on on this implementation. We think it will be really valuable for our employee partners and our customers. But so we're investing for the future in that business. You see that we're growing it really attractively. We're not only growing it attractively, but we are also highly acquisitive in that business. . So when you think about the fire business, think about it this way. We are also dealing with M&A that comes to us. And as I mentioned earlier, M&A, you can't predict it exactly. But -- and in that business, we are -- some of our M&A is -- allows us to be tuck-ins, but others are actually geographic expansion. And when we make M&A in that business and you get M&A expansion, it is -- for a period of time that doesn't run at the margin profile that we do. We've got to make sure that we get our operating protocols in place. And as you can see, M&A account for 340 basis points of total growth for fire in Q2. So that's a component of any margin pressure that we have in that business, little bit of SAP, but we're investing for that in that business because we think the future is really, really bright. And we're quite optimistic about the coming years. Scott Garula: Jason, this is Scott. I just might add, as Todd mentioned, the ERP implementations take some time. We've got some experience with that in our rental business as well as First Aid and Safety, and we are expecting the Fire rollout to carry on into next fiscal year. And I would just look at the impact for fiscal year '27 to be around that 100 basis points for the fire protection business. . Operator: And our next question comes from Faiza Alwy from Deutsche Bank. . Faiza Alwy: Yes. So I wanted to ask about your technology initiatives. I think it's well understood that you guys are at the forefront of implementing the latest and the greatest in terms of technology. So I just wanted to get an update on what are -- is there any recent initiatives you'd like to talk about? And maybe the return on those types of investments, whether it's AI related or anything else you would want to highlight? Todd Schneider: Yes, we are investing in technology, have been for many years, and will be probably in perpetuity, just it's the nature of how business works now. And we are -- we spoke about in the past, we're seeing benefits, whether it's a material cost or cost of goods, production, delivery cost, all those, you're seeing that. We talked about Smart Truck helping us from a technology standpoint, garment utilization being on one system allows us to share garments and reduce our cost there. All that is important. Certainly, AI, we see obvious opportunity there. We're in the early stages as many companies are on the AI front. And I include that into our total technology investment. But we're optimistic about where that will impact us in the future, and we are organizing and investing appropriately to make sure we leverage those opportunities. Operator: And our next question comes from Stephanie Moore from Jefferies. Stephanie Benjamin Moore: I think 2 areas of your strategy were very clear this morning and obviously have been clear for some time now. And first is, obviously, the record retention levels that you could continue to see as well as as you called out your investments in key verticals and just the strength that you're seeing there despite the uncertain macro. So kind of given these 2 factors, maybe talk about how your view on pricing can change because it would seem like look retention is very strong. You're also in the verticals where you're seeing a lot of impact, but also continuing to build out your value with these customers. So i.e., I would assume being much stickier. So maybe just talk about how this can inform your pricing strategy going forward. Todd Schneider: Stephanie, our pricing strategy hasn't changed. And as I mentioned, we're running at historical levels. And I also mentioned, we think long term about these subjects. So our strategy around pricing thinking long term has helped the retention rates. So we're focused on growing our margins, but we're not going to do that just through pricing. We have to go extract out inefficiencies because we operate in a very competitive market. And we have many competitors, whether it is what you might think of as a traditional competitor. But online, e-commerce, the big box retail, we compete with all these people. And as a result, we've got to be focused on providing great value and that applies to our key verticals as well. Each of our verticals that we operate in a very competitive environment, and we're focused on providing the value, extracting out those inefficiencies, but -- because we do not operate -- never have, never will operate in an environment where we can just adjust price up because it's an ultra-competitive environment. Operator: And our next question comes from Scott Schneeberger from Oppenheimer. Scott Schneeberger: It was asked earlier a question on sales cycles and you guys covered the spectrum with the answer pretty well. I'm curious just to ask that a little different way. What you're seeing behaviorally from large customers as opposed to small customers. Are you seeing any softness or strength in one or the other? Just any indications on those -- on size category. Todd Schneider: Yes. Good question, Scott. As you can imagine, we watch our customer base really closely. But we have such a wide breadth of customers and products and services. But it's a wide breadth of customers, whether it's geographic or by [ NIC ] code. You name it, we service it. And so nothing to call out specifically there. We've got certain customers that are thriving, certain ones have more challenges. But we're -- I wouldn't say anything specific to call out regarding the customer base. If we want to go to the fourth decimal type we could get into those levels. But I don't think it's appropriate at this point because in general, our customer base is -- has been pretty stable. And as I mentioned earlier, if anything, we had a slight improvement there. Scott Schneeberger: And I did some -- as you guys mentioned, a very large buyback in the quarter. And clearly, we infer from this call, you're interested in being acquisitive. But with -- it seems like we're going to see some large buybacks from you going forward based on what we've just seen. And your leverage is below 1x, ticked up a little bit using a little bit of short-term borrowing to do it. What's the propensity to take the leverage higher and do that? How aggressive might we see you be with the buybacks? And where would you take the leverage? Todd Schneider: Good question. We view buybacks as an excellent use of cash to provide shareholder return. That being said, we have been very transparent on this. We view it as an opportunistic approach. So I wouldn't just simply model in that we are going to lever up and be highly aggressive on buybacks. We'll be opportunistic and handle that as we have in the past. And if you look at our history, even our 5-, 10-, 20-year history, we've been pretty consistent on that. Our capital allocation approach and I wouldn't expect to change to our approach there. We'll continue to look at that opportunistically and return that back to our shareholders as appropriate. Operator: And our next question comes from Shlomo Rosenbaum from Stifel. Shlomo Rosenbaum: The first question I have, I was just hoping to get more detail on the growth verticals versus the rest of the business. Maybe you could talk a little bit about the growth of those verticals in aggregate versus the rest of the business and maybe -- versus each other? And what percentage of the business they are right now? And then just a separate -- just a deep dive a little bit more on one of the verticals. In terms of some of those like scrubs business that you guys have been very successful in, how much of a differentiator is it for you in terms of being able to use your balance sheet to have those dispensers out there and really invest in effective dispensers. Todd Schneider: Jim, why don't you take the first half, and then I'll talk about the dispensaries. James Rozakis: Sure. Yes. Shlomo, as we mentioned in our prepared remarks, we continue to see really good success across all 4 of our verticals, health care, hospitality, state and local government and education. We continue -- right now, health care is the largest and probably the most developed, we've been in that business the longest. That one represents about 8% of our total revenue, is growing and all 4 of them, by the way, are growing slightly faster than the aggregate of the company, but all the company -- we're getting demand in all of our business lines. So we're seeing good growth across the board. But right now, health care is about 8% of total. And if you put all 4 together, they're about 11%. But we really like the trajectory and the total available market in each one of those. So we continue to organize around those and put good resources toward them. Todd Schneider: Yes. And I'll take the second half, Shlomo. The -- as a reminder, we don't just sell into these verticals. We organize around them, whether it be customer service, the routing of that, which would take a little bit away from density, but we think it's so important to be experts in that business so that we can provide that much more value. So that helps us get better at finding the next products and services that those customers want and help us provide a better customer experience. That being said, you mentioned dispensers. We have deployed dispensers at many customers. And the value that we bring is significant there because it changes the game for them and allows them to look at the product differently. Instead of looking at the product as a commodity, that's -- and let's go with the cheapest one we can, they can provide a better value product because they have control over that inventory. So that's all important. And we're blessed to have a great balance sheet. We have a balance sheet that allows us to invest for those customers and ultimately get a return for our company, provide a better value and value proposition for the customer, better products, better service, better technology, and that gives us a strategic advantage. Operator: And our next question comes from Toni Kaplan from Morgan Stanley. Toni Kaplan: I was hoping you could talk about -- if you think about your business long term, you're already growing high single digits, great. Where do you see the next like step-up of growth coming from? Is it from the key verticals? Is it from new geographies, new products. I guess when you think about your penetration in the key verticals, like how do you think about long-term sustainability of growth at this level? And where are the biggest growth drivers come from? Todd Schneider: Toni, we really like the growth levels that we're at. You see that organically, we're growing at that mid- to high single-digit revenue number. And then we've had some nice M&A advantage as well. So we really like where we are. And it all goes into the algorithm. Our verticals, as Jim mentioned, are growing at a higher rate than our business overall. And we expect that. We're always looking at new products and services that we can launch and do launch. And that goes into our algorithm as well. New geographies, we are -- we have the coverage that we really like in our Rental and First Aid businesses. The fire business, we are still rolling out some flags in that area. So we do get some geographic expansion there, but we've already spoken to that. But the great news is for all of us that we don't need to take our models and go to other geographies. But we certainly need to continue to invest in our business, continue to invest in capacity, invest in new products and services, invest in new technologies so that we can continue to grow at these levels. And we like these levels of growth because we can organize around them. We can plan for them, we can staff for those. We can invest capital for those levels. And when we grow at these levels, it gives us the opportunity to get leverage and margin expansion as a result. Scott Garula: Tony, this is Scott. I might just add that we obviously had an outstanding quarter in the second quarter, strong growth performance from all 3 of our route-based businesses. We had a favorable comp in Q2 to last Q2. And as we have talked about earlier, when we think about the second half of the year, I think Todd mentioned this. We do have some more challenging comps. And you can see that in our guide for the second half of the year. But whether it's the first half of the year or our guide for the second half, we're right in the stated range of that mid- to high single-digit growth. And as Todd mentioned, the growth algorithm we have, we have a lot of confidence in that we can sustain that level of growth moving forward. Operator: At this time, there are no further questions. I'll turn the call back over to Jared for closing remarks. Jared Mattingley: Thank you, Ross, and thank you for joining us this morning. We will issue our third quarter of fiscal 2026 financial results in March. We look forward to speaking with you again at that time. Thank you. . Operator: This now concludes today's conference call. Thank you for your participation. You may now disconnect.
Eric: Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Enerpac Tool Group Corporation Q1 Fiscal 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I'd now like to turn the call over to Travis Williams, senior director of investor relations. Please go ahead. Travis Williams: Thank you, operator. Good morning, and thank you for joining us for Enerpac Tool Group's earnings call for 2026. On the call today to present the company's results are Paul Sternlieb, president and chief executive officer, and Darren Kozik, chief financial officer. The slides referenced on today's call are available on the Investor Relations section of the company's website, which you can download and follow along. A recording of today's call will also be made available on our website. Today's call will reference non-GAAP measures. You can find a reconciliation of GAAP to non-GAAP measures in the press release issued yesterday. Our comments also include forward-looking statements that are subject to business risks that could cause actual results to be materially different. Those risks include matters noted in our latest SEC filings. With that, I will turn the call over to Paul. Paul Sternlieb: Thanks, Travis, and good morning, everyone. For our 2026 results, were essentially as expected. And there were some favorable developments and encouraging trends. In our industrial tools and services segment, or IT&S, product sales grew a healthy 4% organically, which we believe is a reflection of our ongoing ability to gain market share and outperform our broader industrial peers. We saw strong IT&S product order growth for the quarter, increasing our confidence in the outlook for the year. And as I will talk about later, we continue to invest in the business to support our growth strategy. With that, let me turn the call over to Darren who will provide more detail on our first quarter performance as well as geographic and end market trends. Darren? Darren Kozik: Thanks, Paul. Within product revenue, particularly in the UK, turning to slide five, which shows our due to the timing. Describe as a wild card for fiscal 2026 given the underlying economic conditions declined 10%. Again, it's meaningful to separate product from services. In EMEA, product revenue grew 5%, continued strength from infrastructure and government spending and a solid performance in Southern year-over-year growth. In the second quarter and for the full fiscal year. Turning to Slide six. For 2026, gross profit margin of 50.7% was in line with our performance over the past few quarters. As expected, margins were affected by higher tariff-driven costs flowing through cost of goods sold. However, we were able to successfully offset these on a dollar basis through pricing and productivity actions. We expect the margin pressure from tariffs to ease as we enter 2026. Additionally, we enjoyed a favorable mix shift within the portfolio, which was offset by lower service margins. On the selling, general, and administrative line, we were able to hold spending essentially flat year-over-year, offsetting the inflationary impact from compensation incremental spending and innovation with tight cost controls. As a result, adjusted EBITDA was $32.4 million, representing a margin of 22.4%. First quarter adjusted earnings per share was $0.36 compared with $0.40 in the year-ago period. A higher effective tax rate negatively impacted earnings by 2¢ per share. Turning to the balance sheet shown on slide seven, Enerpac's position remains extremely strong. Net debt was $49 million at quarter-end, resulting in a net debt to adjusted EBITDA ratio of 0.3. Total liquidity, including availability under our revolver and cash on hand, was $539 million. The timing of receipts of payments in the quarter. Capital expenditures were also lower as the year-ago period included additional CapEx for our new headquarters. Finally, with our balanced capital allocation strategy, we repurchased $15 million of stock in the first quarter while we maintain ample dry powder for strategic M&A. Based on our performance in the first quarter and encouraging trends on the order front, we are maintaining our full-year fiscal 2026 guidance. As shown on Slide eight, our expectations include organic revenue growth of 1% to 4%, and adjusted EBITDA growth of 6% at the midpoint. Free cash flow of $100 million to $110 million and earnings per share of $1.85 to $2. With that, let me turn it back to Paul. Paul Sternlieb: Thanks, Darren. As I mentioned at the top of the call, we enjoy the pickup in order rates in the first quarter. A trend we achieved across all three geographic regions. Demand's been particularly healthy from the infrastructure, defense, and power generation markets. At the same time, we have a strong backlog and excellent pipeline in HLT. And with the global rollout of Enerpac commercial excellence or ECX, we are benefiting from more discipline and rigor in our sales process and funnel management. In light of the strong order flow, we built additional inventory in the first quarter to ensure that we have the right products in the right locations to meet customer demand on a timely basis. As we've discussed, we are investing in our business to support Enerpac's growth strategy. As Darren mentioned, we are increasing spend on the innovation front, as we expect to deliver even more new product introductions in fiscal 2026. We are also investing in our commercial organization, expanding sales capabilities, coverage, and distribution in countries like India, Australia, and The Philippines. And we are enhancing our e-commerce capability with the implementation of a new technology platform that will improve the user experience and provide us with even more sophisticated marketing and analytical tools, all of which we expect to result in higher conversion rates. The topic of innovation and growth was front and center during our recent annual global leadership conference, which is a gathering of Enerpac's roughly top 50 leaders held each year in Milwaukee. I was truly inspired by the excitement and energy amongst the team, and the work completed to further refine our growth strategy and update our strategic growth initiatives. Speaking of growth, two of the attractive verticals we mentioned over the past few quarters are power generation and infrastructure. In the former, the proliferation of AI data centers and growing demand for electricity, including a resurgence in nuclear energy, underscores the need for Enerpac's products and services. As seen on slide nine, Enerpac provides a range of standard and specialized products and services that support the nuclear industry in multiple regions across all phases of building, operations and maintenance, inspection, refueling, and decommissioning. In addition to our standard industrial tools and services that many of you are familiar with, Enerpac sells a line of specialized tensioners under the BIOC name that have been the industry standard for refueling inspection for more than fifty years. The BIAOC lightweight, self-contained tensioner shown here is used to tighten reactor pressure vessel head studs. The SCT brings greater safety, reduces manpower, and shortens critical path time. With decades of experience serving the industry, and sizable market share in specialized products, we believe we are well-positioned to capitalize on growth opportunities in nuclear. Another strong market we've addressed over the past few quarters is infrastructure, where we've enjoyed significant contract wins for bridge and tunnel projects both in The US and internationally. Recently, Enerpac was selected to design and build a bridge launching system for the Juneau Creek Bridge in Alaska, which can be seen on slide 10. Our custom hydraulic cylinders and computer controls will pull bridge segments into place. When completed, the bridge will be the highest crossing in the state at 285 feet and the longest single-span bridge built in Alaska since 1982. As we continue to drive profitable growth at Enerpac, we believe we are well-positioned with multiple product lines in these key end markets to take full advantage of these secular trends and the opportunities in the market. Before we take questions, I would like to address a change on the investor relations front. Travis has accepted a position at another company and his last day with Enerpac is tomorrow. Travis has done an outstanding job building relationships and communicating Enerpac's story to investors. Moreover, he's been an invaluable resource internally, sharing intelligence and insight into the industry and capital markets. I would like to take this opportunity to thank him for his many contributions and wish him all the best in his new role. We have a search underway for Travis's replacement. Until we fill the role, Darren will be the main point of contact for investors. With that, we'd be happy to take questions. Eric: At this time, I would like to remind everyone, in order to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from the line of Will Gildea with CJS Securities. Please go ahead. Will Gildea: Good morning. Paul Sternlieb: Morning, Will. Thanks for taking our questions. You've talked for a number of quarters about efforts to improve profitability of the service business and investment ways that enable you to tap higher margin opportunities. What caused the sudden sharp decline in service revenue this quarter? And were you surprised by it? Paul Sternlieb: Right. So, yeah, I think we were certainly disappointed on the top line performance in the service business this quarter. After a strong fiscal 2025 year growth actually for service. You know, the issue, as I referenced in the remarks, was largely driven by a contraction in The UK market. And as part of our ongoing initiatives to capture, you know, higher margin service business, we passed on lower margin projects as we've talked about in the past. But given the consolidation and softness in the oil and gas market, you know, we've not yet successfully backfilled all that with more business, particularly in The UK given some of the market conditions there. I would say, as a reminder, our service business is a mix of rental and manpower. And overall, it is margin dilutive to Enerpac. We are actively consolidating our service footprint. We've already taken actions underway on that in Europe. While selectively continuing to make growth investments in the business. And I think it will take some time to work through the dynamics on the service side, but keep in mind that based on our reiterated guidance, we do anticipate growth and margin expansion in fiscal 2026. Will Gildea: Thank you. That's helpful. And then I guess just a follow-up question on that. Can you add some more color to the changes you're making in services to capture higher value business? I know on the last call, you gave the example of transitioning Algeria from an agent-based model to a direct-based model. Can you talk about the reasoning behind that? And if an initiative like that is successful, how long of a runway do you have to make that change in other regions? Thank you. Paul Sternlieb: Yeah. Thanks, Will. So I we we're taking a number of initiatives. Some are commercial, like you referenced, where we're moving from an agent to a direct model. That's the direct model is more the norm for our business. The agent is more the exception. In the case of agents and moving to direct, we end up with, obviously, the direct customer relationship, which allows us to do more follow-on business, obviously, capture more margin as well. Just get a closer overall relationship with the customer. So we feel good about that model and the progress that we're making in transition to multiple there. We're also investing in our service business both in field service capabilities, but also in capital equipment and tools. We've invested in the European market in our leak sealing business, for example, and some new capital equipment. That will allow us, we believe, to capture more growth opportunities and more market share in that service line and be able to respond to customers more quickly for their needs in that kind of service business. So we're making a number of improvements like that. We're continuing, as I talked about, to optimize footprint as well. Not only from a cost standpoint, but to be able to react quickly to customer needs. Will Gildea: Thank you, and switching gears. Can you add some color on your pricing strategy heading into calendar year 2026? Should we be expecting an annual price increase at the beginning of the year? Darren Kozik: Well, good question. So just as a reminder for everyone, we talked about in Q4. You know, going into the year, we saw about two points of benefit in price from the actions we took last year. You know, as we look at this year, you know, we will look to kind of remain obviously from a tariffs perspective and a price perspective. We're gonna make up for those on a dollar-for-dollar basis and hold our margin. So with that, we did you know, take a small low single-digit price increase in early December here. That will take some time to roll through the channel as we do have notice periods for that. But we constantly look at price and productivity to keep our margin targets and margin high. Thank you very much. Paul Sternlieb: Thank you. Eric: Your next question comes from the line of Ross Sparenblek with William Blair. Please go ahead. Ross Sparenblek: Hey. Good morning, gentlemen. Paul Sternlieb: Good morning. Darren Kozik: Morning, Ross. Ross Sparenblek: When we think about your, you know, 2026 organic guide, a little bit of price, what is contributing there from new products? And kind of the cadence of your new product launches? Everything about the rest of the year or fiscal 2026? Paul Sternlieb: Yeah. Ross, we're super excited by our innovation program. We highlighted that on the last Q4 earnings call. We launched, you may recall, five new products in fiscal 2025. We're pleased with the market acceptance. They continue to ramp commercially and globally. We also have a pretty ambitious innovation program and a set number of launches that we that we're targeting for this fiscal. Which are more than we launched in last fiscal. So, we're continuing to accelerate our innovation efforts. Part of it that is driven by additional investments we've made in innovation over the last few years. In fact, if you look at our 10-K, actually, over the last three years, you'll see incremental R&D spend on a dollar basis, as a percent of revenue every single year. I think that's a good indication. Also, you know, some folks may have visited our new innovation lab here at our global headquarters in Downtown Milwaukee. That's another investment we've made to drive improvements in our innovation program and faster time to market. So, we're pretty excited by the innovation progress we've made. Excited about the commercialization of the ramp of those products, and excited about the products we're planning to launch here in fiscal 2026. Ross Sparenblek: Okay. Well, when we think about kind of, you know, early days on this, you know, R&D flywheel, what is kind of the trajectory here as we think about, you know, the longer-term growth algo? I mean, are you trying to get a couple extra points of growth in new products? Are we targeting new adjacent TAMs, or is it just kinda upgrading and more defensive in the core portfolio? Darren Kozik: Know, Ross, I think as we think about growth, I mean, you heard us reaffirm our guidance for this year kind of 1% to 4%. You know, I think as we think of the macro, you know, Europe was the wild card for us. As we look at the higher end of that range, that encompasses a little bit of price. Recovery in the market, and obviously successful launches of our new products. Beyond that, obviously, innovation and the product investments we're making as Paul referenced, really, increase in R&D over the last three years. We'll see that start to take off into the future. Paul Sternlieb: Yeah. And Ross, I yeah. It's certainly part of the growth algorithm, you know, it is part of how we believe that you know, we are targeting to, perform or outperform our peer set. And we believe we've been able to do that successfully here. But I would also make the comment that, you know, obviously, we look very closely at our direct competitors and what they're doing from an innovation perspective. And we continue to firmly believe that we are outpacing not only investment spend, but just the pacing, intensity, and the level of new product launches relative to our competitive set. So we never rest on our laurels, but we're pleased with the progress we've made, particularly relative to the competitive set. Ross Sparenblek: Yeah. I can appreciate that. I mean, it looks like you guys are running around 2% of sales in your R&D spend. It has been ticking up slowly. I'm just trying to get a better sense of what your visibility looks like into your R&D funnel, like, how robust of opportunities you see today. Are we still kinda early days of planting the seeds? And, you know, buying the equipment and helping the guys, you know, get to the point where they're, you know, empowered to start building out that pipeline. Paul Sternlieb: Yeah. So we do have a multiyear innovation funnel. So we're always looking several years out. We're working on, you know, now updating that funnel for another year out as we execute on products and projects for this year. And just a reminder, again, you know, we launched five new products in fiscal 2025. You know, our target is to nearly double that number of new product launches here in fiscal 2026. So I think you'll see us gain additional pace and acceleration. And just, again, you know, reflective of the investments and the focus and the new processes that we've put in place. So that all is part of our overall growth algorithm at the end of the day. Ross Sparenblek: Okay. So we should anticipate a more measured pace of R&D growth going forward? Paul Sternlieb: Yeah. I again, I think three and a percent of sales or five percent tomorrow. Yeah. No. I mean, I think you'll see a consistent ramp over prior years. You know? But, you know, we've talked about beating the market by several 100 basis points in terms of top-line growth at the end of the day. And, you know, part of that clearly will be driven by our innovation program. Ross Sparenblek: Okay. I appreciate that. And if I can just add one more here. If I go back to last year, the backlog seemed pretty immaterial, but now we're speaking to confidence kind of these, secular growing, you know, project funnels. Any visibility there on sizing where the backlog kinda stands? Versus, like, a normalized basis and what's kind of underwriting that confidence? Paul Sternlieb: Yeah. I mean, I'll make a few comments Darren may in as well. I think, you know, we do you know, we're not a very heavy backlog business, as you know. We tend to be more you know, book to bill or shorter cycle, and most of our products are what we would classify as more OpEx than by our customers. Although, we do have a capital equipment business in HLT, you know, inclusive of DTA. That has more backlog. And, those backlogs tend to be sort of six to twelve-month time frames. You know, that said, I think we have seen, you know, our backlog tick up and that was driven by, you know, as we referenced on the remarks earlier, pretty strong order activity, and growth in overall orders in the quarter. And we were very pleased with that. And that order growth actually outpaced revenue growth in the quarter. So, again, giving us, you know, just more increasing confidence in our overall outlook for the year. Particularly as we as we go through the year. So I think all of that, you know, you know, just led us to maintain, you know, our current guidance for the full year. Darren Kozik: Only thing I would add, Paul, is, you know, Ross, as we kinda look at the business, obviously, we acquired DTA last year. DTA being part of our HLT business now is really helping that. As those markets tick off, we now have more products for our customers. As we talked about in Q4, their cross-sell opportunity is huge. We're bullish on HLT for the year. Ross Sparenblek: That makes sense. Alright. Well, thank you guys for the time. I'll pass it along. Eric: Your next question comes from the line of Tom Hayes with ROTH Capital. Please go ahead. Tom Hayes: Hey, good morning, guys. Thanks for taking my questions. Darren Kozik: Good morning, Tom. Paul Sternlieb: Hey, Tom. Tom Hayes: Hey. Just wanted to go back to one of Will's questions on the pricing, Darren. Was that pricing act that you put in place in December across all product families and globally? And then kind of a related question on gross margin for the year. How are you thinking about the margin flowing through the balance of the three quarters? You guys have done a great job of offsetting the tariffs. Just wondering your thoughts on kind of puts and takes on the margin front for the balance of the year? Darren Kozik: Sure, Tom. You know, I would say from the recent pricing those were in The Americas and in Europe. Now, you know, we did kinda release in this earnings a little bit more of a pie chart to give you a flavor for what our product business looks like. So just remember that low single-digit price increase is solely on product, it's not in the total portfolio. So when you factor that into the math, make sure you look at that aspect of it. I would say the second piece from a margin perspective you know, Q1 was where we thought it would be. Okay. Q2 will probably look more like Q1. And then as we get into the second half of the year, some of those higher cost tariffs will work off their way through the system, so margin will improve as we enter the second half of the year. Tom Hayes: Okay. Great. Appreciate that. I appreciate the color that on the product sales by region, but I'm not sure if you gave it by for APAC. Is that something you guys can share? Paul Sternlieb: Yeah. I think it's it's actually in the slides page five. But in APAC, we actually saw growth in this revenue in standard products. We saw we did see a sharp decline in APAC on HLT. I mean, it's a small business, and HLT tends to be lumpy. So that just varies quite a bit from quarter to quarter. Tom Hayes: Okay. Maybe just lastly, in respect to time, an area we don't talk about a lot, but you called it out on one of the early slides. It continues strong growth in Cortland. Just kind of remind us, a little bit about the business and kind of what's driving that strong growth. Paul Sternlieb: Yeah. We continue to be really pleased with the progress the team is making at Cortland. As you recall, that's effectively our other segment. And that's Cortland Biomedical. So, you know, roughly a $20 million revenue business annually. Obviously, not connected to our core tools business, but it is a very strong, very solid high growth, and high margin business. And you know, it doesn't draw undue investment or sort of management time or attention. So it runs relatively independent. But that business is very long cycle, very sticky. They design and develop and manufacture, you know, custom biomedical textile fibers for specifically for particular medical devices for giving OEM customers. So those are specked in and that those ultimate products that the customer has are obviously FDA qualified. So it's a very sticky business. Know, there is a lot of growth happening in that market. Cortland is exceptionally, we believe, well placed to support customers. We've won a number of new commercial opportunities, and you've seen that materialize in the ramp in revenue. So we continue to be quite bullish about the growth opportunities, the margin prospects, and we like the funnel of opportunities that we have there. Tom Hayes: Appreciate the color. Thank you. Paul Sternlieb: Mhmm. Thank you. Eric: Your next question comes from the line of Steve Silver with Argus Research. Please go ahead. Steve Silver: Thanks, operator, and thanks for taking my questions. And I'd like to offer my best wishes to Travis as well. So in the prepared remarks, you guys mentioned the pickup in order rates and you also mentioned building inventory heading into Q2. I'm curious just whether you can quantify at all the magnitude of the inventory ramp and maybe identify any key products beyond HLT? Darren Kozik: No, great question. I mean, we think about inventory as we head into, you know, into the quarter, I mean, it's up about 15%. Okay? So we had a really strong Q4. As you think about Q1, our product sales were at 4%. Okay? So we were very pleased with that. With all those product sales coming through, know, we had to work because our order rates were stronger than our product revenue growth rates in the quarter. Steve Silver: Great. And one more if I may. You guys have talked quite a bit in recent quarters about the balance sheet. Curious as to whether there's been any change in the M&A being in a very strong place to support strategic M&A. Funnel, if you will, just in terms of companies that are dealing with the macro issues that might be gravitating towards M&A at this time? Paul Sternlieb: Yeah, sure, Steve. I would say I'm pretty encouraged there as well. I mean, I do think M&A activity overall in the market and here for Enerpac has picked up reasonably considerably in the last quarter or two. We are actively evaluating several opportunities so we're spending a lot of our time focused there at, you know, the pace and quantity of deal flow has definitely picked up. We're having very robust dialogue on any number of opportunities. So I feel, you know, more positive and optimistic around that, the same time, I would say, you know, we remain extremely disciplined. As always, we will certainly not overplay overpay and, you know, our focus ultimately is, of course, on creating value for Enerpac shareholders at the end of the day. Steve Silver: Fair enough. Thanks again, and happy holidays to the entire team. Paul Sternlieb: Thank you. Thank you. Thanks very much. Happy holidays. Eric: As a reminder, if you would like to ask a question, there are no further questions at this time. I will now turn the call back over to Paul Sternlieb for closing remarks. Please go ahead. Paul Sternlieb: Okay. Well, thanks again for joining us this morning. We will be participating in the CJS new ideas for the New Year virtual conference on January 14, and the annual Roth conference in Laguna Niguel, California in late March. Thank you, and to all our team members around the world, customers, partners, and shareholders, best wishes for a wonderful holiday season, and a happy New Year. Eric: Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.
Operator: Good morning, and welcome to Worthington Steel's Second Quarter Fiscal Year 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question during that time, simply press star then the number one on your telephone keypad. I will now turn the call over to Melissa Dykstra, Vice President of Communications and Investor Relations. Please go ahead. Melissa Dykstra: Thank you, operator. Morning, and welcome to Worthington Steel's Second Quarter Fiscal Year 2026 Earnings Call. On our call today, we have Jeff Gilmore, Worthington Steel's President and Chief Executive Officer, and Tim Adams, Vice President and Chief Financial Officer. Before we begin, I'd like to remind everyone that certain statements made today are forward-looking within the meaning of the 1995 Private Securities Litigation Reform Act. These statements are subject to risks and uncertainties that could cause actual results to differ from those suggested. We issued our earnings release yesterday after the market closed. Please refer to it for more detail on the factors that could cause actual results to differ materially. Unless noted as reported, today's discussion will include non-GAAP financial measures which adjust for certain items included in our GAAP results which are presented on a standalone basis. You can find definitions of each non-GAAP measure and GAAP to non-GAAP reconciliations within our earnings release. Today's call is being recorded and a replay will be made available later today on worthingtonsteel.com. Now I'll turn it over to Jeff Gilmore. Jeff Gilmore: Good morning, and thank you for joining Worthington Steel's Second Quarter Fiscal Year 2026 Earnings Call. Before we discuss our second quarter results, I want to thank our more than 6,000 employees across North America and Europe. Your commitment to safety, quality, and service every shift, every plant, continues to set the standard. I'm proud of the work you're doing and grateful for it. On December 6, we issued a statement regarding potential M&A activity. Consistent with that statement, we will not be providing additional detail or addressing related questions on this call. With that, let's turn to the second quarter. Net sales were $871.9 million, Adjusted EBITDA was $48.3 million, and adjusted earnings per share was 38¢. We delivered these results in a market that remains mixed, combined with compressed galvanized spreads. Even with those headwinds, our execution remains strong where it matters most: safety, shareholder value, customer service, and transformation. On the commercial front, our team continues to win and capture high-margin business, particularly in Cold Rolled Strip. This quarter, we gained market share with new and existing customers. We saw all-time high shipments during the month of October to a key D3 automotive customer and won new business with a large Japanese OEM. While these programs will take some time to ramp up, this momentum fuels cautious optimism for early 2026. Our sales to the automotive market were strong this quarter. Looking ahead, North American light vehicle output is expected to hold. Consumer demand is also expected to continue to drive growth in the electrified vehicle market, particularly hybrids, which suits our strategy and product mix very well. Construction is stable but subdued. We are seeing pockets of strength in areas related to power and infrastructure. In agriculture, we have been able to capitalize on our diverse customer base to partially offset continuing soft conditions. We are hopeful that ag starts to rebound later in calendar year 2026 as interest rates ease and some policy uncertainty subsides. We're positioning for the year depending on OEM release schedules. Patients die casting and automation complement our core, extend our European reach, and improve our competitiveness in advanced mobility and industrial markets. We see good cultural alignment and early collaboration across operations and commercial teams. Thank you to everyone who is involved in this integration. Shifting to new products, this quarter, we announced an innovative technology related to our electrical steel laminations called full surface bonding. This patent-pending technique creates a stronger bond between the laminations in the motor core, eliminating gaps, and resulting in a motor that is more efficient, durable, and cost-effective. All of this is underpinned by daily transformation. Transformation at Worthington Steel isn't a project. It's how we run the company. We measure it in safety, quality, delivery, cost, and revenue. And we work to make progress every day. This quarter was no exception. As a key tool in our transformation toolbox, artificial intelligence is becoming more integrated into our processes. We deployed two AI agents in our credit department, allowing us to speed up individual customer Another success was the development of automation to improve advanced shipping notices to one of our key OEM customers. Automating this process increased the accuracy of our advanced shipping notice and resulted in improved payment timeliness. The common thread here is practical impact: saved hours, higher accuracy, faster decisions, and better use of our assets. These efforts are key to holding operating expenses flat even as volumes and complexity grow. For instance, in plants where we streamline changeovers and reduce scrap, service levels improve and cost per ton comes down. In shared services, where we automate manual reviews and postings, we redeploy talent to analysis. And in the supply chain, where we improve visibility, we integrate inventory more tightly with demand. These are small changes, but they are critical to building a stronger company quarter after quarter. In parallel with these improvements, our culture and customer relationships continue to shine and receive recognition. Last month, we were honored to be named a 2025 Supplier of the Year by Shepler Group USA, receiving the America's Region Supply Chain Award. Recognition for performance, collaboration, and service. Just as our customers are recognizing how we show up for them, others are recognizing how we show up for our people. We received the Military Friendly Employer Gold designation for the eleventh consecutive year. We support those who have served our country through a range of programs, including focused recruitment, onboarding resources, and the internal veterans network that fosters belonging and connection across our company. Additionally, Computer World has named Worthington Steel to its 2026 Best Places to Work in IT for the eighth year in a row. I'm proud to see this recognition for our team's work this year to update global systems, introduce AI-driven tools, enhance our work, and support growth through integration and modernization projects. Finally, this quarter, we released our 2025 Corporate Citizenship and Sustainability Report, highlighting progress in safety, greenhouse gas emissions, and waste elimination, as well as our commitment to developing people through training and supporting communities. Our report sums up what makes Worthington Steel different: our culture and commitment to safety. In calendar year 2025, we also marked our seventieth anniversary. In celebration, our employees set a goal they called 70 for Good, to complete acts of service with 70 nonprofits in our communities, and I'm proud to share that we exceeded that goal. The program embodies who we are at Worthington Steel. It's a tangible expression of being strong for good, and it reflects our belief that investing in our people and communities makes the business stronger. So let me end where I began, with our people. Thank you to every Worthington Steel employee for your commitment to safety, quality, and service. To our customers for your trust and partnership, and to our shareholders for your continued support. We have a clear strategy, a resilient model, and a team that knows how to execute. As I said in my opening remarks, the environment is mixed today. We remain cautiously optimistic about 2026. We believe conditions are setting up for improvement in 2026, and we intend to be ready. I'll now turn the call over to Tim for more detail on the financials for the quarter. Timothy Adams: Thank you, Jeff, and good morning, everyone. Before diving into the details, I want to start with the headline. This was a solid quarter operationally and financially, particularly given a mixed demand environment and continued volatility in steel pricing. We expanded adjusted EBIT meaningfully year over year, generated strong free cash flow, and continued to gain share in our most important markets while maintaining balance sheet strength and financial flexibility. For the second quarter, we are reporting earnings of $18.8 million or 37¢ per share as compared with earnings of $12.8 million or 25¢ per share in the prior year quarter. There were a handful of nonrecurring items in both periods. Excluding those, adjusted earnings were 38¢ per share this quarter compared with 19¢ per share last year, reflecting improved underlying performance. In the second quarter, we reported adjusted EBIT of $26.6 million, which was up $12.3 million from the prior year quarter adjusted EBIT of $14.3 million. That improvement was driven primarily by higher direct volumes, including continued share gains, improved direct spreads, and higher equity earnings from Serviacero, partially offset by lower toll processing volumes and higher SG&A, largely related to compensation, benefits, and professional fees. Total shipments were approximately 902,000 tons, down modestly year over year as lower toll volumes more than offset volume growth in direct sales. Importantly, direct sale volume made up 65% of our mix in the current year quarter compared with 55% in the prior year quarter. Direct volumes increased 13% compared with the prior year quarter, with the vast majority of the volume increase coming from our existing facilities complemented by the addition of CEDA. Our increased shipments in the automotive market continue to be a standout. Direct shipments to automotive increased 26% year over year. This reflects both share gains from new programs reaching expected volumes and a return to more normal production levels at one OEM customer that had curtailed production last year. More broadly, it reflects the strength of our long-standing OEM relationships and our collaborative, solutions-oriented approach with customers. Outside of automotive, energy shipments were up 50% year over year, largely driven by project-based solar programs. Agriculture volume was up 1% as grain bin strength offset weaker OEM equipment demand. These gains were partially offset by softness in construction, down 9%, heavy truck down 6%, and service center where customers continued to destock. Toll processing volumes declined year over year primarily due to the closure of our Cleveland area, Worthington Samuel coil processing facility last fiscal year and softer market conditions. We view this decline as cyclical, not structural, and expect toll volumes to improve as end market demand normalizes, excluding the impact of that consolidation. Turning to the other drivers for adjusted EBIT this quarter. First, direct spreads increased year over year. Direct spreads were up $6.5 million, primarily due to a $6.2 million favorable swing in pretax inventory holding losses. In the current quarter, we had estimated pretax inventory holding losses of $7.2 million compared to estimated pretax inventory holding losses of $13.4 million in the prior year quarter. We expect the market price for steel to remain volatile in the near term. After stabilizing around $800 per ton in September and October, the price for hot roll coil has increased to approximately $900 per ton. Given that many of our contracts use lagging index-based pricing mechanisms, we estimate in our 2026 inventory holding gains and losses will fall within a range of a pretax gain of $3 million to a pretax loss of up to $3 million. As I mentioned earlier, adjusted EBIT also improved year over year due to the increase in equity earnings from Serviacero, our Mexico-based joint venture. Serviacero's equity income increased $7.7 million due to higher direct spreads, inventory holding gains, as well as the favorable impact of exchange rate movements. Finally, these improvements in adjusted EBIT were offset somewhat by an increase in SG&A. The $9.8 million increase in SG&A was primarily due to increased compensation and benefits expense of $5.9 million and higher professional fees related to various strategic projects we are evaluating, up $2.3 million. Turning to cash flows and the balance sheet. This quarter, cash flow from operations was $99 million, and free cash flow was $75 million, benefiting from a reduction in working capital. Capital expenditures were $25 million in the quarter, primarily related to previously announced electrical steel investments. For fiscal 2026, we expect CapEx of approximately $110 million, reflecting a disciplined approach aligned with long-term growth priorities while maintaining flexibility in uncertain markets. On a trailing twelve-month basis, we generated $73 million of free cash flow. We ended the quarter with $90 million of cash and net debt of $92 million, down sequentially driven primarily by working capital improvements. Earlier this week, we announced a quarterly dividend of 16¢ per share payable on March 27, 2026. In summary, this was a solid quarter. We're gaining share in key markets, generating consistent cash flow, and maintaining a strong balance sheet. That combination positions Worthington Steel well to navigate uncertainty and to act decisively when opportunities arise. I want to thank our entire Worthington Steel team for their continued focus on safety, customer service, and execution this quarter. At this point, we will be happy to take your questions. Operator: We will now begin the question and answer session. Our first question will come from the line of Philip Gibbs with KeyBanc Capital Markets. Please go ahead. Philip Gibbs: Hey, good morning. Timothy Adams: Hey, Phil. Philip Gibbs: You'd mentioned in the SG&A increase in your remarks, Tim, that compensation and benefits were up $5.9 million and higher professional fees were up $2.3 million. So I'm wondering what out of that larger increase is more one-time in nature because I know you had called out a CEDIM fee. You know, I also know that some of this is related to some of the M&A that you're potentially working on. So just trying to think about what may be core because clearly, it was elevated this quarter. Timothy Adams: It was. If you look at it from a year-over-year perspective, we now have CEDIM in there. That's one thing we pointed out during my opening remarks. But if you're talking about one-time, it's those professional fees of $2.3 million. I think that's how we had it quantified. That is related to the strategic projects. Philip Gibbs: What about the $2.5 million that you had called out from the just the CEDIM, I believe it was, an earn-out. It's just CEDIM was not in the results. Timothy Adams: Yeah. CEDIM was not in the results last year. And now they're in the results this year. That's the Philip Gibbs: Oh, okay. So that wasn't a one-time payment. That was their underlying result? Timothy Adams: No. The one-time payment was related last quarter to the bonus. It was a transaction bonus that happened. I think it was $4.6 million. That's all done. And now what you're seeing is just adding CEDIM to the mix, adding them to the financials. Philip Gibbs: Okay. So the higher professional fees of $2.3 million, that's largely related to the M&A, and that could obviously be somewhat more volatile and unpredictable. Timothy Adams: Correct. Philip Gibbs: And then in the just the automotive momentum that you had on the direct side, pretty impressive, Jeff, was the primary catalyst behind that the cold rolled strip piece? I thought I heard you mention that early in the call. Jeff Gilmore: Yeah. So, Phil, actually not. Most of what you saw this quarter was the market share gains that we had talked about in previous quarters. And really those programs working to 100% of the market shares that we gained. We have been fortunate, and the market share gains have continued. And a lot of those recent wins are automotive, and they are specifically cold rolled strip specific. And those are programs that we will look forward to starting really in the first quarter of the calendar year. Would probably that third month of the first quarter and then starting to reach full potential in the second quarter of the calendar year. Philip Gibbs: How do we tease out think about how much of that, which is on the that you just mentioned, is related to the tariffs from just imported foreign steel, but also you know, how much eventually is related to onshoring of just OE platforms overall? So I'm trying to Great. Trying to kinda tease I'm trying to tease out the short term versus the long term. Thanks. Jeff Gilmore: Yeah. That's a great question. So the recent market share gains, I would tell you, a pretty significant amount of that is coming due to the onshoring of supply chains. We definitely had some customers bringing material over from Europe or elsewhere, and they are now localizing that supply chain. So certainly was favorable to us. We have not seen any market share gains due to any announcements of onshoring manufacturing. So you know, to your point, that is something that would be more in the future for us to look forward to. Philip Gibbs: Thank you. Operator: Our next question comes from the line of John Tumazos with John Tumazos Very Independent Research. Please go ahead. John Tumazos: Thank you very much. Could you walk us through the deductions for your minority interest partners? They were a little smaller this quarter than last year. Timothy Adams: Yeah. Compared to year over year, I think what you're seeing is there's definitely some slowness in demand. Right? And I think we're seeing some of that. So also, what you have to keep in mind is last year, at this time, we had the Samuel Worthington Samuel coil processing joint venture in there. And we've removed that this year. So you know, we've had some differences in profitability year over year. Really due to demand. John Tumazos: With the disappearance of the Cleveland facility in the Samuel JV, what happens to the machinery? Do you move it to other Worthington plants? Does it get sold for scrap? Just what happens to the equipment? Timothy Adams: Sure. So just to be clear, we had several facilities up there. So the business that we could, we moved to Twinsburg. Your question's a good one. We typically sell the real estate. And we've got that underway already. I think it depends on the type of equipment. If we think it's high value add equipment, we won't sell it, or we'll try to sell it offshore. If it's something that's a little more generic, like a footer or cut to length line, we'll find a home for it. If we can use it I mean, the first question you ask is, can you use it internally somewhere? And we try to do that first. And then if we don't have a need for it internally, then we'll look to sell it if it's low value added equipment. Operator: Our next question will come from the line of Martin Englert with Seaport Research Partners. Please go ahead. Martin Englert: Hello. Good morning, everyone. Quick question. The compressed galvanized spreads in recent history do you think is contributing to that, and what may prompt it to normalize? Jeff Gilmore: Yeah. I mean, question. I mean, I think the first thing you're gonna point to is certainly just decreased demand, Martin, and specifically construction. And so, you know, with decreased demand, it just creates certainly a lot more competitive rivalry. And certainly, that's what we have been facing Martin, we feel like we hit the trough and we'll start to see some margin expansion going forward. We saw a little of that in CRU here. On Wednesday. And the reason for the expansion and then potentially normalizing, hopefully, in the second quarter of the calendar year, it has much to do with the February. So, I mean, there is obviously limited galvanized product coming into the US at this point. I think it was down Tim, correct me if I'm wrong, 35% and probably will continue to increase. That has to do with antidumping as well. So I'd expect we continue to see that. It expand and then normalize somewhere around the second quarter. I think there's a ceiling because there certainly has been added capacity in the US as well, but we're certainly looking forward to that, Martin. Good question. Martin Englert: Have prime scrap spreads relative to obsolete had any negative impact on your business? Recently? Timothy Adams: No. Nothing material. Nothing meaningful to our margins, Martin. Martin Englert: Okay. And last one that I have is, calendar year 2026. What are your top transformation initiatives that you're focused on? Jeff Gilmore: Yeah. So we have we mentioned in prior quarters everything in our facilities, we have transformation events ongoing. You're very familiar with that. That's just how we do business. We really turned our focus after separation was transformation through our back office. And that's been certainly a big priority of ours. We just had our fourth report out with the back office teams. And the progress has been nothing less than amazing. The team has embraced it. We are seeing certainly savings and the hours saved have been significant as well. And in addition to that, Martin, that group has fully embraced artificial intelligence and we have had some great success stories with automation. And have launched our first two agents. So we've now moved to agentik.ai with much on deck there. And then the second, which is a key priority, is Temple. Transformation is not an area where we got too deep into it while we were getting integrated and familiar with their business. We have really started to double down on those efforts as we just think whether it's the income statement or the balance sheet there's gonna be a lot of good meaningful opportunities for the shareholders. And in addition to that, I say Temple is CEDIM. You know, we have mentioned they are world-class at tool and die making as well as world-class in automation. And so we have been excited to learn their best practices and embrace them because they're all scalable across that footprint. But back office and Temple would be the priorities. Operator: We are working towards a scorecard. I for our next call. We want to do a better job of quantifying surely hope to have that available the savings that we're seeing through transformation, as well as the launch of artificial intelligence. We have seen savings. We're gonna continue to see a lot more. We have five pretty robust pilots that I think will have certainly a positive impact on the income statement as well as the balance sheet. So we're gonna start quantifying those savings for you, specifically transformation and artificial intelligence. And then in line with that, we want to quantify and share with you the hours saved in the workplaces as well. We're seeing significant hours saved now, which is allowing us to redeploy all of our employees to more meaningful work. So we're excited about that as well. But that's certainly a commitment that I'm making to you right now, Martin. Martin Englert: Okay. Appreciate it. Look forward to the update on that front. Thank you. Jeff Gilmore: I will now turn the call back over to Jeff Gilmore, President and CEO, for closing remarks. Operator: Just want to thank everybody for joining us this morning and showing interest in Worthington Steel. Clearly, we're quite pleased with the quarter results. And excited over our strategy and the opportunities we have to continue to execute on it. Clearly, the story today was gained market share. And we've talked quite a bit about the market share gains in automotive. But even more exciting, we've started to see market share gains in other markets as well, whether it's agriculture, energy, or transformers, transformer core specifically, as well. So look forward to start seeing those shipments, you know, probably early second quarter of the calendar year, and so a lot for us to look forward along with transformation and artificial intelligence. So with that, we wish everybody happy holidays, and we very much look forward to talking to you again following the current quarter. Thank you. Operator: This concludes today's call. Thanks for joining. You may now disconnect.
Operator: Good morning. Thank you for standing by. Welcome to Accenture's First Quarter Fiscal 2026 Conference Call. At this time, participants will be in listen-only mode. After today's presentation, we will conduct a question and answer session. To ask a question, you may press star then 1 on your telephone keypad, and to withdraw your question, please press star then 2. As a reminder, this conference is being recorded. I'd now like to turn the conference over to Alexia Quadrani, Managing Director and Head of Investor Relations. Please go ahead. Alexia Quadrani: Thank you, operator, and thanks, everyone, for joining us today on our first quarter 2026 earnings announcement. As the operator mentioned, I'm Alexia Quadrani, Executive Director, Head of Investor Relations. On today's call, you will hear from Julie Sweet, our chair and chief executive officer, and Angie Park, our chief financial officer. We hope you've had an opportunity to review the news release we issued a short time ago. Let me quickly outline the agenda for today's call. Julie will begin with an overview of our results, Angie will take you through the financial details, including the income statement and balance sheet, along with some key operational metrics for the first quarter. Julie will then provide a brief update on our market positioning before Angie provides business outlook for the second quarter and full year fiscal 2026. We will then take your questions before Julie provides a wrap-up at the end of the call. Some of the matters we'll discuss on this call, including our business outlook, are forward-looking and, as such, are subject to known and unknown risks and uncertainties, including, but not limited to, those factors set forth in today's news release and discussed in our annual report and Form 10-K and quarterly reports on Form 10-Q and other SEC filings. These risks and uncertainties could cause actual results to differ materially from those expressed on the call. During our call today, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors. We will include reconciliations of non-GAAP financial measures where appropriate to GAAP in our news release or in the Investor Relations section of our website at accenture.com. As always, Accenture assumes no obligation to update the information presented on this call. Now let me turn the call over to Julie. Julie Sweet: Thank you, Alexia, and everyone for joining this morning. Apologies in advance for my voice. I am getting over a seasonal cold. And my voice is not quite cooperating. I really wanted to start today by thanking our nearly 784,000 people around the world for your extraordinary work and your commitment to our clients, which enabled us to deliver another strong quarter. Let me begin by sharing that we are very proud to have earned the number four spot on the great place to work list of the world's best workplaces, our highest ever ranking on this prestigious list. This recognition reflects our strategy to be the most client-focused, AI-enabled, great place to work for reinventers. It is especially meaningful because it is based on feedback from our people worldwide. Our ability to attract and retain great talent is one of our most important competitive advantages. Before handing over to Angie, I will briefly highlight the value we delivered this quarter, the importance of our partnership strategy, and this quarter's strategic acquisitions. We are very pleased with our results as we continue executing our strategy to help our clients reinvent every part of their enterprise, reflected in our bookings of $20.9 billion, including 33 clients with quarterly bookings greater than $100 million. We delivered revenue of $18.7 billion, growing 5% in local currency at the top of our guided range with broad-based growth across markets and both types of work. And we continue to strengthen our competitive position by taking significant market share on a rolling four-quarter basis against our closest global publicly traded competitors, which is how we calculate market share. Adjusted operating margin expanded by 30 basis points year over year, and we delivered adjusted EPS growth of 10% compared to Q1 last year. We continue to invest significantly to execute our talent strategy to rotate our workforce. We have nearly reached our goal of 80,000 AI and data professionals, and our people participated in approximately 8 million training hours this quarter, with a significant focus on building advanced AI technology and industry skills. Advanced AI is increasingly embedded in our large transformation programs, either enabling future enterprise use or being implemented directly as part of our solutions. Our strong leadership in advanced AI is a clear competitive advantage. As clients select us to help them capture the value of this technology now and over time and to build the readiness required to adopt it effectively across the enterprise. Momentum in the adoption of enterprise AI continues. Our Advanced AI bookings this quarter were $2.2 billion, nearly doubling from Q1 last year and also up from Q4. Revenue reached another milestone this quarter at approximately $1.1 billion. As we think about the advanced AI opportunity ahead, as you know, we were the first in our industry to share our bookings and revenue from Advanced AI, which we define as GenAI, Adjenta AI, and physical AI, and does not include data, classical AI, or RPA. We introduced the metrics in Q3 FY23 just months after GenAI burst onto the scene, initially to size the reality of the opportunity and to demonstrate our early leadership. At that time, bookings were about $100 million across roughly 100 projects, and revenue was immaterial. We have measured it consistently since that time. To date, we have now delivered approximately $11.5 billion in bookings across 11,000 projects and $4.8 billion in revenue. This will be the last quarter in which we share these specific metrics. The demand for AI is both real and rapidly maturing. We've now reached a point where advanced AI is being embedded in some way across nearly everything we do. Many of our clients are focusing on moving beyond stand-alone proofs of concept or initiatives. We're shifting to more scaled end-to-end solutions that integrate forms of AI, and it has become less meaningful to isolate the data specifically for advanced AI as it does not reflect how the demand is evolving on the ground. The full scope of our AI work and the value we're creating. Now turning to our partnership strategy. Our partnership strategy is grounded in client demand. Demand for reinvention remains strong, with our clients continuing to prioritize larger transformational programs focused on building their digital core and driving both efficiency and growth. Technology is front and center for every client, and the 60% of our revenue in Q1 from work we do with our top 10 ecosystem partners continued to outpace our overall growth. Given the importance of the broader technology ecosystem to our clients, we plan to continue providing insight into the role our top partners play in our growth by maintaining the metric we introduced at the end of FY2025, the percentage of our revenue tied to work with our top 10 ecosystem partners and its growth relative to our overall growth as it provides a clear view into our largest, most important partnerships. We also plan to continue to share our partnership strategy and how we're growing new businesses with an expanded group of partners. Most of our clients operate with a network of ecosystem partners to meet their enterprise needs. They rely on us to help integrate those partners and expect us to be the leader with the most relevant players across their enterprises, including new and emerging players. As a result, it is important that in addition to our top 10, we work with a broad set of partners that play important roles across enterprises. Many of these support specific functions such as digital manufacturing, product engineering, core banking and insurance, supply chain, and finance. While others are helping clients advance their AI and data capabilities. Our partnerships are critical to our clients reinventing all parts of their enterprises. Together, they represent meaningful opportunities for growth and further strengthen our ability to deliver comprehensive end-to-end solutions. Over the past year, in response to client demand, we've been expanding and in some cases forming new partnerships with emerging AI and data companies. And these will play a key role in helping our clients use these technologies, including creating new solutions and integrating and leveraging the synergies with their existing ecosystems. These evolving partnerships, which are laid out in our earnings presentation, are a significant competitive advantage for us. Turning now to our strategic acquisitions. Earlier this week, we announced an agreement to acquire a 65% majority stake in DLB Associates, a US-based leader in AI, data center, engineering, and consulting in the rapidly growing data center professional services market. An estimated $12 billion addressable market expected to double by 2030. Along with our FY25 acquisition of UK-based Sobin, this meaningfully expands our capital projects capabilities and presence in the high-growth data center consulting market. It also positions us to capture growth not only through the work we do with our helping our clients use AI, our primary business, but also in the opportunity created by the company's building the infrastructure to power AI. And this quarter, we also invested $374 million primarily in six strategic acquisitions. We're scaling our capabilities with CPOL integrated product support business in Italy, which brings deep defense and aerospace engineering expertise for mission-critical programs and total EBS solutions in Southeast Asia, which adds AI, cloud, and digital workplace innovation that strengthens Avanade's position in the region. And we're scaling new growth areas with NeuroFLASH in The US, a sales force and advanced AI leader whose AgenTex solutions expand our reach into the mid-market. Atomy in Japan, which enhances LearnVantage with AI learning and capabilities to help clients build AI-ready workforces. And Deco in The UK and Ranger Data in The US, which strengthen our Palantir and advanced AI capabilities. In summary, we are pleased with how we delivered a quarter and continued to strengthen our foundation for long-term growth. Over to you, Angie. Angie Park: Thank you, Julie, and thanks to all of you for joining us on today's call. We are very pleased with our first quarter results with revenue at the top of our guided range as well as strong adjusted margin expansion, adjusted EPS growth, and free cash flow. These results reflect the execution of our strategy to be the reinvention partner for our clients. We continue to invest for long-term market leadership while delivering significant value for our shareholders. Now, let me summarize a few highlights for the quarter. Revenues grew 5% in local currency, reflecting nearly 4% organic growth and were broad-based across geographic markets and types of work. Excluding the 1% impact from our federal business, our revenues grew approximately 6% in local currency in Q1. Adjusted operating margin was 17%, an increase of 30 basis points compared to Q1 results last year and continues to include significant investments in our business and our people. We delivered adjusted EPS in the quarter of $3.94, which represents 10% growth compared to EPS last year. And finally, we delivered free cash flow of $1.5 billion and returned $3.3 billion to shareholders through accelerated repurchases and dividends this quarter. We also invested $374 million primarily attributed to the six acquisitions in the quarter. With those high-level comments, let me turn to some of the details starting with new bookings. New bookings were $20.9 billion for the quarter, representing 12% growth in U.S. Dollars and 10% growth in local currency with an overall book to bill of 1.1. Consulting bookings were $9.9 billion with a book to bill of 1.0. Managed services bookings were $11.1 billion with a book to bill of 1.2. Turning now to revenues. Revenues for the quarter were $18.7 billion at the top of our guided range, reflecting a 6% increase in U.S. Dollars and 5% in local currency and a foreign exchange impact of 1.4%. Consulting revenues for the quarter were $9.4 billion, up 4% in U.S. Dollars and 3% in local currency. Managed services revenues were $9.3 billion, up 8% in U.S. Dollars and 7% in local currency, driven by high single-digit growth in technology managed services, which include application managed services and infrastructure managed services, and mid-single-digit growth in operations. Turning to our geographic markets. In The Americas, revenue grew 4% in local currency, excluding the 2% impact from our federal business, Americas grew 6% in local currency in the quarter. Growth was led by banking and capital markets, industrial and software and platforms partially offset by a decline in public service. Revenue growth was driven by The United States. In EMEA, we delivered 4% growth in currency, led by growth in banking and capital markets, insurance, and life sciences. Revenue growth was driven by The United Kingdom and Italy. In Asia Pacific, revenue grew 9% in local currency, led by growth in banking and capital markets, communications and media, and public service. Revenue growth was led by Japan and Australia. Before I move on, I want to briefly update you on the business optimization actions we initiated last quarter and completed in Q1 as part of executing our talent strategy. This quarter, we recorded $308 million in costs, primarily related to employee severance, bringing the total for these actions over the past six months to $923 million. Our business optimization costs impacted operating margin, tax rate, and EPS. The following comparisons exclude these impacts and reflect adjusted results. Now moving down the income statement. Gross margin for the quarter was 33.1% compared with 32.9% for the same period last year. Sales and marketing expense for the quarter was 10% compared with 10.2% for the first quarter last year. General and administrative expense was 6.1% compared to 6% for the same quarter last year. Adjusted operating income was $3.2 billion in the first quarter, reflecting a 17% adjusted operating margin up 30 basis points compared with results in Q1 last year. Our adjusted effective tax rate for the quarter was 23.9% compared with an effective tax rate of 21.6% for the first quarter last year. Adjusted diluted earnings per share were $3.94 compared with diluted EPS of $3.59 in the first quarter last year, reflecting 10% growth. Day services outstanding were fifty-one days, compared to forty-seven days last quarter and fifty days in the first quarter of last year. Free cash flow for the quarter was $1.5 billion resulting from cash generated by operating activities of $1.7 billion net of property and equipment additions of $157 million. Our cash balance at November 30 was $9.6 billion compared with $11.5 billion at August 31. With regard to our ongoing objective to return cash to shareholders, in the first quarter, we accelerated our share buybacks and repurchased or redeemed 9.5 million shares for $2.3 billion at an average price of $245.32 per share. Also in November, we paid a quarterly cash dividend of $1.63 per share, a 10% increase over last year for a total of $1 billion. So in summary, we are very pleased with our Q1 results. And we are focused on delivering Q2 end of the year. Before I turn it back to Julie, let me provide an update on our commercial models. Our large base of fixed price work continues to grow and is a strong foundation for how we believe our commercial models will continue to evolve. In FY 2025, about 60% of our work was fixed price, which is up about 10 points over the last three years. This reflects the increasing role of our proprietary platforms over a long period of time and clients wanting greater certainty in cost delivery. This is where our scale, experience, and strong financials matter. Now back to you, Julie. Julie Sweet: Thank you, Angie. Starting with the demand environment, clients continue to prioritize their most strategic and large-scale transformational programs, which convert to revenue more slowly, but position us at the center of the reinvention agendas. The pace of overall spending and discretionary spend in our market is at the same levels we have seen over the last year. We are delivering strong results and taking market share in this environment because reinvention is critical to our clients and our clients know we deliver real reinvention with real outcomes. Let me turn to four strategic growth areas that are essential for enterprises to use technology, AI, and data to achieve these outcomes. First, the digital core. Cloud, data, and platform modernization remain foundational to every reinvention. When companies tell us they want to use AI, they quickly realize that AI is only as powerful as the data underneath it. Most organizations have mountains of data, so spread across systems, stored in different formats, often unreliable or incomplete. Before AI can create value, underlying data and the connected and properly governed processes connected to it need to be simplified, cleaned, and modernized. We help clients manage all their data wherever it may be and turn it into something they can access and use to make decisions, train models, and uncover insights. We modernize their data platforms and make sure the data flows securely and consistently across the business so people can trust it and use it with confidence. We also use AI to improve data quality at scale. In the age of AI, data isn't just an input. It's the advantage. That's why we continue to see at least one out of every two advanced AI projects lead to a data project and we're the partner that helps our clients unlock it. For example, Essity, a global leader in hygiene and health, is making advanced AI, including agentic AI, core to how they run their business, starting with procurement and finance, setting the foundation for company-wide reinvention. We are helping Essity build a cloud-based data and AI platform that combines Accenture's deep industry and functional expertise with our ability to scale advanced AI. We're starting in high-volume parts of the business. Processing hundreds of thousands of purchase orders a year, the opportunity for double-digit productivity gains is strong. This foundation positions Essity to move decisively beyond pilots and reinvent end-to-end processes, unlocking new pathways to value and long-term growth. Security remains one of our fastest-growing businesses, growing very strong double digits this quarter. As cloud data and AI connect more of the enterprise, the threat landscape expands quickly. We are using AI to detect threats earlier, respond faster, and simplify complex environments. Companies cannot scale AI unless they can do so safely, this continues to be an important growth engine. Building on our long-standing relationship, we are partnering with one of Saudi Arabia's leading financial institutions to build a robust internal cyber defense capability that is designed to protect the bank, meet rising regulatory expectations, and enable the launch of modern sustainable digital services. We helped the bank move from limited visibility to a far more advanced security position, expanding threat detection, reducing incident response times, and are helping to improve their national cyber maturity scores. We are also helping the bank achieve full regulatory audit readiness, a critical requirement for trust and future growth. Now with Accenture's deep cybersecurity expertise, we will bring in specialized talent, strengthen governance, and help with upskilling to accelerate their progress. With the stronger foundation and the internal capability to maintain it, the bank can now introduce new services with far greater confidence and is well-positioned for its next phase of innovation. Accenture Song grew mid-single digits this quarter. Song continues to help B2B and B2C clients drive growth by improving how they connect with, and shape the customer's experience, the marketing first reaches them, the website or store where they buy, the service when they need help, and the digital products they use every day by bringing together design, creative, data, technology, and industry expertise to reinvent marketing, commerce, service, and digital products. One example is our partnership with Virgin Media O2, one of The UK's leading telecom providers. Where we didn't just modernize technology. We worked together to transform the entire customer experience and how work gets done. By rebuilding their digital core and embedding advanced AI, nearly 10,500 service agents now work on a unified cloud platform with connected data and workflows. More than 300 customer journeys have been redesigned, simplifying processes bringing the full customer context into a single view. These changes are helping agents resolve issues faster and more accurately contributing to a 35% increase in net promoter scores in some areas and same-day resolution improving from approximately sixty-five percent two years ago to nearly 90% today. A cultural shift is also underway. Upskilling teams to enhance their customer-first mindset turning service calls into opportunities to improve customer loyalty and trust. This kind of change takes strategy, process, and talent working in sync with Accenture's song bringing it all together to design experiences that resonate at scale so that Virgin Media O2 can drive innovation, and set a new benchmark for customer service excellence. We also continue to grow in the core value chain of many industries through our Industry X offerings, growing mid-single digits this quarter. Manufacturing and engineering remain early in their digital transformation journeys. Digital twins, predictive analytics, robotics, and other AI-enabled technologies are creating new levels of efficiency and resilience. Those same strengths are now propelling our capital projects work, where clients need us to design, build, and commission critical infrastructure and extend Accenture deeper into their core value chains. Take North America's transit sector, Agencies are facing mounting pressure to modernize aging infrastructure and meet growing ridership needs. Efforts that require delivering multiyear multibillion-dollar capital programs. Partnering with one of the largest public transit agents we're applying our infrastructure and capital projects expertise help transform how these critical programs are managed spanning a vast network of subway stations, maintenance facilities, bus garages, and administrative offices. By bringing together multiple data sources across their construction portfolio, we are helping to enable more informed decision-making. Supported by rigorous project controls, advanced scheduling, cost and risk management, and safety and financial oversight to improve efficiency, transparency, and forecasting. Just as we do in manufacturing. As a result, the agency is strengthening its daily transit operations and supporting safer, more reliable service for millions of riders. Now let me share how we're seeing demand evolve with the work we're doing in advanced AI. It is early innings, which means there is significant opportunity ahead. Technology is rapidly evolving. While enterprise adoption at scale is nascent, demand continues to grow, and IDC estimates that the total addressable market for advanced AI is expected to grow more than 40% through 2029, from roughly $20 billion today to over $70 billion. We are seeing a steady increase in demand, Over the last nine quarters, we've seen about 100 incremental clients initiate advanced AI projects with us each quarter, but most have a lot of work to do before they will be able to scale across the enterprise and it is still a relatively small part of our client base. Over 1,300 clients to date out of 9,000. So we see lots of opportunity to help those who have initiated and to expand in our existing clients as well as attract new clients. Clients increasingly understand that advanced AI is not a quick fix. Adopting it successfully requires foundational work to deliver P and L impact and other critical outcomes. This is why our clients and the broader ecosystem are turning to us to help bridge the gap between powerful technology and achieving real measurable results. The real opportunity is not proving AI works, it is making it work everywhere. Scaling AI means working with all forms of AI and means embedding it across critical processes so it transforms outcomes. For example, we are partnering with Bristol Myers Squibb, a global biopharmaceutical leader, to transform how therapies move from discovery to market. By embedding AI at scale across the organization. Drawing on its deep life sciences experience, BMS is using AI to accelerate innovation and expand its impact for patients. We are also establishing early leadership in Agentic AI with a scale of our deployments working across the ecosystem. We have built an extensive library of over 3,000 reusable agents reflecting our deep industry and functional expertise. These agents have been used in real client environments giving us a unique foundation of proven solutions to help clients move faster, and with more confidence. Over to you, Angie. Angie Park: Thanks, Julie. Now let me turn to our business outlook. For the 2026, we expect revenues to be in the range of $17.35 billion to $18 billion. This assumes the impact of FX will be approximately positive 3.5% compared to the 2025. Our Q2 guidance reflects an estimated 1% to 5% growth in local currency, including about a 1% impact from our federal business. For the full fiscal 2026, based upon how the rates have been trending over the last few weeks, we continue to assume that the impact of FX on our results in U.S. Dollars will be approximately positive 2% compared to fiscal 2025. For the full fiscal 2026, we continue to expect revenue to be in the range of 2% to 5% growth in local currency over fiscal 2025, including an estimated one impact from our federal business. Excluding the impact of federal, our revenue is expected to be an estimated 3% to 6%. This year, we continue to expect an inorganic contribution of about 1.5% and we continue to expect to invest about $3 billion in acquisitions this fiscal year with the potential to do more. For adjusted operating margin, we continue to expect fiscal year 2026 to be 15.7% to 15.9%, a 10 to 30 basis point expansion over adjusted fiscal 2025 results. We continue to expect our annual adjusted effective tax rate to be in the range of 23.5% to 25.5%. This compares to an adjusted effective tax rate of 23.6% in fiscal 2025. We continue to expect our full year adjusted diluted earnings per share for fiscal 2026 to be in the range of $13.52 to $13.90 or 5% to 8% growth over adjusted fiscal 2025 results. Due to slightly higher business optimization costs in the quarter, which were $58 million above our original Q1 estimates, we now expect GAAP EPS of $13.12 to $13.50. For the full fiscal 2026, we continue to expect operating cash flow to be in the range of $10.8 billion to $11.5 billion, property and equipment additions to be approximately $1 billion, and free cash flow to be in the range of $9.8 billion to $10.5 billion. Our free cash flow guidance reflects a very strong free cash flow to net income ratio of 1.2. We continue to expect to return at least $9.3 billion through dividends and share repurchases, an increase of $1 billion or 12% from fiscal 2025. Our Board of Directors declared a quarterly cash dividend of $1.63 per share to be paid on February 13, a 10% increase over last year. We remain committed to returning a substantial portion of our cash generated to our shareholders. With that, let's open it up so that we can take your questions. Alexia? Alexia Quadrani: Thanks, Angie. I would ask that each keep to one question and one follow-up to allow for as many participants as possible to ask a question. Operator, would you provide instructions for those on the call, please? Operator: Absolutely. Thank you. And today's first question comes from Tien-Tsin Huang with JPMorgan. Please go ahead. Tien-Tsin Huang: Hey, thanks so much. Julie, I appreciate your comments on scaling AI and how it's not a quick fix. So I do want to ask or maybe comment that we've noticed a bit of a shift in how people view the consulting industry's role in AI. Do you agree with this, Julie? And if so, why now? What's driving the change? And are you seeing any impact on business activity as a result of that? Julie Sweet: Thanks, Tien-Tsin. Yes, we're actually seeing the shift. And it's really because of what we've been saying for a while, right? Enterprise AI is fundamentally different than consumer AI. Consumer AI adoption's instant. The enterprise, you can't adopt it unless you have the right security. You've done the right work around processes, and most companies have fragmented and siloed processes. You have to have the right data, and most companies have, you know, mountains of data with a lot of issues in the data, and we call it, you know, they have processed it, they have data debt. And, of course, they need a modern digital core. And that's why so many companies are still early in the journey. You know, our clients are convinced AI is gonna be a very part of their future, and it's gonna allow them to unlock brand new value. And that's why they're coming to us because now they want to actually get there. And that's the foundational work that's driving our business. And then when you look at our bigger deals over the last quarter, for example, you see that advanced AI is, you know, a bigger part of those deals. You also see that it's both growth and cost because clients are not only fixated on the productivity side, you cannot cut your way to growth. And in this market, they need to find more growth. And this is where our strength really comes in, and that's why we're delivering strong quarters. Right? We have great momentum this quarter because we can help them on the growth agenda and the cost agenda. And we're, you know, so critical with our ecosystem partners. We understand where the technology is. And where it's going. And you saw that again this quarter with our growth with our top 10 ecosystem partners outpacing overall. And then, of course, some exciting new partnerships. Tien-Tsin Huang: Alright. Perfect. Then sort of a related question. You mentioned partners. I'll ask around these AI partnerships. You announced a bunch of Anthropic, OpenAI, Snowflake, etcetera. Just how might these partnerships on the AI front be different than other tech ecosystems partnerships in terms of think about time and productivity or, you know, investments to certify personnel to scale it up, etcetera. Just your thoughts on that and how quickly might these AI partners to the top 10? The partner front? Thanks. Julie Sweet: Well, first of all, the partnerships really demonstrate our talent advantage. So we've got decades of experience in being able to learn new technologies, skill people. Who else could have hundreds of thousands of people, you know, helping our biggest partnerships continue to grow incredibly well and be able to dedicate and commit, you know, 30,000 people here, etcetera. So excuse me. I think that's a really important part of what you're seeing with us in our growth and our ability to grow into new areas is that we've got the foundation of great talent and the ability to upscale. And, look, we're expanding in these partnerships because of what we see in client demand. But our clients have an ecosystem of partners, and the role that we play is to be, you know, we really try to be number one with all of the partners so that we can help our clients integrate and use these new technologies with their existing ecosystem, which is absolutely critical to them. So, you know, lots of excitement. The market is expanding, and we're gonna grow with that market. Tien-Tsin Huang: Thank you. Operator: Thank you. And our next question today comes from Jason Kupferberg with Wells Fargo. Please go ahead. Jason Kupferberg: I actually wanted to pick up where Tien-Tsin just left off. I was curious as a follow-on regarding these big partnerships in the AI world. When did they start moving the needle on revenue in your view? It's obviously critical to lay the foundation right now. But is this, you know, a next twelve months dynamic where we can start to see it showing up in the P and L perhaps? Or is it longer dated? And then I have a follow-up. Thanks. Julie Sweet: Susan, what I would say is these partnerships are part of an ecosystem for our clients. And so it's, I think, more about the market itself, right? So our enterprise adoption is dependent on clients. You know, these partnerships are all about enterprise adoption. So I would focus more on how the market and enterprise adoption is going as opposed to specifically because we can scale as fast as needed. And that is, you know, our expectations there are reflected in our guidance. Jason Kupferberg: Okay. Understood. And then I wanted to pick up on your comments about the increased adoption of the fixed price work because I think it ties in with a trend we've been seeing in your numbers where revenue growth is outpacing headcount growth, pretty materially and consistently. So do you feel like that trend is sustainable? And what's really driving that? Because we've all been talking about nonlinear revenue growth for a very long time, and it seems like Accenture is now actually starting to see it. Angie Park: Hi, Jason. Good morning. It's Angie. Let me take that. We're really pleased with our revenue per person this quarter, which did grow 7%, which is really primarily driven by our talent rotation. We're now hiring, as we shared with you last quarter. We're hiring for the new skill, and so we expect that revenue per person growth to moderate over the course of the year, and that'll go up and down, you know, really based upon when we bring people in. And, Jason, just to add on, though, you're right. So this sort of revenue and headcount that sort of breakage has been going on for a long time. It really goes back all the way to the introduction of RPA. So we'd expect that to continue, but it's not tied exactly as Angie said to, like, what's happening quarter to quarter. Jason Kupferberg: Right. Thank you, guys. Operator: Thank you. And our next question today comes from James Faucette with Morgan Stanley. Please go ahead. James Faucette: Thank you so much. I want to follow-up on a couple of things that have been said by Tien-Tsin and Jason. First, back on AI and those bookings, I appreciate that AI is becoming integral to all of your engagements. And so maybe deploying specific bookings, etcetera, on a go-forward basis makes sense. But how should we think about, like, the mix between what we could think of as proof of concept type engagements versus going into full production, any color you can give on the types of projects that are moving to whether that be by industry or type, etcetera. Julie Sweet: Sure. Great question. So first of all, one of the things that I think is important to understand is that people have moved ahead away from just thinking about models. Right? It's about models embedded in solutions, and most of the solutions involve different kinds of AI. Right? So you have if you have class RPA that is 100% accurate, right, depending on what you're using, you really have to understand all of that. And that's what the clients are looking to us for is to bring them more solutions, which is why our partnerships are really important. And our understanding of the industry and the function is so important. So if you're doing something in banking, which is one of the industries where there's a lot going on in advanced AI, you know, know your customer and compliance. Solution they're looking for you know, you have to understand the actual compliance how it works across the bank. And that's really the importance now of what you're seeing that people get that these are about solutions about really understanding operations. And that's what we're bringing. If you look at sort of where things are scaling into production, of customer so a lot of customer service, and I gave one of the examples today on the call. With the Virgin Media O2. You're also seeing areas like finance, and procurement. And so these are areas where you've got, you know, good technology readiness. We have a lot of depth of understanding here. And you can move relatively quickly because it's using a lot of usually pretty good data. We see a lot of value coming and being embedded in the core value chain, you know, the grid and utilities, right, the pharma and R&D. But those are the harder areas to crack. And so it's still pretty early in terms of scaling. But that kinda gives you a flavor for it. And so any of the industries that have a lot of customer service, are there banking has been, you know, one of the lighthouses, insurance to some extent already. But the things I tell my clients is that in every industry, unlike prior ways of technology, there are leaders in every industry who already had strong digital cores who are leapfrogging. It's very different than cloud where you had some, you know, industries like, say, energy lagging behind for quite some time. It's quite different this time. And that really plays to our strengths because we have that diversity of industry expertise and our clients look to us to really bring it across the board. James Faucette: That's great. And then as a follow-up, you mentioned and talked a little bit about the revenue per head and the evolution there. One of the questions that we get from investors a lot is around pricing particularly on a like-for-like basis and how that may be evolving and how we should think about the puts and takes there, especially as it relates to your margins and margin growth objectives? Julie Sweet: Yes. I think hi, Jim, how are you? Hi, James. So as it relates to pricing, so just overall, I think you have to look at it in totality. And so as you think about our pricing, one of the things and we've been seeing, and it's early, but we're seeing pricing improve in several parts of our business. And as you look, one of the things that we're super pleased about is that our contract profitability, we're starting to see some of that improved pricing, show up in the P and L. And we saw that this quarter. So we were really pleased with that, and it's really about balancing those components. James Faucette: Great. Thank you. Operator: Thank you. And our next question today comes from Bryan Keane at Citi. Please go ahead. Bryan Keane: Hi, guys. Good morning. Wanted to ask about discretionary spend. We're all waiting around for a while here for that to come back. I'd just be curious to know how you're thinking about that heading into next year conversations with clients and should we be hopeful that discretionary spend comes back, you know, in the turn in the calendar year? Julie Sweet: Alright, Bryan. I'm not waiting around for it to come back. Okay? So just to be clear, we have not been waiting around coming back. So I know you guys are, but we're delivering our results despite it because we really at this point, you know, we haven't seen a change in the market. And when you look around, like, all reading the same thing. We saw what came out, you know, in The US. This week on jobs. If there isn't some catalyst out there where we're saying that's the catalyst that's gonna change confidence or change industries. And look, I you know, we work across industries. Every industry right now has got a different set of, you know, challenges with a lot of these big macro trends. And so you know, we're not having conversations today that would suggest that there's gonna be a change in discretionary spending. But what the conversations we are having, though, is you know, CEOs who are just like, you know, Accenture, they're very resolute. That they have to deliver results. Despite the market. And that's why, you know, we're focused on pivoting the way they're spending. We're focused on doing the large transformational deals and then being at the center so that when we hopefully do get tailwinds, we're there, you know, to really benefit from them. But we're not seeing a catalyst. We'd love to hear it if you guys are in the external environment, and our conversations haven't changed. But people are you know, they're gonna deliver despite that. Bryan Keane: Got it. Got it. And then just as a follow-up, that 60% of work being fixed prices is above industry norms. And you guys have been working on that forever. And that's pushed up 10 points in the last three years. How do we think about the as AI becomes a bigger piece of that, does that can that number get up to 70 or 80%? And just a little bit of how that pricing works with productivity, how do you pass on some savings and keep it yourselves? Thanks so much. Julie Sweet: Well, one of the things that I think as you think about our positioning in the market is that these fixed price deals really are about our clients having confidence that we can deliver outcomes. And to do that, you've gotta have our scale, our experience, our strong financials. And so we see that it is a real competitive advantage in this market where clients cannot simply experiment. They can't take a flyer. They have to know that when they're investing with a partner, they're gonna deliver results. And that's why we feel the market now, you know, continue. We're taking market share because of that. So I can't, you know, predict exactly. I mean, I think commercial models are gonna continue. We believe they're gonna continue to evolve. And we've got a really strong foundation for that. And we are starting to see more focus on, you know, trying to get to outcome-based. So, you know, I think more to come in the models, but it really speaks to the underlying strength of our business. And then with respect to, you know, pricing and passing it along to our clients, remember, this has been a business model for the industry. Industry, really all the way going back to the introduction of technology and RPA, right, where we're signing contracts that depend on our use of more technology over time to provide productivity. And so that's still the commercial model of the industry right now. Bryan Keane: Got it. Thanks for taking the questions. Operator: Thank you. And our next question today comes from Bryan Bergin at TD Cowen. Please go ahead. Bryan Bergin: Hey guys, good morning. Thank you. Wanted to ask on the growth side. So just really the moving parts as you consider the fiscal 2026 growth outlook from here. So you affirmed the 2% to 5% after a solid 1Q at the top end, 2Q looks largely as expected. Yet the federal headwind is actually a bit less than the lower than the prior range. So it sounds like demand is broadly consistent. So the question is what may have precluded a low-end raise just considering that low-end raise had deterioration assumed before. Just curious, is there anything incremental there or just ongoing uncertainty and just prudent approach just given this early in the fiscal year? Angie Park: Hi, Bryan. Good morning. So look, as we think about, we just had a really strong print in Q1. We had strong bookings, two quarters in a row. We can see the backlog from our large deals. We've got a solid pipe. It's our 2% to 5% really reflects what we see going for the remainder of the fiscal year. We got three quarters left and it's our best view. And we were really pleased that federal came in a bit better than what we had anticipated, which is the strength of the work that they do. Bryan Bergin: Okay. Understood. My follow-up is on Song. Heard the mid-single-digit growth that sounds consistent here, which is good. Wanted to dig in and appreciate the detail you gave in the slides. Can you just talk about the implications for song growth just looking ahead, just you consider recent advances in models like Sora. And there's a perception that enterprises can do more of this themselves or just the cost of such service we'll see material deflation. So how do you navigate that type of a backdrop going forward? Julie Sweet: SOAR is a great example of something we embrace and are helping our clients embrace because what SOAR does is help them accelerate production, and so it's like a really good tool but it's just a tool. Right? So what Accenture does is say, how do you use these tools to actually get productivity differently to, more importantly, create the right new product and the new experience. And that's why one of the things I was mentioning earlier was that if you look kind of at our largest deals, this quarter, a big proportion of them have customer and customer service in it, because clients need growth. And the tools are just a productivity piece. They're not what you can do to, you know, how do you actually respond to social media sentiment in an hour. Right, which is what we can do in our operations around marketing, for example. So we see Song as critical because again, you can't cut your way to growth. The market's not getting, you know, better overall for our clients. And they're really turning to us to find the new ways and to help them use these tools in the meantime to get more productivity. Bryan Bergin: Makes sense. Thanks, and happy holidays. Operator: Thank you. And our next question today comes from Darrin Peller at Wolfe Research. Please go ahead. Darrin Peller: Thanks guys. Julie, what does the revenue opportunity look like at a client that has done all of the digital core work required to be get effectively leveraging AI much as you'd like to see. And then maybe just a quick follow on would be just around managed service opportunity and what that looks like. Really trying to get a sense if you have any customers that are really at that stage that can give us examples of whether it's a net increase revenue and the opportunities you have in different services that could help a client out that has the digital core ready? Julie Sweet: Darrin, it's a great question. And what we're seeing is it's really expanding our work. So think about you've built a digital core. And of course, just keep in mind, you know, there's still a lot to do in the digital core because there's so much new opportunities and new ways of thinking about data. For example, than if you, you know, built your data foundation a few years ago. So there's still a fair amount of work to do. Even if you've got a pretty modernized digital core. But the real work, and this is why I think it's so important to understand how you adopt AI, is that you have to then change the processes. You have to upscale your talent. Right? One of the things I talk to CEOs a lot about is that if someone comes to you and says, you know, here's how we do something today. Now we're gonna use AI, and there isn't a big change, then they're not gonna get value. And most of the work today has been around sort of isolated areas, hasn't been across the enterprise. And so what you're seeing is we've talked a little bit also about this last quarter, this inflection point where you've got now clients saying to us, okay. We have to do this across the enterprise. How do we think differently? Like, how do we put marketing and sales and service together? And they, you know, used to be in different functions. What does that mean then for the use of AI? So the actual rewiring is a huge amount of work. And remember, the technology today, like, it's great in some parts of the enterprise. But, like, if you think about manufacturing or engineering, where we've had been investing for decades, it's still early in the digitization journey even for those who have a core. So we have lots of great examples and that's why I talk about to our clients. Look. Where people have already invested a lot. They're investing with us now to try to leapfrog. And that's where we are so different because we're tech but we have the industry and the functional and the change management. Right. Which is what unlocks the enterprise AI. So we really see a big opportunity, you know, over the next decade. Darrin Peller: That's great. That's really helpful. Just very quickly, you know, following the business optimization, what is your headcount? What should we expect from headcount? Your headcount strategy for the remainder of the year? Thanks again, guys, and happy holidays. Angie Park: Thanks, Darrin. I'll take that. So as it relates to our headcount, look, we expect to we're doing our talent rotation and we expect to increase our headcount throughout the year. In The U.S. and in Europe. So you should see that come through for the remainder of the year. Darrin Peller: Okay. Thanks again. Operator: Thank you. And our next question today comes from Kevin McVeigh at UBS. Please go ahead. Kevin McVeigh: Great. Thanks so much and congratulations on the results. Think you'd mentioned that advanced AI is 1,300 of your 9,000 clients and that implies about 14%. Versus the 6% revenue and 9% bookings. Should we use that in terms of a leading indicator or goalposts of what the revenue and bookings should scale? And if that's the case, any sense of that 14%, how that scales over time just as we're thinking about the adoption rate? Julie Sweet: The way I would really just think about it, so it's not meant to be some new metric in that way. What it's really showing is just how rapidly it's moving. You know, 100 clients initiating a quarter. And that it's at the same time really, really early, right, when you think of our whole client base. But I wouldn't start now creating, like, kind of a new metric in that. It's just too early to start drawing those correlations. But I'm trying to give some insight into, like, kinda where is the market right now. Kevin McVeigh: It's super helpful. And then just real quick, the 17.3% margin, I mean, went back, I think that's the highest Q1 you've ever had. Is that a function of the efficiencies? And again, fixed pricing? And how should we think about the margin trajectory of the business maybe a little bit longer term to the extent you can comment on that? Angie Park: Yes. Hey, Kevin. We're really pleased with the 30 basis points of op margin expansion that we posted this quarter. Which was in line with our expectations. And certainly, our operating margin is affected by the level of investments that we do throughout the year. And so we're really pleased that we're reconfirming the 10 to 30 basis points for the full year. As it relates to EPS, I do want to make one point. Really pleased with the 10% growth that we posted this quarter, strong operational results, op margin expansion as well as gains on investments. But there's one thing that I do two things that I wanna call out as it relates to Q2 specifically. For your awareness and how we're thinking about it. First is that we expect our tax rate in Q2 to be above our full year guided range due to the tax impact of equity compensation. And then second is that we had higher gains on investment in Q2 of last year, and we don't expect the same for this year. But importantly, there's no change to our overall adjusted our full year guidance for adjusted op margin, tax, or EPS, this is really timing. Angie Park: Thank you. Operator, we have time for one more question, then Julie can wrap up the call. Operator: Absolutely. And our final question comes from Dave Koning at Baird. Please go ahead. Dave Koning: Yeah. Hey, guys. Thanks so much. The Health and Public Services growth was sequentially, I think up 7% the strongest or I think second strongest in twelve years. So, very, very good. Is a lot of that just the federal spending headwind dissipating from Q4 into Q1? Was that a lot of it just getting better than normal? Or is it just underlying health and federal spending? Angie Park: Hi, David. Good morning. And so as it relates to our health and public service, really, we saw strength in we told you about federal, and we know that, and that came in better than we expected. And then the second component is the strength that we're seeing in EMEA and Asia Pacific. Really strong, well-positioned, in terms of that business for us. And keep in mind, that's where we've been investing over the last few years, including in acquisitions, and you're seeing that those investments pay off. Dave Koning: Great. Thank you. Happy holidays. Julie Sweet: Happy holidays. So thank you everyone. In closing, I want to thank our shareholders for your continued trust and support. I want to thank all of the people who do this work every day, all of our Reinventors around the world, I hope everyone has a very safe and happy holiday season. Thank you for joining today. Operator: Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Operator: Good afternoon, everyone, and welcome to NIKE, Inc. Second Quarter Fiscal 2026 Conference Call. You'll find it at investors.nike.com. Leading today's call is Paul Trussell, VP of Corporate Finance and Treasurer. I'd now like to turn the call over to Paul Trussell. Thank you, operator. Paul Trussell: Hello, everyone, and thank you for joining us today to discuss NIKE, Inc.'s second quarter fiscal 2026 results. Joining us on today's call will be NIKE, Inc. President and CEO, Elliott Hill, and EVP and CFO, Matt Friend. Before we begin, let me remind you that participants on this call will make forward-looking statements based on current expectations, and those statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in NIKE's reports filed with the SEC. In addition, participants may discuss non-GAAP financial measures and nonpublic financial and statistical information. Please refer to NIKE's earnings press release or NIKE's website investors.nike.com, for comparable GAAP measures, and quantitative reconciliations. All growth comparisons on the call today are presented on a year-over-year basis, and are currency neutral unless otherwise noted. We will start with prepared remarks and then open the call for questions. We would like to allow as many of you to ask questions as possible in our allotted time. So we'd appreciate you limiting your initial question to one. Thank you for your cooperation on this. I'll now turn the call over to NIKE, Inc. President and CEO Elliott Hill. Elliott Hill: Thank you, Paul. Let me start by thanking all of you for joining on the eve of a holiday week here in the United States and many parts of the world. And with that, let me also recognize a NIKE team that's leaving nothing on the table right now. When you work in retail, the holidays don't mean a break. When you work in sport, you often say that sport never sleeps. So when you work at NIKE, you're then the sick of an incredibly busy time. With that in mind, I want to extend a special and heartfelt thanks to my NIKE teammates. Thank you for your continued commitment, passion, and determination. And thank you for delivering another quarter of steady progress and building momentum. Fiscal year 2026 continues to be a year taking action to rightsize our classics business, return NIKE Digital to a premium experience, diversify our product portfolio, deepen our consumer connections, strengthen our partner relationships, and realign our teams and leadership. And I'd say we're in the middle innings of our comeback. We started with the win now actions, which was our immediate response to our biggest challenges and opportunities in our culture, product, storytelling, marketplace, and winning on the ground. And now our sport offense is the accelerator of our win now actions. It's how athlete-centered innovation travels across and through every country, and channel to drive growth. Our focus on sport by brand is the engine of our growth. Our global marketplace is the amplifier. And it is our sport offense that connects the two. Said another way, our growth will come from sport, athletes, product innovations, sport moments, and will be scaled through countries, channels, and accounts. Turning to the quarter. I'd frame up the results as slightly better than we had anticipated ninety days ago, and while we're driving progress through WinNow, we're nowhere near our potential. I see three themes that give a better picture of where we stand right now. The first theme is that our sports teams are quickly finding the rhythm in the new sport offense. While rightsizing our classics, we're building a more diverse product portfolio gaining the most traction in our performance business, which validates that we've got the right structure to drive a relentless flow of innovative product across our unmatched opportunities. The second theme is that we're building a healthier base for top-line growth. The NIKE brand grew this quarter. And the mix was strong. We delivered 8% wholesale growth, elevated the experience in key NIKE stores in nike.com, and had fewer days of promotion. These are all positive signs. The third theme is that our comeback continues to move at different speeds. It won't be a straight line. But we're acting decisively to accelerate the lagging areas with China at the top of that list. At year-end, it's clear how important it is to stay closely connected to what's happening on the ground. From intern to CEO, and every role I've held in between, I've felt that way. Which is why as you likely saw this quarter, I announced a change in my leadership team. All geographies will now report directly to me. I'm confident this change will result in accelerating our win now actions by allowing our geography GMs to more closely shape our strategy, drive faster decisions, and influence investments. The geography that is leading the way for NIKE right now is North America. As our largest business, that's where much of our focus has been. With North America, we're working with the most diverse wholesale landscape which gives us several strategic partners to segment and differentiate our multi-brand, multi-sport, and multi-price point portfolio. The team has done an excellent job of reconnecting with partners and getting sharper on the consumers we serve, and those that we seek to serve. This quarter, that approach led to over 20% wholesale growth in North America, with meaningful growth coming from existing partners. Our North America marketing team is also finding the right balance of inspiring through big teen moments, like the Dodgers World Series campaign after their win, or at the Chicago Marathon. Where we supported everyone from everyday runners chasing personal best to Connor Mantz shattering an American marathon record that stood for twenty-three years. North America is driving a healthy repeatable offense, and showing us what winning looks like. It's a great signal for our future success in other geographies. In Greater China, we highlighted last quarter that we were facing a longer road to a healthier business. We've been implementing the WinNow action in our key cities of Beijing and Shanghai, leading with more storytelling of our product innovations, editing our assortments, and elevating the presentation of those assortments in targeted doors. What we've done is a start. But it's not happening at the level or the pace we need to drive wider change. The next step is to further adapt our approach to fit China's unique monobrand footprint and digital-first marketplace. The reset requires a fresh way of thinking from our NIKE teammates, and our NIKE store partners and it will take time. Over the years, we established our premium position in market share there because the Chinese consumer believes in our ability to innovate. And inspire them through sport, I'm confident we'll get back to fulfilling that promise. China continues to stand out as one of the most powerful long-term opportunities in sport. That has not changed. Expect to hear, see, and feel much more about how we'll manage the China marketplace differently this fiscal year and beyond. Both EMEA and APLA are geographies that are led through distinct influential countries and key cities. So we're moving quickly to resourcing our teams on the ground including sales. They're the ones who deliver locally relevant assortments, elevate the presentation of those assortments, fuel product seating, and build local relationships, create meaningful stories and consumer connection, and ultimately drive profitable and sustainable revenue in both wholesale and direct. EMEA activated their sport offense on December 1. So they just started rehiring these critically important revenue-generating roles in key countries. I'm locking arms with the leaders of our geographies and with Matt who now leads sales and NIKE Direct to elevate the way consumers experience our brand. I know what it looks like when it's successful. I can see the upside. It's a brand by brand, sport by sport approach, paid off in a partner by partner. City by city, high street by high street, mall by mall approach. And every detail matters. Next, I'll share some color on how the sport offense is fueling a more diversified product portfolio through footwear, apparel, and equipment, and up and down price points. Our teams are determined to deliver a consistent product innovation pipeline. In January, NIKE Running will build off of the strong start of our new stability shoe, the Structure 26, with the introduction of the structure pop plus. Running grew by over 20% for the second quarter in a row in Q2. It's up double digits in every channel, including NIKE Direct. Also in January, we'll debut NIKE Mind, a new footwear platform that will help athletes prepare for performance, and competition which we see as a new dimension to the NIKE training's offense. We introduced NIKE Mind along with three other new innovations, platforms, in October. One of them is the new platform that traps air for warmth in an ACC jacket. The jacket inflates from a shell to a puffer based on the warmth needed. The Thermofit Air Milano jacket will debut at the Winter Olympics in February. Also in February, at the NBA All-Star Game in LA, you'll see an example of how our three basketball brands and their product lineups will come together under the sport offense. The Swoosh, the Jumpman, and the Star Chevron. Have a unified creative feel and merchandising approach with Foot Locker in LA. And we believe that it has great potential to be scaled. Our NIKE skims collection will launch internationally in EMEA and APLA in the same time frame, following a successful rollout in North America. NIKE football, the deeper investment in World Cup starts now. This quarter, we brought a fresh perspective to the culture of the game in a T90 collaboration with Palace, and with our Hollywood Keepers sportswear collection. And in March, our athletes will begin wearing our new apparel platform Aerofit. In their national team kits. Aerofit is like air conditioning for the body flowing air through the garment unlike any previous performance apparel. The innovation platform will scale across several sport dimensions, in coming seasons. Overall, wholesale partners are very confident in our NIKE football product. Booking units are nearly 40% higher than World Cup 2022. To help sell food, the commitment we'll refresh over 100 NIKE Direct and 1,400 partner doors around the world. And our marketing team is making significant investments to inspire football fans everywhere. All of these new concepts will come to the consumer in the back half of the year. As a result, our order book is improving season on season. Through the sport offense, we're on our way in product. But as I've said, near-term investments to clean up and elevate the marketplace have put real pressures on margins. Tariffs have also obviously added a significant headwind to overcome. I want to state it very clearly. Margin expansion is a top priority for me and my leadership team. While it will take time, we see the path back to double-digit Aegion EBIT margins for NIKE, Inc. That formula includes a multi-branded and diverse product portfolio, that is constantly refreshing and bringing in newness and seeking to drive value out of every relationship we have in the marketplace. It also requires us to be bolder and more creative in how we operate. I made another change within my leadership team this quarter. Asking Venkatesh Alagirasami to be in the role of our Chief Operating Officer. He and his team will look end to end to ensure technology is fully integrated across the company and how we create, plan, make, deliver, and sell our world-class innovations. We see significant opportunity to get our core operations running more efficiently and more profitably. I look forward to sharing more in the coming quarters. With that, I'll turn it over to Matt to go deeper into the quarter and then offer some closing thoughts. Before we take your questions. Matt Friend: Thanks, Elliott, and happy holidays to everyone on the call. Our second quarter results demonstrated the resilience of our portfolio. With modest year-over-year reported top-line growth despite managing headwinds from the actions we have taken to reposition our business. As I look back on where we are, one year from Elliott joining the company and moving forward with our WinNow actions, our business is in a better position. Sport dimensions represent a larger mix of the portfolio. Led by running, and we are seeing momentum build in other sports. The classics footwear franchises are on track to decline from peak levels by more than $4 billion by fiscal year-end. Wholesale has returned to growth. With a growing order book globally in both spring and summer. NIKE digital has reduced promotional activity and is operating more strategically in sync with our partners. And inventory is in a healthy and clean position in North America and EMEA. While we are encouraged by all of this, as we have said, our progress will not be linear. As each brand, sport, and geography is on a different timeline. And we continue to read and react every day in service of the long-term health of our brands. We highlighted last quarter that it will take more time to return to healthy growth in Greater China and Converse. And we expect headwinds to continue for the balance of the fiscal year. There are also puts and takes across EMEA and APLA. Meanwhile, North America and running stand out again this quarter. And we are growing more confident in our ability to sustain the momentum as we look forward. Being in the middle innings, as Elliott referenced, also means it will take time for the actions we have put into place to change the trajectory on EBIT margins. We have been navigating transitory headwinds to margin due to our WinNow actions. And shifts in the business. Including product and channel mix, and continued inventory liquidation. As we highlighted last quarter, we are also navigating new structural headwinds from the $1.5 billion of annualized incremental product costs due to higher US tariffs. This represents a gross headwind of approximately 320 basis points to gross margin. In fiscal 2026. And while we have begun to take actions to reduce this to a net impact of approximately 120 basis points, it is still a significant factor impacting our near-term EBIT margins amidst the turnaround in a very dynamic operating environment. All in all, we have made meaningful progress through our five win now actions. Yet there is more work to do and our teams are hustling. For this quarter, revenues were up 1% on a reported basis. And flat on a currency-neutral basis. NIKE Direct was down 9% with NIKE Digital declining 14%. And NIKE stores down 3%. Wholesale grew 8%. This included a top-line headwind of approximately $550 million from the reduction of our Classics franchises. Down over 20% versus the prior year. This means our currency-neutral revenue grew 6% excluding the impact of this headwind. Gross margins declined 300 basis points to 40.6% on a reported basis primarily due to increased product costs due to higher tariffs in North America as well as inventory obsolescence in Greater China that was not contemplated ninety days ago. SG and A was up 1% on a reported basis year over year, driven by higher brand marketing expense, partially offset by lower operating overhead. Relative to expectations, SG and A was lower due to operating overhead savings. Reflecting the team's continued focus on disciplined cost management. Our effective tax rate was 20.7%, compared to 17.9% for the same period last year. Primarily due to changes in earnings mix. Earnings per share was 53¢. Inventory decreased 3% versus the prior year. With units down high single digits. In North America and EMEA, which represent almost three-quarters of our business, we have returned to a healthy marketplace. We still have work to do in Greater China, parts of APLA, and Converse. Now I will turn to the geographies. And once again focus my remarks on specific context and insights of our WinNow Progress. In North America, Q2 revenue grew 9%. NIKE Direct declined 10%. With NIKE Digital down 16%. NIKE stores were down 2%, Wholesale grew 24%. And EBIT declined 8% on a reported basis. As Elliott said, North America is our best example of executing our win now actions. And we are taking the learnings from their playbook to execute across all other geos. Momentum is extending beyond running into additional sports including basketball and training. It relates to the North America marketplace, wholesale delivered strong growth in the quarter. While the quarter certainly benefited from liquidation to value channels, as we cleaned up the marketplace, we also saw a balanced contribution of growth from both new and existing partners. North America also made additional progress on repositioning NIKE Digital to a more premium representation of the NIKE brand. With fewer days of promotion, lower markdown rates, and increased demand at full price. Nike.com posted its best Black Friday ever this year. Partially driven by strong sell-through of the Jordan Black Cat launch. Growth in the quarter was driven by running, kids, basketball, and training. With running delivering high double-digit growth, in NIKE-owned stores, NIKE digital, and wholesale. Sportswear saw sequential improvement up low single digits in the quarter. With classic footwear franchises declining approximately 20% year over year. Inventory declined mid-single digits versus the prior year. With units down double digits. Closeout units declined double digits, and the mix is very healthy. Last, I want to point out that North America gross margins only declined 330 basis points versus the prior year. Despite 520 basis points of impact from new US tariffs. This gives us confidence that our win now actions are working, profitability is recovering. And we are on the path back to sustainable, profitable growth. EMEA, Q2 revenue was down 1%. NIKE Direct declined 3%. With NIKE Digital down 2%, and NIKE stores down 5%. Wholesale was flat. EBIT declined 12% on a reported basis. EMEA has maintained a healthy marketplace. Although promotional activity has been heavier than expected. We saw growth in Central and Eastern Europe and The Middle East. Offset by slight declines in Western Europe. In Q2, our performance business continued to build momentum, driven by double-digit growth in running, We also saw growth in training and sportswear. Sportswear growth was driven by apparel, with footwear flat, as a mid-twenties percent decline in classic footwear franchises was offset by growth in Air Max, and the look of running styles. Inventory grew double digits versus the prior year. With units flat, and the spread primarily due to foreign exchange rates. Closeout mix in the geography is healthy. In Greater China, Q2 revenue declined sixteen NIKE Direct declined 18%. With NIKE Digital down 36%. And NIKE stores down 5%. Wholesale declined 15%, EBIT declined 49% on a reported basis. Our priority in Greater China is to create greater brand distinction through sport and innovation. Leveraging deep local insights in a premium more consistently managed integrated marketplace across both physical and digital channels. Over the past several seasons, we have faced consistent challenges with declining store traffic softer in-season sell-through rates, and higher levels of aged inventory across the marketplace. Our brands have consistently been off-price for consumers. Especially in digital. Affecting our premium positioning across the entire integrated marketplace. These challenges resulted in a higher mix of off-price sales with higher markdowns. Higher sales-related returns, higher wholesale discounts, and higher obsolescence charges to clean marketplace inventory levels. This cycle has had a significant effect on the profitability of Greater China. This quarter, we took the following actions in China. We continue to obsess our initial NIKE store pilot. Which delivered encouraging results this quarter. With better traffic, and comp sales growth relative to trends across the broader fleet. We focused on sport, combining new product innovation with elevated retail presentation. And we saw running continue to grow. In the quarter. We were less promotional during 11/11, resulting in an approximate 35% decline versus the prior year. In line with our plans. We accelerated returns of aged inventory owned by partners and wrote off both partner and NIKE inventory in the quarter. We reduced NIKE inventory by mid-teens versus the prior year. And by 20% in units. And we reduced our sell-in plans for spring and we cut our buys for summer. To improve sell-through and full-price realization. We will need to make further shifts in the integrated marketplace to break the cycle that we've been managing through. There is more work ahead to scale the momentum of the initial store pilot to more doors to elevate our brands across all digital platforms, and to clean up excess product in the marketplace. We expect headwinds to continue but we are working to set the foundation for a return to growth in this important geography. APLA, Q2 revenue was down 4%. NIKE Direct declined 5% with NIKE Digital down 10%. And NIKE Stores up 1%. Wholesale was down 3%. EBIT declined 15% on a reported basis. APLA continues to deliver mixed results across countries. With positive results in Latin America more than offset by headwinds in Asia Pacific countries. During the quarter, the team leveraged promotions to make progress on pockets of excess inventory in the marketplace. In the quarter, running grew double digits, and apparel grew mid-single digits overall. Inventory grew double digits versus the prior year, with units up mid-single digits. Though we saw pockets of improvement year over year. Now I will turn to our third-quarter guidance. We continue to operate in a dynamic environment. Both for consumers our global business. And we remain focused on what we can control to make forward progress for the long-term health of our brands. Our outlook reflects our best assessment of these factors based on the data we have available to us today. We expect Q3 revenues to be down low single digits. With modest growth in North America as we see reduced liquidation activity versus prior quarters performance in Greater China and Converse similar to Q2, as well as a three-point benefit from foreign exchange. We expect Q3 gross margin to be down approximately 175 to 225 basis points. However, excluding the 315 basis point impact, of higher gross product costs related to new tariffs gross margin expansion would be positive in the third quarter. We expect Q3 SG and A dollars to be up low single digits due to higher demand creation and investments in our sport offense. We expect other expense net of interest income, to be an income of 0 to $10 million in the third quarter. Now I'll close with a few final thoughts. We are making progress in the areas we focused on first. And we are increasingly confident in our path forward. Led by momentum in North America. We are making the investments required to position our full portfolio for a recovery. And making decisions in service of the long-term health of our brands. Operationalizing the sport offense, elevating the marketplace, and rebuilding our key city teams are critical priorities to return to sustainable, profitable growth across all brands, all sports, and all geographies. Finally, as you heard from Elliott, we are focused on improving the profitability and operating efficiency of our business. And realigning costs while also investing to reignite growth. We look forward to sharing more in upcoming quarters. With that, I'll pass it back to Elliott. Elliott Hill: Thank you, Matt. This quarter, the Los Angeles Dodgers reminded us what it takes to win at the highest level. Back-to-back World Series titles, something no team had done in twenty-five years. They gave us a game seven for the ages, They didn't take the lead until the eleventh inning. Down three o early every outside voice said, it's over. But they kept chipping away. Every setback became a lesson. They leaned on each other, They believed. When belief was hard. Manager Dave Roberts shared those insights with us at the opening of our new NIKE store in Portland. Just days after that win. He talked about what guided his decisions not just analytics, but trust. Feel, and sacrifice. That included putting in bench player Miggy Rojas who hit an improbable home run-in the ninth followed by a bases-loaded throw to the plate. In the bottom of the inning. With one more out to go, Robert swapped in Pajas who immediately made a leaping game-saving catch. Every decision mattered. And every player was ready when called upon. But the boldest move he made was managing Yoshinobu Yamamoto's innings our NIKE guy and World Series MVP. Who won his a historic three games in the series. The day after throwing nearly 100 pitches, he surprised everyone to close out game seven. That wasn't just effort. That was a statement. I'm leaving nothing on the table. It inspired the entire team. That's what greatness looks like. It's not about perfection. It's about perseverance. It's about sticking to the plan and performing when the pressure is highest. NIKE is in a similar moment. We're the industry leader. Expectations are high. And, yes, we face pressure and setbacks. But like the Dodgers, we're leaning on each other. Focused on the fundamentals, making the hard calls, and building for the long game. Because in the end, greatness isn't promised. It's earned. And we're ready to earn it again and again. Thank you now. And now Matt and I will take your questions. Operator: We will now begin the question and answer session. To ask a question, press star then 1 on your telephone keypad. Kindly ask that you please limit your initial question to one. Our first question will come from the line of Matthew Boss with JPMorgan. Please go ahead. Matthew Boss: Great. Thanks. So Elliott, you led both in the release and on the call. By citing the turnaround is in middle innings. Could you elaborate maybe where you've scored runs so far versus where you have opportunity remaining? Just your overall confidence today that you can win the game? And then, Matt, if you could just elaborate on the components of gross margin that you cited. I think you cited underlying expansion excluding tariffs. For the third quarter and just the progression that we should think about moving forward? Elliott Hill: Great. Thank you, Matthew, and appreciate the question. And let me start by saying the path back to sustainable profitable growth is gonna go through our win now actions, and that will be and they will be accelerated by our sport offense. And would also say that I'm incredibly inspired by the way our teammates have responded to the actions in the new offense. The drivers of our growth right now for NIKE, they came through the win now which were our near-term actions around culture. Product, storytelling, the marketplace, and winning on the ground with consumers. But it's our sport offense is the accelerator of those actions. It's how we take athlete-centered innovation and it travels through every country channel and account to drive growth. And the sport offense is what's bringing the balance to our portfolio. We have a relentless flow of innovative product now coming across our three brands through multiple sports, performance and sportswear, men's, women's, and kids, and we pay it off across 190 countries. So we've had some meaningful progress, Matthew, over the last ninety days. NIKE brand, is growing. Sport is growing with running leading the effort there at up over 20% and taking market share. We're beginning to diversify the portfolio, rightsizing our classic As Matt said, we declined roughly $4 billion from its peak. North America grew 9%. Wholesale grew. Our order book for spring and summer is up. So we have a healthier base from which to grow profitable, sustainable growth. So in terms of middle innings, specifically, I think the best way to think about it is that we have our businesses the dimensions of our business Jordan. I think still has some room to dimensionalize beyond streetwear. Into things like Jordan basketball, Jordan training, etcetera. But I've seen some real good progress around the streetwear there. We're resetting the marketplace for Converse under new leadership. In terms of product, performance is growing but sportswear is still in the early stages of diversification. We've done a great job of right-sizing the franchises, but we still need to diversify that portfolio. Portfolio. Middle innings. And then from a geography, North America's leading. EMEA just transitioned to the sport offense. Followed by APLA, which, as Matt pointed out, had some mixed results. And then China has our longest road ahead. That's why we're sitting here saying we're in middle of innings. Great success in North America, work to do in China. And but all I would say here just to sort of close it out, Matthew, is while the middle innings, while we keep saying we're in the middle innings, I will say this. The win now actions and the sport offense is working and it will lead us back to profitable, sustainable growth. Matt Friend: And, Matt, as it relates to margins, I would just say that you know, our business is still in a transition in the middle innings. And we are navigating through both transitory and structural headwinds across the portfolio. But as Elliott said, we've made meaningful progress through the win now actions, and you can really see that in the progress that we made in North America in Q2. North America's gross margins were down 330 basis points despite more than 500 basis points of a headwind to product cost due to the gross impact from the new tariffs. And so, that's a marketplace where we're furthest along in repositioning digital. We're back to growth in wholesale. We've made the most progress in cleaning up the marketplace. And so, as I look ahead to Q3, we guided, our margins to be down 175 to 225 basis points. That includes 315 basis points of higher product costs related to new tariffs. And so we expect expansion, excluding the impact of new tariffs, really reflecting the beginning of recovery of the transitory headwinds at the corporate level. And, you know, we continue to expect to see momentum building in North America given where the state of the marketplace is. We're watching promotional activity in Europe. But inventory in Europe is in a healthy place. And then as I mentioned, there's puts and takes across APLA. And we expect the trends in Greater China and Converse for Q3 to be relatively in line with what we saw in Q2. As we continue to take actions on both of those resets. And so I would say that overall, we're encouraged by the momentum and the progress that we're seeing. But we've still got some work to do. Operator: Our next question will come from the line of Ike Boruchow with Wells Fargo. Please go ahead. Ike Boruchow: Thanks. Good afternoon. Thanks for taking the question. I guess maybe for Elliott, maybe a similar type of question as Matt's, but you've mentioned the recovery won't be linear several times over the past year or in transition, and it totally makes sense. I guess, I'd like to know if you're able to share when you believe that maybe that caveat won't be needed anymore, and you'll be able to better kinda hold momentum, create better visibility for investors, on what's clearly becoming a reset base revenue and earnings. Thanks. Elliott Hill: Yeah. Thanks, Ike. Here's the best way that I, you know, that I would should think about it is you know, each geo let's first start with the brands. Each of the brands are at different stages in terms of diversifying their product. Portfolio. We just got into the sport offense. In September, so we got these small cross-functional teams. We're getting them up and running. As fast as we can. Same thing's happening in the countries and key cities around the world. That's happening at different stages. And so that's we believe in the strategy, and we know that the path back to profitable and sustainable growth is through the win now action. We also believe in the sport offense and our ability to create beautiful products, and then pay it off in an integrated marketplace. We just have three brands in multiple sports. And four geos in 190 countries, and they're all operating at different timelines. And so that's the reason why we keep saying that, you know, we have different timelines, and it's just gonna take time. So I will just sort of point to the place we focus first, which is North America, and we're having great success there. So we're confident in our path forward. Matt Friend: Yeah. And I just would add, Ike, that we said on North America that, you know, we're growing increasingly confident that we can sustain that momentum. I would also say that we've said that we believe we're gonna drive modest growth in wholesale this year. Starting to have more confidence in that dimensionality of the business. What you also heard on the call today was that, you know, we took some unplanned actions in Greater China. As we're navigating real-time through, some of the challenges that we see in some of the businesses that are under reset. And so, you know, we're gonna continue to take it ninety days at a time for now. To give ourselves the flexibility to make the right decision for the long-term health of our brands. And, you know, much of what we said today is consistent with what we've been talking about for the past couple quarters. Operator: Our next question will come from the line of Bob Drbul with BTIG. Please go ahead. Bob Drbul: Hi. Good afternoon. Just a could ask two questions. I think the first one is you know, on the commitment and sort of the focus on the return to double-digit, EBIT margin, you know, it's a big priority for you guys. Is there a timeline in which you could talk to when you think you'll get there? I think the second question is just, like, part of that, I think, is on China. Long road ahead, you know, Q2 revenue is similar Q3 similar to Q2. How deep a reset do you think is necessary in China? And is we near a bottom in revenue or EBIT declines in China? Thanks. Elliott Hill: Okay. So, Bob, let me do this. You stuck in two questions on me, but here's what I'm gonna do. Let's take EBIT first, and then we'll take China because I don't wanna confuse the two. But let me first just say that, improving margins continues to be a top priority. And I said it before, and I'll continue to say it. We do see a path back to double-digit EBIT margins. Margins are under pressure for two reasons. First, the driver of our win is our win now actions. When that we've intentionally taken to clean up the marketplaces around the world. The second, is the impact of tariffs. Where we implement they which were implemented after we activated the WinNow actions. And we're seeing the benefits of us taking those actions. We've said it North America back to growth, running back to growth, wholesale up, the order book, and we have a healthier base for top-line growth moving forward. In addition to the top-line growth, we also have the opportunity to improve the efficiency and productivity and how we operate the business and we're gonna share more in the coming quarters. Matt, I don't know if you wanna add anything to that. Matt Friend: I would just say something that's that will sound familiar. You know, we're clear on what the path back looks like. It starts with growth. And I think that, you know, the investments that we've made to drive the win now actions are paying through. You see it with a second quarter of top-line growth. And specifically the growth that North America was able to in the quarter, which is where we focused our demand creation investments and where we focused our investments in our commercial teams in order to be able to get back on the offense in the marketplace. Part of what's gonna drive expansion is recovery of our full-price mix. As we continue to manage the off-price, full-price mix in the marketplace. And, I point to North America where we've now cleaned the inventory in the marketplace, and we're starting to see margin expansion. Excluding the headwind of tariffs. Another big opportunity for us is to leverage the supply chain cost as we grow. And that's been a meaningful headwind over the last year as our business has reduced in size. And growth will help us with that. But there's also a lot of focus and attention on that as well. And then the last piece of it I would say is the work that we're doing to be in the way we're managing cost across the business. We've been investing in marketing, and we feel good about where we've leveled our brand marketing investment. We've locked in some of our most important team franchises for the long term, which strategically puts us in a great position in the world of sport. But we've been very focused on managing operating overhead. And we will continue to do that, and we look forward to sharing more about that in the upcoming quarters. Elliott Hill: K. I'll jump back now, and I'll take let me take China. China continues to be one of the most powerful opportunities in sport. We're confident that, the win now actions and the sport offense will allow us to continue to invite 1.4 billion consumers into the world of sport fitness and the lifestyle sport. So we see China as a big opportunity. With that said, it's clear that we need to reset our approach to the China marketplace. And it's gonna start with structure. The geos are now reporting to me. Angela, who's our GM in Greater China, is now part of my SLT senior leadership team. And I look forward to working with her and the rest of our team more closely. Let me share a little bit of the diagnosis of where we are. And we believe and firmly believe and will always believe that our growth will come through sport, but the reality is we've become a lifestyle brand competing on price. In China. We also reduced the feed on the ground, people on the ground, and as you know, it's a monobrand marketplace with thousands and 5,000 doors. With the teams working the presentation of our product at retail. And we weren't making the investment in our store fleet so our stores aren't compelling. And as Matt mentioned, the cycle that it started to feed itself, soft demand leading to consistent promotions and then impacting profitability. And we did signal last quarter because of these structural differences that China would be on a different timeline. So we're taking action. We're cleaning up the marketplace of aged product. We're getting back to the basics of retail, consumer right assortments. Better storytelling, and elevated visual presentation, We're increasing investments in Shanghai and Beijing, resetting key doors, Matt referenced those in his prepared remarks. We're seeing early success. But I'll say this. It's not happening at the pace we like. So we have more to do. It's gonna take a fresh perspective, a new approach, and we will have to come through this with new capabilities as well. And we're working closely with our partners, Pausch and Top Sports to adapt our approach. But I'll just sort of end here. I've done this before. I have a deep history in the market. We've diagnosed the problem. And we will return NIKE to a beloved premium and innovative brand in China. Operator: Our next question comes from the line of Aneesha Sherman with Bernstein. Please go ahead. Aneesha Sherman: Elliott, at the start of 2025, you expressed your strong confidence in the pipeline for running. And you laid out this three by three framework that you discussed with partners. And we're now seeing strong acceptance in the market, and the business is growing over 20%. As you look across the other verticals, know you talked about new innovation across all of them, but do you see the phasing of the growth? And are there particular areas where you have that same level of conviction that you had in running a year ago and where you expect the business to ramp very quickly versus some that are a little slower? And then a follow-up on North America. Matt and Elliott, you both talked about the contribution of new distribution and same-store sales. On the wholesale growth. Are you happy with the mix of partners you have now? Or is the goal to continue to ramp up new distribution points into next fiscal year as well? Thank you. Elliott Hill: Anisha, thanks for the questions. Let I'll start. Let me take the product portfolio piece first. Here's what I'd say. The teams are doing a really nice job of building a more diverse portfolio. You can start to see it in our numbers. We do have an unmatched portfolio with depth and dimension. Across performance and sportswear, men's, women's, kids, footwear, apparel, accessories, and up and down price points. And we believe that moving into these sport-obsessed teams through our sport offense, we're already starting to see the pipeline and the flow of innovation coming through across the three brands, NIKE, Jordan, and Converse. So we know when we focus on sport, we win. You called out running. Already. I will hit very quickly that we launched Romero premium. As part of that nine-box construct that you referenced this quarter. And had very good sell-through. And we also launched Structure 26 our dues in our stability silo, and we're launching structure plus next month. So we're continuing to fill that out. But it's not just about footwear. It's also about apparel. We have some really strong apparel coming through in running as well. So we will continue to grow and dimensionalize running as NIKE running as an opportunity. In terms of other business opportunities, global football, it's probably the furthest along in terms of their construct. We have three silos there. Footwear silos. The Mercurial, Tiempo, which we will launch in Q3, and then our Phantom, which had a really strong launch in Q1. So three silos, also connecting deeply with each of the consumers that play a different style of football. Apparel and footwear also dimensionalizes that opportunity. National team kits, World Cup, really strong read there. 40% up on the order book versus World Cup 2022. Training, twenty-four seven apparel, continuing to diversify the footwear. I see that coming. That's not yet hit. We feel good about what's coming. From training and footwear. SKIMS had a successful launch. We in EMEA and APLA next. Next quarter at basketball. We're dimensionalizing through women's. Sabrina, Asian, Asia, and now we have Caitlin coming. And our men's business continues to do well. Job sold through extremely well. And then we just launched the GT Future. And we had kids lining up for that shoe. So started dimensionalize beyond or dimensionalize the portfolio. And then I could just dive into innovation a bit more further out I think it's getting stronger every season. We're investing significantly in our NIKE sports research lab. And we're being intentional about connecting that R&D into our sport offense. And we announced a few big which I talked about product opportunity or product innovations, NIKE Mind, and then ArrowFit. So I feel good about the pipeline. And we see the response in our order book, which is up for the back half of the year. Matt Friend: I'll jump in on marketplace, Elliott, and then you can add to it. Anisha, we feel good about the North America marketplace and, our partners. We've got great partnerships. We've been working incredibly close with our partners. As we're working to elevate the marketplace and reposition the NIKE brand in a segmented and differentiated way across accounts and, across the marketplace. Tom Petty and the team have just been crushing it. In terms of, leading us through our win now actions. And when I look at the order book for the back half of the year, the order book is very balanced. In terms of growth between new partners and existing partners. And so we feel great about the quality of the growth that we see in the back half across a balanced integrated marketplace. Our teams are always looking for opportunities because our marketplace strategy is a consumer-based strategy. We wanna be in the path of the consumer leveraging our partners across digital and physical owned and partnered. And so I wouldn't rule out the possibility of it, but I wouldn't say that that's what's needed in order for us to be able to sustain the momentum that we see in North America. Elliott Hill: I was gonna add to it, but you've already embraced your new job. Right? I think the only thing that I would add to it, Anisha, because I think Matt did such a nice job. Is that, again, that Tom and the leadership team have done a really great job of just rightsizing the product, getting the market marketing going. And then I would say the thing that's the big difference is the setting three-year visions with each of and this is into the details, but it matters. Setting three-year vision by account on the consumers that we wanna serve by sport, and then bringing that back to one-year plans and then to seasonal plans. And that's how you get back to driving profitable sustainable growth between with the partners and again, the team's done a really nice job. So leading the way, and there in lies the opportunity in the other geos for us. We've gotta get the other geos keeping pace, and we're working hard to do just that. Operator: Our next question will come from the line of Jonathan Komp with Baird. Please go ahead. Jonathan Komp: Maybe one more on China. Do you think the North America experience where Elliott, we saw maybe two or three quarters of severe after you came in and accelerated the win now actions followed by now a return to growth and healthier conditions. Is that a reasonable timeline or playbook to think about China? And then just maybe bigger picture, if you are viewing some of these headwinds currently in resets, more as temporary. Maybe just expand on why not. Providing maybe two or three-year out targets or a little bit more specificity around you know, the timeline to get back to double-digit margins? Thank you. Elliott Hill: Yeah. You know, in terms of China, you know, what I said earlier is we've taken actions. We're cleaning up. We feel good about having a handle on what has happened in China, and more importantly, what we must go do. And it's gonna take a fresh perspective and a new approach and ultimately, some new capabilities. And so and we're working with and through partners which, again, you know, that's where it gets tough to put an exact date on it, but we're confident in the path forward. And the team that we have in place and we're ready to get that business moved and turned as quickly as we possibly can. Matt Friend: John, I'd just say on your timing question, you know, we're operating in a dynamic environment for both consumers and for a global business. And we're trying to turn around our business across three brands multiple sports, in four geographies. And as a result of that, you know, it's complicated what we're trying to do. We're encouraged by what we've been able to do in North America. And I think we've got a clear path of what we need to do across the other dimensions of our business. But we're reading and reacting every day. And it's important right now that we've got flexibility to be able to make the right decisions every week as we're trading the business in order to be able to establish the long-term health of our brands. And, and so, for the near term, gonna continue with this consistent practice that we've been doing. And, as our confidence grows, we will certainly share greater insight into how we're thinking about the longer term. Operator: Our final question will come from the line of Simeon Siegel with Guggenheim Securities. Please go ahead. Simeon Siegel: Thanks. Hey, guys. I hope you and your families have a very happy holiday and New Year season. So, Elliott, just to follow-up a little bit, the North America revenue growth it was just such a big number even before accounting for this large Classics reset. So can you just speak to what product is growing domestically so much better enough to accelerate that revenue growth? This much and just way more than offset the ongoing reset. And then, Matt, it feels like the growing wholesale penetration should help that operating overhead maybe structurally. So just curious if you could give us any thoughts where operating overhead goes. And then as you think about that opportunity, is the idea that you can take a portion of that and fund it back into demand creation, which has always been one of your key competitive advantages? Thanks, guys. Elliott Hill: Yep. Simeon, thanks. And also wishing you and your family a happy holidays as well. In terms of North America growth, running obviously is a big piece, and it's not just growth. You know, sell-in, what we're encouraged by sell-through. We're actually having, taking market shares, so we're feeling good about that. Global football, soccer, we're seeing growth there. We're seeing growth in training. SKIMS as well would be another one I'd call out. And then basketball. The team's doing a really good job with basketball right now. And, again, I touched on a few, but, like, the GT Future this weekend was phenomenal. And while sportswear is not growing, they've done a really nice job of rightsizing sportswear and starting to diversify the portfolio across the look of running, which is primarily driving it. But we also have some footwear on the women's side in sportswear, Air Max Muse and the Superfly that's doing well. And then, of course, Jordan. You know, I've gotta call Jordan out, and when we speak about North America, they've done a really nice job and we had a great sell-through of the AJ4 Black Cat. We're getting back to telling stories. That by the way, that was our largest Black Friday ever that Black Cat was. A launch ever. And then just recently, it's not in this quarter, but the AJ11 Gamma, we had people lining up for that shoe. Again, which is fun to see. See kids lining up for sneakers again. So I think the team's done a really nice job of making certain that they're running a complete and balanced portfolio across the brands and sports. Matt Friend: Simeon, I just add that the growth that we delivered in North America in Q2 was certainly strong. And if you look at our guidance for Q3, we said that we expect modest growth in North America, and you can really sort of connect the dots between how much liquidation fueled the growth in Q3 versus what's gonna be great comp, full-price growth as we get into the third quarter. And so, hopefully, that helps you connect the dots a little between the second quarter and the guidance for Q3. In terms of your question on cost leverage, you're absolutely correct. Growth creates leverage on the cost structure. Wholesale growth, in particular, creates meaningful growth on the cost structure, led by unit growth. And you see it not only in the supply chain costs, you're shipping pallets of product to partners versus shipping one zero one units to consumers. But you also will see it more broadly across our operating overhead. We're certainly focused on continuing to prioritize our investment in demand creation. I wouldn't leave that to believe that we've necessarily decided we're gonna go much higher than the 10% of revenue at this point in time because we feel like that gives us a good amount of investment to be able to continue to drive our brand forward. But, you know, if I'm prioritizing between the two, we certainly wanna have more flexible liquid demand creation to create big moments that impact consumers and to be able to activate that on the ground in key cities. And so we're gonna continue to tightly manage costs on the operating overhead side. As Elliott said, you know, we've got a number of things that we're looking at here. We look forward to sharing more, in the coming quarters. Operator: And that will conclude our question and answer session and our call today. Thank you all for joining. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to Uxin's Earnings Conference Call for the quarter ended September 30, 2025. [Operator Instructions] Today's conference call is being recorded. I would now like to turn the call over to your host. Please go ahead. Unknown Executive: Thank you, operator. Hello, everyone. Welcome to Uxin's earnings conference call for the third quarter ended September 30, 2025. On the call with me today, we have D.K., our Founder and CEO; and John Lin, our CFO. D.K. will review business operations and company highlights, followed by John, who will discuss financials and guidance. Before we proceed, I would like to remind you that this call may contain forward-looking statements, which are inherently subject to risks and uncertainties. Now with that, I'll turn the call over to our CEO, D.K. Please go ahead, sir. Dai Kun (Founder, Chairman & CEO): [interpreted] Hello, everyone. In the third quarter of 2025, we continue to build strong growth momentum. Retail transaction volume reached 14,020 units, representing a 134% year-over-year increase and marking the sixth consecutive quarter of year-over-year growth above 130%. Despite a significant expansion in inventory, our inventory turnover remained at around 30 days. Customer satisfaction also remained at an industry-leading level; our Net Promoter Score (NPS) was 67 this quarter, sustaining a level of 65 or above for 6 consecutive quarters. At the same time, profitability continued to improve with gross margin increasing to 7.5%, the highest level we have achieved in the past 3 years. The expansion of our superstore network has also continued to progress. Earlier this week, our Jinan Superstore officially commenced operations. Together with the Wuhan and Zhengzhou Superstores that opened earlier this year, we have now completed all 3 new superstore openings planned for 2025. Our Wuhan Superstore is expected to reach nearly 1,800 retail units in December with a local market share approaching 10%. Meanwhile, our Zhengzhou Superstore is already expected to achieve approximately 900 retail units in December with market share nearing 5%. With these additions, we now have 5 superstores in operation. In addition, we have announced strategic partnerships with local governments in Tianjin, Guangzhou, and Yinchuan to jointly invest in and operate new superstores. Each project is designed to support a capacity of more than 3,000 vehicles. We plan to open 4 to 6 additional superstores in 2026, marking a transition into a phase of accelerated nationwide expansion. We believe Uxin has established a clear path to scaling, driven by more precise pricing, higher customer satisfaction, and superior operating efficiency. Our machine learning-based pricing system ensures each vehicle is competitively priced in real time, and our fully integrated factory-logistics-retail model enables end-to-end control. For the fourth quarter, we expect retail transaction volume to exceed 18,500 units, representing year-over-year growth of more than 110%. For the full year 2025, we expect to surpass 50,000 units, reflecting growth of more than 130%. With that, I'll turn the call over to our CFO, John. Feng Lin (CFO): [interpreted] Thank you, D.K. In the third quarter, retail revenue totaled RMB 820 million, up 84% year-over-year. The Average Selling Price (ASP) for retail vehicles was RMB 58,000, compared to RMB 59,000 in the prior quarter and RMB 74,000 in the same period last year. While ASP declined as we shifted toward a more affordable inventory mix, the strong growth in transaction volume more than offset this. We expect ASP to remain relatively steady in the near term. Turning to our wholesale business, transaction volume was 1,884 units, an 81% increase year-over-year. Total revenue for the quarter reached RMB 879 million, representing a 77% increase year-over-year. Gross margin for the quarter was 7.5%, up from 7% a year ago and 5.2% in the prior quarter. This improvement was primarily attributable to the easing of price competition in the new car segment and the Wuhan Superstore moving beyond its start-up phase. Adjusted EBITDA loss narrowed significantly to RMB 5.3 million, a 43% reduction year-over-year. Looking ahead to the fourth quarter of 2025, total revenue is expected to exceed RMB 1.15 billion. We are now ready to begin the Q&A session. Wenjie Dai (SWS Research): [interpreted] Congratulations on the 3-year high in gross margin. How does management view the sustainability of this level, and what factors could drive further improvement? Unknown Executive: [interpreted] There are two main drivers: first, new car pricing has stabilized; second, the profitability of the Wuhan Superstore has improved significantly. Looking ahead, we believe there is still substantial room for expansion. Policies aimed at reducing excessive competition should keep prices stable. Additionally, our data-driven pricing capabilities are reducing errors and loss-making vehicles. Finally, value-added services have significant penetration upside. Our long-term target gross margin is around 10%, and our existing Xi'an and Hefei stores are already approaching this. Fei Dai (TF Securities): [interpreted] Following the opening of Zhengzhou, ramp-up seems faster than Wuhan. What initiatives drove this? Also, how long do you expect new superstores to take to reach stable operations? Unknown Executive: [interpreted] Zhengzhou benefited directly from what we learned in Wuhan regarding construction, inventory build, and sales ramp-up. Furthermore, our larger pool of transaction data has improved our pricing capability. For a standard new superstore with a 3,000-vehicle capacity, we expect it to reach breakeven in about 9 months. We expect inventory to reach planned capacity in 18 to 24 months, at which point profitability should reach a mature level. Fei Dai (TF Securities): [interpreted] Carvana recently surpassed $100 billion in market cap. Could you comment on the similarities and differences between their model and Uxin’s? Unknown Executive: [interpreted] The biggest difference is the sales channel; Carvana is online-only, while Uxin uses offline superstores for over 70% of sales. In China, cars represent a larger share of household assets, so consumers prefer in-store experiences and test drives. Similarities include the own-inventory model with self-operated reconditioning and a focus on precise pricing for high turnover. Carvana sells 500,000 units annually; we sell 50,000. We are confident we can reach Carvana's current volume within 4 to 5 years by sustaining over 100% year-over-year growth. Operator: This concludes our question-and-answer session. I would like to turn the conference back over for any closing remarks. Unknown Executive: Thank you all for participating. We look forward to reporting to you soon. Operator: The conference has now concluded. Thank you for attending. You may now disconnect.
Operator: Good afternoon. Thank you for holding. Your conference will begin in just a couple of Please remain on the line. Your conference will begin very shortly. Greetings, and welcome to Altigen Communications, Inc.'s Fourth Quarter and Fiscal Year 2025 Results Conference Call. At this time, participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Gary Stone, CFO at Altigen Communications, Inc. Gary, you may begin. Gary Stone: Thank you, Paul. Good afternoon, everyone, and welcome to Altigen Communications, Inc.'s earnings call for the fourth quarter fiscal 2025. Joining me on the call today is Jerry Fleming, President and Chief Executive Officer, Joe Hamblin, Chief Digital and Transformation Officer, and I am Gary Stone, Chief Financial Officer. Earlier today, we issued an earnings release reporting financial results for the period ended September 30, 2025. This release can be found on our IR website at www.altigen.com. We have also arranged a replay of this call, which may be accessed by phone. This replay will be available approximately one hour after this call's completion and remain in effect for ninety days. The call can also be accessed from the investor relations section of our website. Before we begin our formal remarks, we need to remind everyone that today's call may contain forward-looking information regarding future events and the future financial performance of the company. We wish to caution you that such expectations and/or beliefs are just predictions and actual results may differ materially due to certain risks and uncertainties that pertain to our business. We refer you to the financial disclosures filed periodically by the company with the OTCQB over-the-counter market, specifically the company's audited annual report for the fiscal year ended September 30, 2024, and the most recent unaudited quarterly report for the quarter ending June 30, 2025, as well as the safe harbor statement in the press release the company issued today. We do expect our audited financial report for fiscal year '25 to be filed by the end of this month. These documents contain important risk factors that could cause actual results to differ materially from those contained in the company's projections or forward-looking statements. Altigen Communications, Inc. assumes no obligation to revise any forward-looking information contained in today's call. In addition, during today's call, we will also be referring to certain non-GAAP financial measures such as adjusted EBITDA. These non-GAAP measures are not superior to or a replacement for the comparable GAAP measures, but we believe these measures help investors gain a more complete understanding of our results. With that, I'll turn the call over to Altigen Communications, Inc.'s CEO, Jerry Fleming, for opening remarks. Jerry? Jerry Fleming: Thank you, Gary, and good afternoon, everyone. Thanks for joining us on today's call. I'll begin today with an overview of Altigen Communications, Inc.'s performance and strategic progress during fiscal year 2025. Following my remarks, Joe Hamblin will provide additional insights into our operating execution, after which Gary will return to review our financial results for the fourth quarter and the full fiscal year. Earlier today, we reported our fiscal fourth quarter and full year fiscal 2025 results. I'm pleased to share that we have delivered our sixth consecutive profitable quarter, culminating in full-year profitability for fiscal 2025, which we view as a meaningful milestone that underscores the progress of our business transformation. For the fourth quarter, revenue totaled $3.5 million with net income of $254,000. Looking at full-year performance, fiscal 2025 revenue was $13.9 million, representing a 2% increase over fiscal 2024. While cloud revenue declined modestly by 3%, this was more than offset by the 15% growth in our services business, which was driven by higher consulting revenues and increased deployment services revenue related to our new cloud solutions. Compared to the fiscal year 2024, net income before taxes increased by more than $1.3 million year-over-year, resulting in earnings of $0.03 per share for fiscal 2025. Our long-term objective remains clear: to build shareholder value by protecting and extending the lifetime value of our customer base through modern cloud solutions while accelerating growth through AI-enabled solutions and services. I'll now review our progress against this, beginning with the actions we've taken to modernize our cloud solutions portfolio. As we previously communicated, we experienced some revenue pressure as a result of the declining competitive position of certain legacy PBX and contact center offerings. This trend was anticipated and understood, and we proactively initiated a comprehensive effort to transition away from those platforms in favor of more scalable, future-ready modern technologies. Over some period of time, we conducted a thorough evaluation of all available alternatives, carefully assessing multiple technology providers against our criteria, including performance, scalability, cost structure, and long-term strategic alignment. These efforts culminated in the introduction of all-new best-in-class white-label UCaaS and CCaaS solutions during fiscal 2025. Our technology platforms have been validated, in our opinion, through the early market traction and growing customer momentum since their launch earlier this year, reinforcing our confidence that these investments position Altigen Communications, Inc. very well for improved competitiveness and long-term value creation. Specifically, for our core engaged teams contact center, which we essentially launched right about this time last year, we deployed six customers representing 240 agents during the year, with billing for those customers commencing at various points throughout the fiscal year. We've since contracted with an additional five customers representing another 238 agents, which will begin contributing revenue upon completion of their respective deployments. Combined, these 11 customers represent 470 agents, and we expect them to generate approximately $75,000 a month in recurring revenue. For our 60 customers representing 1,600 users from our legacy MaxCS cloud platform during fiscal 2025, we've since contracted an additional 50 customers representing about 1,400 users that will commence billing once their deployments have been completed. In addition, we have another 100 customers representing about 2,500 users on our legacy Max Cloud platform that we plan to migrate to the Max Cloud GC platform over the next six months or so. Now, these migrations do not immediately increase revenue since these customers are already on a monthly cloud recurring revenue plan. However, we do expect the benefits of these migrations to include a significant extension of the customer's lifetime value, to materially reduce churn, and to lower our long-term support cost. Looking ahead, we'll also be targeting the several hundred remaining MaxCS on-premises customers, which represent about 4,000 users, in an effort to convert them to MaxCloud UC. As we convert these on-premises customers that are lower revenue customers to MaxCloud GC, we do expect to see new monthly incremental revenues. Our ability to enhance our solutions portfolio with the new Cloud UC and core Engage platforms is a direct reflection of the build versus buy strategy that we've adopted. In other words, we build solutions where we can deliver differentiated intellectual property, most notably in AI-powered applications. Conversely, in highly competitive categories such as UCaaS and CCaaS, we believe value is best created through white-label partnerships and/or selective acquisitions rather than duplicating commoditized platforms. This approach has been instrumental in reducing our operating expenses while transitioning our fixed development cost to a more scalable variable cost model. It's also enabled us to reallocate capital we were previously spending on development resources toward the development of new innovative AI-powered solutions. Turning to our strategic partnership with Fiserv, we are continuing to advance multiple new initiatives, including a next-generation AI-powered cloud IVR solution, an AI-enabled customer experience analytics platform, and now our core engaged contact center service contact center as a service platform. These solutions, as a reminder, are all brought to market by Fiserv under the Fiserv brand. As such, Altigen Communications, Inc. is not in control of the product launch timelines. Instead, our responsibility is to develop the solutions, work with Fiserv to get them certified under the Fiserv brand, and to support the Fiserv sales effort once those products are launched. With a $20 billion company like Fiserv, it takes time to get the necessary approvals and associate sign-offs completed. However, the wait will be worth it in the end as we continue to progress toward product launch. Moving to our consulting services division, we continue to expand our relationship with the Connecticut Department of Transportation, which includes the addition of new AI-focused initiatives. The engagements with CT DOT not only contribute to near-term revenue but also generate valuable domain expertise that directly helps our software-based AI solutions. The knowledge we continue to gain from AI projects on the consulting side is fully transferred to the AI solutions on the software side of our business. Now, the AI market, as many of you know, is literally flooded with vendors, most of them focusing on building next-generation AI platforms. Our unique approach is that we don't build the AI platforms. We build business solutions that utilize those platforms. Keep in mind our typical target midsize enterprise customer does not have deep AI expertise on staff to build their own AI solutions. So our model is to provide that expertise in the form of packaged AI solutions and services, which allows those customers to deploy Altigen Communications, Inc. AI solutions without the need to invest in expensive technical resources. By all accounts, this is the model preferred by midsize organizations. I'll leave you with this thought. Our business transformation efforts are beginning to show results. We've significantly upgraded our technical talent, streamlined our internal business systems, reduced our operating expenses, and introduced all-new leading-edge UCaaS and CCaaS solutions. We believe these efforts position Altigen Communications, Inc. to drive sustainable profitability, improve customer retention, and long-term customer value. With that, I'll turn the call over to Joe Hamblin for additional details on our progress. Joe? Joe Hamblin: Thank you, Jerry. Good afternoon, everyone. The past eighteen months, we've executed a comprehensive transformation of Altigen Communications, Inc., rebuilding nearly every aspect of the company's operating model, technology stacks, and go-to-market foundation. This was a deliberate reset designed to stabilize the business and restore profitability and position Altigen Communications, Inc. for scalable growth. From an operational standpoint, we focused first on simplification and discipline. We modernized internal systems, outsourced non-core functions such as accounts payable and receivable, consolidated vendors, and introduced greater automation across finance, provisioning, and service delivery. As a result, we've eliminated approximately $1.5 million in annualized operating expense, materially improving our cost structure while increasing our ability to execute our velocity's execution. In parallel, we addressed the most critical issues impacting our long-term competitiveness: our legacy product portfolio. During fiscal 2025, we replaced an aging PBX platform and an overly complex contact center solution with modern cloud-native offerings. MaxCloud UC was introduced to preserve and grow our legacy customer base while Core Engage to help us accelerate the growth of our Microsoft Teams practice. Using the deliberate buy versus build strategy allowed us to rapidly transform our product portfolio. This approach also enables Altigen Communications, Inc. to provide differentiation by building solutions where we can add tangible value, particularly in the AI and analytics space. This strategy has fundamentally changed our operating leverage. Our UCaaS and CCaaS platforms now operate on a largely fixed cost model, enabling margin expansion as subscribers' values grow. This is important as it has allowed us to redeploy capital and talent away from maintaining legacy software towards higher value innovation. With the foundation in place, fiscal 2025 marked the completion of our transition year from a transformation to growth moving forward. To further sharpen execution as we enter the next phase, we have a plan that will align the company functionally around our four primary revenue streams: the MaxUC platform, our Microsoft Teams practice, IVR, and our Altigen Consulting Services practice. This functional alignment will improve focus and accountability across both sales and operations, ensuring that product strategy, delivery, and go-to-market efforts are tightly coordinated within each business line. We believe the structure will improve sales effectiveness, accelerate decision-making, and better support scalable growth. To further support our go-to-market efforts, we began a full relaunch of the Altigen Communications, Inc. brand. We engaged a new digital marketing firm to rebuild our digital presence, modernize messaging, and improve demand generation. At the same time, this also includes SEO, remake, targeted pay-per-click campaigns, new core engaged product content, and a specific vertical outreach program. Our initial focus is on approximately 1,700 regional banks and credit unions, each with over $500 million in assets, where we already have strong domain credibility and footprint with our IDR platform and the Fiserv relationship. Both Jerry and I have stated product innovation remains centered around AI-driven differentiation. On the solution side, we have completed the development of several AI-enabled offerings that extend the value of our existing footprint. Our conversational AI front end for the IVR, now in customer preview, modernizes how callers interact with financial institutions using natural language, reducing containment costs while improving the customer experience. We've also completed the development of Core Insights, our next-generation customer engagement analytics platform. Core Insights uniquely combines the IVR transaction data with the customer demographics data to deliver actionable insights into customer behavior, intent, and service patterns. This platform enables banks and credit unions to better predict customer needs, personalize engagement, and identify new cross-selling opportunities. The customer preview program will begin in 2026. To support expansion into larger enterprises and regulated industries, we've also initiated a SOC 2 Type 2 certification program, with the expectation of completing it here in January 2026. This is a critical milestone for us and will enable us to pursue larger, more complex opportunities across financial services, public sector, and enterprise markets. On the service side of the business, our Altigen Consulting Services division continues to perform at a high level, anchored by our long-standing partnership with the Connecticut Department of Transportation. In fiscal 2025, this relationship expanded further with new AI-focused initiatives, reinforcing Altigen Communications, Inc.'s role not just as a technology provider but also as a trusted transformation partner. We are now leveraging the success to open doors with other state departments of transportation and enterprise organizations. Earlier this year, we presented alongside the Connecticut Department of Transportation at the AIDC conference in Pennsylvania, which has already resulted in follow-up engagements with several states. We continue our outreach campaign by participating in the Oklahoma State Expo, and we were also at the iHEAP conference this past October. We have plans to participate in several new events in 2026 as the opportunities present themselves. Strategically, we also signed a partnership with a leading agentic AI platform provider. This partnership allows us to provide a scalable, highly secure enterprise-grade AI solution. This partnership also creates a dual revenue opportunity for us: recurring platform revenue combined with high-margin professional services that align directly with our AI-first strategy. So in summary, Altigen Communications, Inc. today is a very different company than we were two years ago. We've stabilized the business, modernized our platforms, simplified operations, and restored ourselves to profitability. With that foundation firmly in place, fiscal 2026 will be about execution, scaling our customer base, accelerating revenue growth, and expanding margins through disciplined growth. With that, I'll turn the call over to Gary Stone to review our financial results and for more details. Go ahead, Gary. Gary Stone: Great. Thanks, Joe. Okay. For our February, which is July to September, we reported total revenue of $3.5 million with GAAP net income of $254,000 or $0.01 per share. This compares to the prior quarter's revenue of $3.7 million with GAAP net income of $2.1 million and $0.08 per share. Recall that in Q4 of last year, we recorded a $1.8 million deferred tax benefit. This year, it was only $300,000. For our 2025 fiscal year, we reported total revenue of $13.9 million compared to $13.6 million last year. Total cloud services for fiscal 2025 was approximately $6.9 million, down slightly from the $7.1 million last year. Meanwhile, our services and other revenue increased 8% to $7 million from $6.5 million in the prior year. Gross margin for the year was 63% compared to 62% in the same period last year. GAAP operating expenses for the year totaled $8.1 million, reflecting a 7% decrease from $8.7 million in the same period last year. GAAP net income for the full fiscal year 2025 was $738,000 or $0.03 per diluted share compared to the GAAP net income of $1.56 million or $0.06 diluted share in the prior year, which included that deferred tax benefit I mentioned earlier. So apples to apples, excluding the tax impact, our net income for fiscal year '25 is $1.03 million compared to a loss of $279,000 from last year, a favorable difference of $1.3 million. Earlier this quarter, or last quarter rather, the U.S. District Court in Utah ruled in favor of Altigen Communications, Inc. in the lawsuit with Intermountain Technology. In light of this favorable court ruling, we reduced our accrued liability by half to $372,000. Further reductions in the accrued liability may occur as we get more clarity on the full extent of the damages and legal fees that Altigen Communications, Inc. will be entitled to recover. Looking at our liquidity, we closed out the year with $2.75 million in cash and cash equivalents, up from $2.6 million last September and down from the $3.5 million in the prior quarter. As you recall, last quarter was a lot higher than we expected due to a large customer who paid ahead of schedule. Working capital was $2.9 million compared to $2.1 million in the previous year, reflecting a 38% increase and I should add a multiyear high. Our EBITDA adjusted for legal, severance, and other one-time costs was $1.6 million compared to $500,000 in the prior year. So in conclusion, we've made great progress this year, and we're very excited about our future. So now let me turn the call back over to Jerry Fleming for our closing remarks. Jerry? Jerry Fleming: Jerry, you're on mute. Operator: Oh, thanks for the instructions. Sorry about that. Jerry Fleming: The progress we're making is tangible and accelerating. Our investments in modernizing our platforms, improving our cost structure, and expanding our growth initiatives will enable us to deliver on our 2020 vision, which is 20% top-line growth with 20% to the bottom line, building long-term shareholder value. I'll now hand the call back to the operator for a Q&A session. Operator? Operator: Thank you. At this time, we will be conducting a question and answer session. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. Again, please press star 1 on your phone at this time. And please hold while we poll for questions. And the first question today is coming from Alan Markham from Van Clemens. Alan, your line is live. Alan Markham: Yes. Thanks for taking my call. So it sounds like you've rebuilt a lot of your structures and you know, guiding towards the future. Can you forecast a point during '26, maybe in the half or even before that when you'll see a measurable or a material difference in your revenue growth? Jerry Fleming: We will. I think, Alan, we'll be able to as we particularly as we get some of these customers migrated over to the cloud that I discussed earlier. And once we have some more visibility to when those customers are billing, then we'll have then we'll be able to be in a position where be able to, let's say, offer some predictions really in terms of what we expect our revenue to be. Right now, it's really hard to say because a lot of it is we have customers that are in various stages of deployment. And, we're not 100% certain. We're not in control of those deployment timelines as the customer. But you know, as we get those in production, we'll have a lot more visibility going forward. Alan Markham: Okay. Thanks. Just to follow-up on that. So in the case of just to use Fiserv as an example, and you you'd mentioned you can't control when they launch that product. So I guess when they do flip that switch, that could possibly noticeably change what you know, what Altigen Communications, Inc. earns from that from that company. Jerry Fleming: Yeah. Dramatically. And that's one of our frustrations that we don't control that. Of course, they're Fiserv customers, so these solutions are sold under their brand. But, yes, we're working hard to get access or to get their approval and get their marketing folks to launch the product. But when they do, we mentioned three of them that we have, as they start kicking in, you know, we'll see a significant uptick in revenue from Fiserv. Just can't tell you when sitting here today. Alan Markham: Thanks for taking my questions. Operator: You're welcome. Thank you. The next question is coming from Mike Schattinger. Mike is a private investor. Mike, your line is live. Mike Schattinger: Yes. Can you tell me whether or us whether you expect this quarter to be like sort of the low watermark for revenue and do you expect it to ramp from here without getting into, like, you know, specifics of how much? Or I'm just trying to understand. It hit the bottom. Jerry Fleming: Yeah. That's a fair question, Mike. Yeah. I think so. You know, there can always be anomalies that mess things up a little bit here or there, but the most important thing our most important things, I guess, we did, and Joe certainly expounded on that, was revamping our legacy platforms. Which were causing way too much churn because they had lost their, really, their competitive nature. And having the new solutions that are now ramping and gaining market acceptance and gaining customers as I was talking about. Yeah. I think we're that has stopped the downside. And now we can start looking at upside from here. So, yes, we do expect this it should get better from here is the expectation. Mike Schattinger: Okay. So we should sort of expect a ramp from here maybe with some variability quarter to quarter. Gary Stone: The trademark. Like, sort of on a sequential basis. Taking holiday shopping. Generally trending upward is our expectations, Mike. Mike Schattinger: Okay. Alright. And you said something towards the end of the prepared remarks of targeting. I wanna say, like, it was something like 20% top line or and 20% bottom line. Did I hear that right? Jerry Fleming: Mhmm. Right. By 2028. So, yeah, they're we're looking to ramp our you know, in a a little bit hard to say how we'll do each year, but, to achieve that as a as a as a goal to continue, 20% top line and 20% to the bottom line, you know, are our you know, sort of our marching orders, if you will, internally, and what we're what we're shooting to achieve. Mike Schattinger: But you but did you just say by 2028 or or starting next year? Gary Stone: 02/2010 tech AI By twenty twenty eight. I don't think we get them. Jerry Fleming: We might get there in 2027. But Okay. Just with the cloud revenues, we I can't guarantee that. But, by 2028, we wanna be you know, certainly this one. In that position. Mike Schattinger: Okay. Those are all my questions. Thank you. Gary Stone: Yep. You're welcome. No problem. Operator: Thank you. And that does conclude today's Q and A session and also concludes today's conference. You may disconnect your lines at this time and thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to the Scholastic Reports Second Quarter Fiscal Year 2026 Results. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speakers' presentation, there will be a question and answer session. To ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. I would now like to hand the conference over to your speaker today, Jeffrey Mathews, Executive Vice President and Chief Growth Officer. Hello, and welcome, everyone, to Scholastic's fiscal 2026 second quarter earnings call. Today on the call, I'm joined by Peter Warwick, our President and Chief Executive Officer, and Haji Glover, our Chief Financial Officer and Executive Vice President. Jeffrey Mathews: As usual, we posted the accompanying investor presentation on our IR website at investors.scholastic.com, which you may download now if you've not already done so. We would like to point out that certain statements made today will be forward-looking. These forward-looking statements, by their nature, are subject to various risks and uncertainties, and actual results may differ materially from those currently anticipated. In addition, we'll be discussing some non-GAAP financial measures as defined in Regulation G. The reconciliations of those measures to the most directly comparable GAAP measures can be found in the company's earnings release and the company financial tables filed this afternoon on a Form 8-K. This earnings release has also been posted to our Investor Relations website. We encourage you to review the disclaimers in the release and investor presentation and review the risk factors disclosed in the company's annual and quarterly reports filed with the SEC. Should you have any questions after today's call, please send them directly to our IR email address, investor_relations@scholastic.com. And now I'd like to turn the call over to Peter to begin this afternoon's presentation. Thank you, Jeff. Afternoon, everyone. Peter Warwick: Scholastic performed strongly in our important back-to-school season. We delivered 13% adjusted EBITDA growth in the second quarter and have affirmed our FY 2026 earnings guidance after adjustments for the sale leasebacks that we closed yesterday, which were not assumed in our original guidance. I'll discuss this further in a moment, as will Haji, who'll provide the adjusted view based on these highly accretive transactions. In quarter two, we also sustained our momentum with key strategic and financial initiatives, achieving major goals in our transformation to a more growth-focused, shareholder-oriented company. Before discussing quarter two results, I want to take a moment to review Scholastic's journey over the last four years. Since the start of fiscal 2022, I've had the privilege of working with our new board chair, Yola Lochese, to remake Scholastic with a singular purpose: realizing the power of our unmatched brand, IP, channels, and balance sheet for long-term growth and value creation. While significant opportunity and work remain, I'm proud of the progress that we've made. So first, we've refreshed our board and leadership team. We've added seven new independent directors with deep expertise in education, digital media, and capital allocation. We've also appointed new leaders in each of our major segments and in key corporate functions, including chief financial officer. These changes ensure the board has the experience and perspectives needed to maximize Scholastic's long-term opportunity and value while bringing innovative thinking, sharper strategic focus, operating discipline, and renewed accountability to our management. Second, we've reorganized and reengineered our core businesses and overhead functions to better align with Scholastic's long-term growth opportunities, improve execution of our plan, and unlock operational efficiencies. We unified our children's book group, bringing together our publishing and proprietary distribution channels to fully capitalize on Scholastic's scale as the world's largest and only vertically integrated children's book publisher and distributor. We restructured Education Solutions to focus our product portfolio, strengthen go-to-market capabilities, and reset our cost structure. We've also reorganized our international segment. At the same time, we've significantly reduced costs in our shared services and overhead functions by eliminating redundancies, improving processes, and reducing our real estate footprint. Third, we've invested and expanded into highly strategic growth opportunities. The acquisition and integration of Nine Storey Media Group further differentiates Scholastic as a global children's media book and IP company with the ability to reach kids and families where they are today—on screens as well as on the page. In addition, we've significantly scaled models and channels to tap new sources of corporate, philanthropic, and state and local government funding for literacy, generating over $300 million in revenue for our books and literacy solutions since fiscal 2022. And fourth, we've implemented a disciplined and shareholder-focused approach to capital allocation. Since fiscal 2022, we have returned almost $500 million to shareholders through share repurchases and dividends, reducing our share count by approximately 25%. At the same time, as we have invested in the opportunities that I've just described. Peter Warwick: This month, we crossed another major milestone with the closing of two successful sale leasebacks that have unlocked more than $400 million in net proceeds from our major non-operating real estate assets. As a first step to deploy this incremental liquidity, our board has increased our open market share repurchase authorization to $150 million. Haji will speak later in the call about the financial impact of these highly accretive transactions and uses of proceeds. I want to be clear that the board and I are absolutely committed to deploying this incremental cash in ways that create value for our shareholders, and our top opportunity is returning it efficiently to shareholders. In summary, carefully executed comprehensive changes over the past four years position Scholastic's organization, strategy, and finances to better realize the value of its unique strengths that were built over the past century. That is our brand, our IP, and our channels by growing profitably, delivering impact and value for our customers, and driving returns for our owners. As we enter 2026, we remain focused on continuing this work. Turning now to the second quarter results. The performance of our children's book publishing and distribution segment demonstrates the strength of Scholastic's proprietary school-based channels and the power of our major global franchises. School book fairs delivered another strong back-to-school season and remain a cornerstone of Scholastic's reach and engagement with kids. Growth across key performance metrics, fair counts, revenue per fair, and e-wallet usage, and lower cancellations underscore the unique strength and relevance of this beloved event-focused channel, its ability to spark excitement among students, families, and educators. We continue to execute on initiatives to profitably grow fairs, expanding the addressable market, improving selling and marketing effectiveness, introducing new fair formats, and advancing merchandising with strategic pricing optimization. These efforts are contributing to revenue per fair growth. We expect these positive trends to continue into the spring season as we build on the strong engagement we saw in the first half. In book clubs, our smaller school channel, softer results reflect the continued evolution of classroom and teacher engagement patterns. We remain focused on key strategies improving teacher engagement and increasing student participation to ensure clubs remain an accessible entry point into reading for kids and families. Trade publishing delivered another strong quarter, underscoring the power of Scholastic's global franchises and our continued ability to bring compelling new content to readers across channels. Dave Pilkey's Dog Man, Big Jim believes, the fourteenth book in the global phenomenon, debuted as the number one best-selling title across adult and children's categories in the US on November 11 and has already sold over 2 million copies in print. The book currently holds the number one spot on the New York Times graphic books and manga bestseller list, where titles from the series hold three of the top five positions. And per Surcana Bukscan, nine out of the top 10 kids' graphic novels in November were Scholastic titles. This spring, Pilkey's universe is expanding into the growing category of children's manga with Captain Underpants, the first epic manga illustrated by the acclaimed manga artist Motojiro. The new title and series capitalize on longstanding leadership in graphic novels and our role in helping children discover and deepen their love of reading. A new edition of Sunrise on the Reaping sustained momentum of the latest title in the Hunger Games series, which has sold almost 5 million copies since its March release, with anticipation building ahead of a film release next fall. Similarly, sales of the Harry Potter series benefited from the new interactive illustrated edition of the Goblet of Fire, with fans gushing on social media about a new upcoming Harry Potter series on HBO currently expected in spring 2027. The Wings of Fire series also delivered a breakout moment with Dark Stalker, the first prequel, which became an instant bestseller. We're excited to build on this momentum with the sixteenth Wings of Fire book, the hybrid prints, in March, the first new installment in four years, and then later this month with the graphic novel edition of the ninth book in the series, Talons of Power. Our consistently high-performing series highlights Scholastic's unique ability to build enduring children's stories, characters, and franchises that grow with readers and extend across formats, channels, and generations. We're moving forward to realize the strategic potential of the newly combined children's book group, which unifies editorial, marketing, distribution, and merchandising to reach more kids through a programmatic and coordinated approach. As an example of what's now uniquely possible at Scholastic with this integrated approach, we just announced a comprehensive branding, publishing, and distribution partnership with Mark Rober. The former NASA engineer whose highly popular CrunchLab's brand and YouTube channel reached more than 70 million subscribers, mostly kids. We look forward to sharing more about this partnership on future calls. In Scholastic Entertainment, we continue to strengthen our position as a leading producer of high-quality children's content, expanding the reach and value of our IP. During the quarter, we began production on three premium animated series with major media partners, an encouraging sign of improving green light activity, which we expect to continue to build into next year and to contribute to growth. We also see momentum across our development slate, with a major project based on a long-standing Scholastic brand slated to launch in fiscal 2027. We hope to be able to announce more details of this soon. Our digital channels, particularly YouTube and Scholastic TV, also continued to scale, meeting kids where they are and expanding the discoverability and value of Scholastic IP. Across YouTube channels, engagement remains strong. As kids and families discover and consume more and more stories on platforms. Since its September launch, Paris and Pups, a new animated series in partnership with Paris Hilton, has surpassed over 23 million views across all channels on the platform, with steady weekly engagement as new episodes debut. We expect the potential of this franchise engagement to continue to grow ahead of the fall 2026 launch of a global tie-in publishing program, and of Playmates toys, as well as emerging opportunities for long-form content. One of the clearest proof points of our 360-degree strategy has been data on the impact of the iconic Scholastic red bar and branding. Since updating our YouTube channels at the August, with the Scholastic brand identity, we have seen an immediate lift in visibility and audience engagement and now have more than 253 million views and over 2 million subscribers across all Scholastic channels. These results reinforce that the Scholastic red bar continues to be a meaningful differentiator of quality and reliability as families navigate an increasingly crowded digital landscape. September's launch of Scholastic TV, our first Scholastic branded streaming platform, has further demonstrated the power of our trusted brand and content. The app provides a curated, kid-friendly destination for our shows. Early performance has been extremely strong, with over 350,000 downloads, 3.5 million views, and over 64 million minutes watched to date. This momentum reinforces Scholastic Entertainment's outlook as an increasingly meaningful contributor to Scholastic's long-term earnings driven by both production revenue and our expanding digital footprint. Now, turning to Scholastic Education, where the strategic value of our reading, learning, and literacy offerings not only align with Scholastic's core strengths but are essential to helping kids read and learn, which is at the center of mission and brand. As we discussed last quarter, we continued to navigate a challenging funding environment again in the second quarter, as delayed federal disbursements and slower district decision cycles impacted near-term sales across the industry. That said, we've made meaningful progress focusing our product portfolio and refining our go-to-market approach. In quarter two, our state and local literacy partnership continued to perform solidly. Sales to schools and districts accelerated quarter over quarter. Our magazines have outperformed other categories, reflecting their strong value on cost customer loyalty. We're also beginning to see growth in the sales pipeline for our second half. With our actions to restructure the organization and improve, we were able to offset most of the impact of lower sales again last quarter. Looking ahead, especially to our important spring selling season, we remain cautiously optimistic that better execution, new products, like knowledge library, and spring disbursements of some federal funds will stabilize the top line while we benefit from lower costs. As I've said on prior calls, despite a challenging near-term environment, we remain very optimistic about the long-term strategic value and opportunity presented by this business. In our international segment, we saw a strong performance across global markets from key franchises, including Dogman. We continue to see opportunities in emerging markets, like India and in other Asian countries, and to capitalize on the growing demand for materials for English as a second language. Under refreshed leadership, the team remains focused on improving margins and positioning the business for long-term growth. In summary, as we enter 2026, we're operating from a position of strength. The closing of our sale leaseback transactions and the resulting $400 million in liquidity reflect our commitment to disciplined shareholder-focused capital allocation. Combined with continued momentum across our core businesses and progress on our strategic initiatives, we believe Scholastic is well-positioned to accelerate profitability, deliver long-term growth, and deepen our impact on children, families, and educators while creating lasting value for our shareholders. Thank you. I'll now turn the call over to Haji. Thank you, Peter. Haji Glover: And good afternoon, everyone. As usual, I will refer to our adjusted results for the second quarter, excluding one-time items unless otherwise indicated. Please refer to our press release tables and SEC filings for a complete discussion of one-time items. As Peter discussed earlier, second-quarter results were solid, reflecting strength in book fairs and momentum across our major global franchises. As a reminder, the second quarter represents one of Scholastic's seasonally more profitable periods, as kids return to school, and our school-based channels ramp up again. Beginning with our consolidated financial results. In the second quarter, revenues increased 1% to $551.1 million. Operating income improved to $95 million from $78.9 million in the prior year period, reflecting the company's cost-saving initiatives. Adjusted EBITDA was $122.5 million, a significant improvement from $108.7 million a year ago. Net income was $66.3 million compared to $52 million in the prior year period. On a per diluted share basis, adjusted earnings increased to $2.57 compared to $1.82 last year. Turning to our segment results. In the Children's Book Publishing and Distribution, revenues for the second quarter increased 4% to $380.9 million, reflecting strong performance in book fairs and the strength of our major global franchises in trade. Segment adjusted operating profit improved to $108.8 million from $102.1 million in the prior year period. Book sale revenues were $242 million in the quarter, an increase of 5% driven by higher fair count and increased revenue per fair. We continue to expect higher fair count and revenue per fair to contribute to revenue growth in our booked fairs business this fiscal year. Haji Glover: Book clubs revenue were $28.5 million in the quarter, compared to $33.2 million a year ago, reflecting lower teacher sponsors. As a reminder, clubs is our smaller school-based channel. We anticipate these trends continuing in the spring season. In our trade publishing division, revenues were $110.4 million in the second quarter, an increase of 7%. These results reflect strong performance of new publishing releases across our major global franchises, led by the fourteenth Dog Man title, which published in November, as Peter discussed. We remain optimistic about sustained momentum across our major global franchise and continue to expect trade to be in line with the prior year on a full-year basis. As a reminder, this year's publishing schedule is weighted more towards Q2 compared to last fiscal year, which benefited from major Dog Man and Hunger Games releases in Q3 and in Q4. Turning to our entertainment segment. Revenues decreased by $1.7 million to $15.1 million compared to $16.8 million in the prior year, primarily driven by fewer episode deliveries in line with expectations. As Peter discussed, we remain encouraged by recent green light momentum, and our position for renewed growth in 2026 and in fiscal 2027, particularly reflecting revenue recognition typical of media development and production. Segment adjusted operating loss was $3.6 million, an improvement of $300,000 from the prior year quarter. Turning to Scholastic Education. Segment revenues were $62.2 million in the second quarter versus $71.2 million in the prior year period, reflecting lower spending on supplemental curriculum products. Segment adjusted operating loss was $1.3 million in the second quarter, compared to a loss of $500,000 in the prior year period, reflecting lower gross profit mostly offset by cost reductions from reorganization initiatives and ongoing cost management. As Peter discussed, we continue to experience near-term funding volatility in the segment, though expect year-over-year declines to moderate in the second half based on an improving sales pipeline, new products, and improved execution. Ahead of expected market recovery, we continue to target improved profitability in the second half of the year. International segment revenues were $89.5 million in the second quarter, up from $86.7 million a year ago. Excluding the $500,000 year-over-year impact of favorable foreign currency exchange, segment revenues were up $3.3 million, primarily driven by the new Dogman title as well as new additions across other major franchises. Segment adjusted operating income improved to $12.8 million compared to $7.1 million in the prior year period, reflecting higher revenues and operational efficiencies. We continue to expect modest declines in revenues and profitability in this segment following strong trade performance in fiscal 2025, as I just discussed. Unallocated overhead costs decreased by $4.2 million to $21.7 million in the second quarter, primarily driven by lower employee expenses from cost reduction initiatives. Now turning to cash flow in the balance sheet. As a reminder, our free cash flow and net debt at the quarter end do not reflect the cash proceeds from the sale leaseback transactions, which closed in our third quarter, and that I will discuss momentarily. In the quarter, net cash provided by operating activities was $73.2 million compared to $71.2 million in the prior year period, primarily related to lower operating expenditures and timing of payments, partially offset by higher severance-related payments as part of the cost-saving initiatives. Free cash flow in the second quarter was $59.2 million compared to $42.4 million in the prior year period, reflecting lower payments of film-related obligations and higher cash flows from operations in the current period. At the quarter end, the company had borrowings of $235 million under its unsecured revolving credit facility. Net debt was $186.6 million compared to net debt of $136.6 million at the end of fiscal 2025, primarily driven by operational working capital needs. Consistent with our capital allocation priorities, we continue to return excess cash to shareholders. Through our regular dividend, the company distributed $5.1 million in the second quarter. As announced earlier today, we closed two sale leaseback transactions of our owned real estate in New York City and our Jefferson City distribution centers. We expect the net cash proceeds of over $400 million to be used in line with our capital allocation priorities, which includes share repurchases. As Peter noted, our top priority is returning incremental cash to shareholders, something we've demonstrated a strong track record of doing over the last four years. Our first step to return excess capital to shareholders is reflected in the Board's decision to expand our open market share repurchase authorization to $150 million. The company expects to continue purchasing shares from time to time as conditions allow, on the open market or negotiating private transactions for the foreseeable future. Beyond initially paying down the credit facility and moving forward with our current $150 million open market repurchase authorization, we are exploring additional means to efficiently return excess cash to shareholders and to return to moderate leverage levels, consistent with our recent levels, while preserving a strong and flexible balance sheet. Now for our outlook for the remainder of the year. Looking ahead to the second half of the year, we anticipate revenue growth in school reading events and entertainment divisions, partly offset by modestly lower year-over-year revenues in trade and in international versus a strong prior year comparison when the publishing schedule benefited from major releases in 2025. Reflecting strength in the children's book group, partially offset by lower sales in education solutions, in 2026, we now expect fiscal 2026 revenues to be level with or slightly above the prior year. More broadly, we remain focused on driving favorable operating margins as we benefit from our lower cost structure. As for the impact of tariffs, we are closely following changes in policy and continue to expect approximately $10 million of incremental tariff expense in our cost of product this fiscal year. On a full-year basis, we have affirmed our outlook for fiscal 2026 adjusted EBITDA and free cash flow. Before the impact of the sale leaseback transactions, which closed in our third quarter. Adjusting for partial year impact, of the highly accretive transactions, our outlook for adjusted EBITDA is now $146 to $156 million, which includes a partial year impact of approximately $14 million. In our smaller third quarter, we anticipate a higher seasonal operating loss followed by profitable gains in Q4. For our fiscal 2026 free cash flow outlook, which was previously $30 million to $40 million, we now forecast free cash flow to exceed $430 million, reflecting the proceeds from the sale of our real estate assets. Please see today's earnings presentation for reconciliation of the estimated partial year and pro forma full-year impact of the sale leaseback transaction on the company's guidance. Thank you for your time today. I'll now hand the call back to Peter for his final remarks. Peter Warwick: Thank you, Haji. In fiscal 2026, Scholastic continues to make good progress, building on the momentum we've generated since fiscal 2022 to reinforce our foundations for growth, value, and shareholder returns. As I said at the start of the call, we've refreshed our board and leadership team. We've reorganized and reengineered our core businesses and functions while advancing strategic growth opportunities. And we've carefully allocated capital with a view toward driving shareholder returns, including returning nearly $500 million to our shareholders. We're optimistic about the outlook for our portfolio of businesses for the remainder of the year and over the long term. We also have a very attractive opportunity to repurchase shares using proceeds from our successful sale leaseback transactions, beginning with a $150 million open market authorization. We look forward to updating you on additional actions as we implement them. I'd like to close by thanking Scholastic's employees for their dedication and passion serving kids and customers as well as our shareholders for their continued support. Thank you all very much. Let me now turn the call over to Jeff. Jeffrey Mathews: Thank you, Peter. With that, we will open the call for questions. Operator? Operator: Thank you. Star one one on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. One moment for questions. And our first question comes from Brendan Michael McCarthy with Sidoti and Company. You may proceed. Brendan Michael McCarthy: Great. Good afternoon, everybody. Appreciate you taking my questions here. And congratulations on the quarter and the real estate transaction closing. Peter Warwick: Yes. Thank you, Brendan. Yep. Just just wanna start on the use of proceeds. Can you provide any color or timing around how we can think about that $80 million increase in the buyback authorization? I know it looks like historically, you've taken out about 8% of shares outstanding on a fiscal year basis. What might that look like going forward? Peter Warwick: Well, I mean, we the first what we've what we've announced is the first step. I mean, because of the, you know, the the very successful and highly accretive sale leaseback transaction. The first thing which we have done and which the board has authorized is to increase our, you know, off market share buyback. That's the first that's the first step. Let me hand over to Haji. He can talk a little bit more about about, you know, how we're thinking about it going forward. Haji Glover: Yeah. Thanks, Peter. So roughly, what we're seeing right now is that we have, you know, sell the share repurchase program that we currently have will allow us to get into the market soon to continue to focus on returning cash to shareholders. As we mentioned in the in the call, over the last four years, we did over $500 million return to our shareholders. We're gonna continue to do that thing. We definitely feel that our shares are undervalued right now, so we're definitely gonna go into the market. And we're we're contemplating things with our board to figure out other ways of doing things to help, you know, bring more money to our shareholders. Brendan Michael McCarthy: Hopefully, that answers your question. Yeah. That's helpful. Thanks, Haji. Thanks, Peter. And and Haji, I believe you mentioned you you are targeting paying down a a large portion of the credit facility. Haji Glover: Yeah. I mean, the census yeah. Exactly. Since it is an open line of credit for us, we can pay that down. We have to it's repriced every month, so we'll we'll probably most likely pay that down. And then if we need it, we'll definitely continue to do what we need to do in an organization from a short-term repayment. Our goal is to return to more moderate levels of of debt or moderate levels of leverage. Like we've done over the last few years. Brendan Michael McCarthy: And as far as the, you know, debt to EBITDA target, what is what's the moderate level of leverage? Haji Glover: I mean, historically, we've been right around one and three quarters. Roughly. Brendan Michael McCarthy: Okay. Got it. That's helpful. And and on the new guidance, specifically the top line revenue, can you walk us through the changes there so that obviously excludes the rental income at this point? Are there are there any other changes baked into that lower revenue number? Yes. And Peter mentioned this early on and has Haji Glover: is a part of the discussion today. We're seeing the education business continuing to deal with the the softness because of funding. While we also know that in the second half, we're gonna see some uplift based on funds being released in the second half and our sales the education group. pipeline is starting to be a lot better. But that was one of the reasons, we saw this office from We still expect to see growth in fares, to help offset that as we are are looking at our fare count We're projecting to do 92,000 fares this year compared to almost 90 last year. And then also, RPF continues to be strong. But that those are the things that are causing us to deal with the second half. Brendan Michael McCarthy: Uptick. Haji Glover: In our numbers. Brendan Michael McCarthy: Bunch of puts and takes. And yep. Understood. And and regarding trade channel sales, yeah, obviously, a really strong year for content last fiscal year. Tough comparison this year. Is it still expected to be, you know, flat to moderately lower for fiscal 'twenty six trade channel sales? Yeah. Trade channel sales, absolutely, is gonna be in line with last year, as we anticipated. We we did as you know, last year, we had the launch of the DogMen in Q3. Haji Glover: Versus this year in Q2. And on top of that, we did have the Hunger Games in Q4 last year. So but, ultimately, we're still getting in the nice tailwinds from all of those major franchises as you can see from our results, in the first half of the year. Brendan Michael McCarthy: Absolutely. Absolutely. And and looking at book fairs, were you surprised at all to see, you know, the strong results there? Or are you seeing anything regarding consumer spending that might give you pause for the rest of the year? Haji Glover: Yeah. I'm a turn that over to Peter, if you don't mind. Peter Warwick: No. It's been, I mean, really, it's the the the trends that we that we saw last year are are really pretty much, continuing, which is to say that book book fair bookings are good. Cancellations are down. And, you know, revenue per fare is up. What we're seeing is that in some of the fares, that there, as we saw last year, that there's a a somewhat smaller number of kids who are actually buying. But those kids that are buying are buying significantly more, and that's what's that's what's driving up the revenue per fare. So I think that's the and we're not seeing anything that's in any way different, actually, from from from what we saw from what we saw last year. We're assuming that that is some sort of reflect of the overall economy here, but I'm but, thankfully, you know, we we've been able to manage that pretty well through just being, I think, very effective, very efficient. We've got great book selection and and those and and and marketing and those kinds of things. So we're actually the the Book Fair people are feeling pretty good about the spring. So, you know, that that that that's very encouraging. Brendan Michael McCarthy: That's good. Thanks, Peter. And moving to education solutions. Yeah. Obviously, it's been a tough year so far for that segment. But it looks like despite the revenue decline, think I saw segment adjusted EBITDA was about flat year over year in the second quarter. Peter Warwick: Yeah. Brendan Michael McCarthy: You've obviously, you know, done well taking costs out of that business. And do you do you still see, you know, much room much more room there to to take you know, cost out of that segment? Peter Warwick: Well, we've taken we've taken significant costs out, which really is reflect reflective of what the current state of the of the of the market is. What we now need to be able to do is to, prepare for regrowing that business to the size that it has been, in the past. That's something which almost all educational publishers and especially those who are involved in supplementary publishing like ourselves are are are having to do. I mean, I think we've done a we've we've done a really good job, I think, in in in very quickly adjusting to to what we can do. And I think as the market recovers, what it means is that, you know, more of the more cents per dollar is actually gonna land on our bottom line. Brendan Michael McCarthy: That makes sense. And, yeah, with one yeah. The first the fall season of of the school year, you know, behind us is there. Yeah. Are you more optimistic heading into the into the spring season How how can we kinda think about that education situation? I'm I'm I'm more I'm more Peter Warwick: optimistic in the sense that I think we've stabilized the business. We've got it right sized. We can see that, you know, that we're dealing with a tough situation just like everybody else as well. But, I mean, the quarter four is a and and and the spring tends to be time when there's significant spending ahead of summer for summer reading, and for, you know, materials for the next academic year. So, you know, our our whole approach has been to get this behind us, deal with this thing as quickly as possible. That we can get to a good situation so that as as the season you know, just the the the the the seasonal market, I with purchasing in the spring. And as we hope there's more opportunities, more federal funding being dispersed as well, we expect in the spring that we'll be able to benefit from that We'll see that our overall educational, as it were, sales are going to be more second half loaded than we originally anticipated in our first budget. And that, you know, we'll, we've got ourselves in a good position to build and grow and move forward as the market improves. I think the stronger margins is something which are you know, which which which is really good for us at the moment. That's great. Really appreciate Brendan Michael McCarthy: the detail, Peter and Haji. That's all for me. Alright. Thanks, Brenda. Thanks. Cheers. Operator: Thank you. Our next question comes from Drew Crum with B. Riley Securities. You may proceed. Drew Crum: Okay, thanks. Good afternoon, everyone. I want to go back to the question on uses of cash. I think addressed this on several occasions in your preamble. Is a top priority in terms of deploying the cache. Can you address how dividends play into that I don't think you guys have paid a special dividend through the years and the quarterly dividend payout has been relatively flat over the last several years. So I just want to get some additional color around that. And then I a follow-up. Haji Glover: Yeah. Our goal is to return capital as efficiently as possible. And as you mentioned, the dividend, yeah, we have been consistent with our dividend payout, which is about $0.20 per share over the last few years. On average quarter, that's about $5 million or around an average of $20 million per year. We we're continuing to build and and during more value from the organization. But, ultimately, it's about, you know, investing in our shares. Drew Crum: Okay. And then, Hygiene, just looking at the second half guidance, if I back out the SLB guidance, transactions, it would suggest at least using the midpoint of the ranges would suggest that adjusted EBITDA declines year on year. Just wanna make sure that's correct. And if so, what is driving the decline? Haji Glover: No. I think I I don't think there's a good decline. If you adjust prior year FY '25 with the numbers, you would you'll still you will still show growth. Okay. Okay. Provided that we provided that in the press release. Drew Crum: Okay. Got it. Okay. Thank you. No. No problem. Haji Glover: Thank you. Operator: And this concludes our Q and A. I will pass the call back to management for any closing remarks. Peter Warwick: Well, thank you very much, operator. And look, I'd just like like to thank our employees and shareholders as well as our authors, illustrators, educators, all those who are essential to to our our success. And, of course, all of us here wish you all a very happy and healthy holiday season. Goodbye. Thank you. Ladies and gentlemen, this concludes Operator: today's conference call. Thank you for participating. You may now disconnect.
Operator: Good afternoon, and welcome to the Mission Produce Fiscal Fourth Quarter 2025 Conference Call. Participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Jeff Sonnek, Investor Relations at ICR. Sir, please go ahead. Jeff Sonnek: Thank you. Today's presentation will be hosted by Steve Barnard, Chief Executive Officer; John Pawlowski, President and Chief Operating Officer; and Bryan Giles, Chief Financial Officer. Steve Barnard: The comments during today's call and the accompanying presentation contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are considered forward-looking statements. These statements are based on management's current expectations and beliefs, as well as a number of assumptions concerning future events. Such forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward-looking statements. Some of these risks and uncertainties are identified and discussed in the company's filings with the SEC. We'll also refer to certain non-GAAP financial measures today. Please refer to the tables included in the earnings release, which can be found on the Investor Relations section of investors.missionproduce.com, for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures. And with that, I'd now like to turn the call over to Steve Barnard, CEO. Steve Barnard: Thank you, Jeff. I'd like to start the call by addressing the leadership transition news that we announced concurrent with today's earnings results. We've been focused on succession planning for several years now, and the time is right to implement that plan. Effective at our annual meeting in April, our President and Chief Operating Officer, John Pawlowski, will assume the role of Chief Executive Officer, and I will transition to Executive Chairman of the Board. Let me be clear though. This company is the culmination of my life's work. And I am very excited about this next chapter of Mission's story. In my new role, I'll continue to support John and the leadership team while working closely with our board to drive the business forward. Over the past four decades, we've built Mission into the global leader in avocados, and John's immediate impact on harnessing our potential is being felt across our entire organization. His decades of experience in the global food industry make him the ideal leader to guide Mission through its next phase of growth. With two consecutive years of exceptional financial performance, the successful completion of our major capital investment cycle, and a balance sheet that positions us to capitalize on future opportunities, there's no better time for this succession. I'd like to thank our entire organization for their support and focus over the years as we've reshaped the industry and raised the bar on customer service. With that, I'll turn it over to John to discuss the results. John Pawlowski: Thanks, Steve, for your confidence and partnership. I want to start by saying how honored I am to have the opportunity to lead this organization. When I stepped into this role, I had high expectations. But what I've experienced over the past twenty months has surpassed them in every way. The depth of operational capability, the strength of our global relationships, and the caliber of our team are truly remarkable. And this quarter, this year, showcased exactly why that matters. Steve and the team built something special over the past forty years. And I don't take lightly the responsibility of carrying that forward. But I also couldn't be more excited about where we are headed. The foundation is strong, the team is executing at a high level, and the opportunities in front of us are significant. Now let me turn to our results. Because fiscal 2025 was a defining year for Mission Produce. We delivered record revenue of $1.39 billion, growing 13% on top of a strong 2024. Driving that was a 7% volume growth to achieve a record 691 million pounds of avocados sold through our marketing and distribution business. We also delivered record adjusted EBITDA in the fourth quarter, capping off a two-year period in which we generated more than $180 million of operating cash flow. These results didn't happen by accident. They reflect the power of our integrated global platform, and most importantly, the exceptional execution of our team. What truly sets Mission apart is our ability to execute on a truly global stage. We are a connected global team that can adjust and pivot in real time to seize opportunities, creating a genuine differentiator for our company. Throughout the year, our commercial team demonstrated remarkable agility. We managed demand and supply shifts throughout the Peruvian season seamlessly across our U.S. and European operations. This coordination allowed our team in the United Kingdom to grow revenue by over 60% in 2025, while also enhancing our sales efforts in Southern Europe. These efforts combined to drive a 40% increase in European volumes sold, creating a foothold that enables us to cultivate deeper relationships and positions us for long-term growth in that region. We leveraged our entire platform—our global sourcing network, our distribution infrastructure, our forward positioning, and our category management tools—to drive the best possible outcomes for our customers, maximize the value of fruit across all channels, and deliver quality products to global consumers. We are a volume-centric business. Volume and per-unit margins are the metrics we manage to. They represent areas that we can exert control over and are what underpin our ability to drive strong financial performance. While we can't control the fluidity of industry pricing, our commercial and sales teams are continuously harnessing our data to provide our customers with value-added insights to drive category growth in support of our broader efforts to drive per capita consumption globally. No matter the noise in the market, whether it's tariff uncertainty, pricing volatility, or supply disruptions, this team has repeatedly demonstrated the ability to execute for our customers. That's what I'm most proud of this year. Let me walk through how this played out across our segments. First, our 7% avocado volume growth for the full year and 13% in the fourth quarter alone. The North American market was stable with modest growth. But where we really saw momentum was with greater international penetration. Europe and Asia both delivered strong volume growth in the quarter and for the full year. Importantly, we wouldn't have been able to capture that growth without our Peruvian product leverage. Having that supply consistently gave us the ability to build programs with large retailers and reinforces footholds in growth markets that will serve as a foundation to drive greater household penetration for years to come. Our international farming segment had an outstanding year as well. Our Peruvian orchards returned to normal growing conditions after last year's weather challenges, and we more than doubled our exportable avocado production for the season, selling approximately 105 million pounds compared to 43 million pounds in the previous harvest season. The team's ability to program our own fruit across multiple global regions, balancing customer commitments, market dynamics, and value optimization in real time, is a core differentiator. Our Peruvian production provides consistency of supply, quality control, and the flexibility to direct fruit where it creates the most value. That's vertical integration at work. In blueberries, we saw higher volumes as new plantings came into production across our expanded acreage in Peru. We continue to see tremendous long-term potential in this category, as consumer preferences shift towards healthy, convenient snacking options. Our blueberry strategy is focused on filling in the seasonal calendar and maximizing the productivity of our Peruvian assets. We are approaching the completion of our multiyear expansion efforts and now have approximately 700 hectares in production, focused on premium varietals that deliver superior flavor profiles and extended shelf life. Yields on newer acreage will take time to mature, but the volumes are building and position us well for growth in the years ahead. I also want to touch briefly on our mango business. We continue to make meaningful progress. We managed supply and demand dynamics well this year and grew our market share to 5.2%, up approximately 150 basis points for the full year. That's real traction in a category where we see significant long-term potential. Our goals for mangoes are centered on building the domestic market. We seek to grow consumer awareness and drive household penetration. In fact, household penetration is approaching 40%, up from just 35% three years ago. We are confident that our innovation, consumer engagement, and customer programming are driving these results. This is the same playbook we employed with avocados and is the reason we are building out our sourcing capabilities in mangoes. Consumer engagement and supply consistency go hand in hand. It's the dual focus that's setting the stage for stronger growth as we look out towards the horizon. Beyond the commercial execution, I want to highlight the foundational work we've done over the past twenty months to strengthen our organization. We focused specifically on three areas. First, we've deepened our focus on culture and collaboration. This starts with fostering a more connected global team, sharing ideas, aligning our priorities, and working together to solve problems. That connectivity has shown up in our results day in and day out. Second, we've invested in data and tools. We're building systems that give our commercial teams better access to information in the U.S. and abroad to inform faster, smarter decision-making alongside our customers. And finally, we've built a more disciplined process around our cadence of decision-making. We're being more proactive and more structured in how we drive the business forward. These are not flashy initiatives, but they compound over time and are vitally important to achieving the results that we know our shareholders expect. Looking ahead, we see significant runway for growth. In North America, there's meaningful opportunity both in growing overall avocado consumption and in taking share from competitors. Per capita consumption continues to climb, and we're well-positioned to lead category growth with our customers. Internationally, we're building real penetration. The growth we achieved in Europe and Asia this year wasn't a one-time event. It was the result of deliberate investment and execution that we will build upon in future years. Complementing this growth is an internal focus on driving enhanced free cash flow in the years ahead. We enter fiscal 2026 having largely completed our heavy capital investment cycle. With investments in growth infrastructure in place, CapEx is expected to step down and mark the beginning of a more modest cycle of spend. Combined with a healthy balance sheet and a team that knows how to execute, we have real flexibility to create value for shareholders in the years ahead. With that, I'll turn it over to Bryan for the financial details. Bryan Giles: Thank you, John, and good afternoon to everyone on the call. Fiscal 2025 fourth quarter revenue totaled $319 million, which was down 10% from prior year figures that were elevated by a high sales pricing environment for avocados. We experienced a 27% decrease in average per unit avocado sales prices during the period, which masked the 13% volume growth that was achieved. The volume and price dynamics resulted from higher industry supply, both from greater availability of Mexican fruit driven by a larger crop in the current harvest season and from higher Peruvian avocado production driven by more favorable weather conditions in the current year. Gross profit was $55.7 million in 2025, essentially flat with the prior year, while our gross margin increased 180 basis points to 17.5% compared to the same period last year. While I will address gross profit movement in our segment discussion, the increase in margin percentage was primarily driven by lower avocado per unit pricing compared to last year. As a reminder, profitability in our marketing and distribution segment is managed on a per unit basis, which can lead to volatility in margin percentage when sales prices fluctuate. SG&A expense increased by $500,000 or 2% compared to the same period last year. The increase was primarily due to higher general operating costs, including performance-based stock compensation expense. SG&A growth was tempered by lower statutory profit-sharing expense within Peru and Mexico operations. Adjusted net income for the quarter was $22.2 million or $0.31 per diluted share, compared to $19.6 million or $0.28 per diluted share last year. Beyond the operating performance, we benefited from a reduction in interest expense, down $400,000 or 15% in the quarter, reflecting our continued focus on maintaining our healthy balance sheet through debt reduction and the resultant lower rates we incur on outstanding borrowings. We also realized a 55% increase in equity method income to $1.7 million driven by strong performance from our joint venture investment in Henry Avocado Corporation, which experienced robust results this period. Adjusted EBITDA increased 12% to a record $41.4 million compared to $36.9 million last year, driven by increased avocado production in our International Farming segment and higher overall volumes sold in our marketing and distribution segment. Total segment sales decreased 15% to $271.9 million, driven by the pricing dynamics I described. As mentioned, we manage this business primarily to volume and per unit margins, leveraging our global platform and sourcing network to optimize per unit margin performance regardless of the pricing environment. On that basis, the segment performed very well. Segment adjusted EBITDA increased 11% to $28.3 million, reflecting the impact of higher avocado and mango volumes sold supported by solid management of per unit margins. We are proud to achieve solid EBITDA growth despite comping against the prior year period where per unit margins significantly exceeded our historical averages. Our international farming segment delivered another quarter of strong results. Total segment sales increased 97% to $59.7 million, and segment adjusted EBITDA more than tripled to $8.4 million. This was driven by a recovery in yields at our owned avocado orchards in Peru, leading to sales of owned production during the quarter that were greater than three times prior year figures. While average per unit sales prices were lower compared to prior year, the effect of the higher yields on per unit production costs far outweighed the impact on our financial results. Steve Barnard: Separate from farming production, John Pawlowski: we also continue to benefit from improved utilization of our facility infrastructure through providing a higher volume of avocado packing and cooling services to third parties. In blueberries, net sales increased 16% to $36.5 million, primarily due to higher volume produced on our farms as a result of our expanded total acreage. Segment adjusted EBITDA decreased to $4.7 million compared to $8.6 million last year as a result of lower per unit margins. While our volumes were higher due to new acreage coming into production, overall yield per hectare for the 2025/2026 harvest season is anticipated to be lower than prior year, which drove up our per unit cost. This is part of the natural maturation process for newer acreage, and we expect yields and per unit cost to improve over time as these farms mature. Shifting to our balance sheet and cash flow. Cash and cash equivalents were $64.8 million as of October 31, 2025. For the full year, we generated $88.6 million in operating cash flow, bringing our two-year cumulative total to more than $180 million. This strong cash generation, combined with our disciplined focus on debt reduction, has strengthened our balance sheet considerably. We reduced long-term debt by approximately $18 million during fiscal 2025, and our interest expense for the full year declined by $3.2 million or 25% compared to the prior year. A direct benefit of that debt reduction and the lower rates I mentioned previously. Our net leverage as of fiscal year-end is very healthy at well below one times EBITDA. Capital expenditures were $51.4 million for the year, in line with our expectations. As we've discussed, we are now exiting our heavy capital investment cycle, and for fiscal 2026, we expect capital expenditures to step down to approximately $40 million. This setup positions us for accelerated free cash flow generation going forward. Now let me provide some context on our near-term outlook. For 2026, avocado industry volumes are expected to increase by approximately 10% versus the prior year period, driven by a larger Mexican crop in the current harvest season. Pricing is expected to be lower year over year by approximately 25% compared to the $1.75 per pound average experienced in 2025, driven by higher supply conditions from the larger Mexican crop. Further, while we expect some sequential margin compression in the first quarter due to the current sourcing environment, this is consistent with typical seasonality patterns. For blueberries, the harvest season in Peru will peak during the first quarter. We expect volume increases from our own farms as new acreage comes into production, which should translate to higher revenue as average sales prices are expected to be flat to slightly higher. Profitability will continue to be weighed on by higher unit costs resulting from lower projected yields per hectare in the current harvest season. That concludes our prepared remarks. Operator, now over to you. Please open the call to Q&A. Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star and the number one on your telephone keypad. You may press star and the number two if you would like to remove your question from the queue. For any participants using speaker equipment, before pressing your star keys. Our first question comes from Mark Smith with Lake Street Capital. You may proceed with your question. Mark Smith: First question for me, I was curious about your outlook for mangoes. You've had fantastic growth here the last several years. Kind of curious where we are in that cycle, and any insights you can give us into potential growth here, this next fiscal year. John Pawlowski: Really, the glide path on the mango side is going to be similar to last year's glide path, right, where continuing to pursue market share penetration. We're continuing to try and push our global sourcing initiatives in regards to access to the right fruit at the right time. We feel like we've not only gained nice penetration with new customer base last year but the opportunities continue to be in front of us. And cross-selling where we're already doing our avocados. And providing programs to some of those players out there that either aren't happy with or are open to new players in that space, helping them program things out and provide category insights. So the glide path you saw in '24 and '25, I would say, is consistent with the glide path that we're pushing and pursuing in '26. Mark Smith: Excellent. And then I wanted to ask about the cash flow story. Obviously, really attractive here, especially as you guys reach the end of kind of an investment cycle. I'm curious about the biggest risk in kind of accomplishing this free cash flow growth. Bryan Giles: You know, I'm hey, Mark. This is Bryan. You know, when we look, you know, we've delivered two consecutive years of very strong operating cash performance, and that's driven off the operating results of the business. I do think we benefited some this year by the lower pricing environment we saw at the end of the year, and that did help to boost operating cash a bit. But I think in general, it's strong operating performance of the business that's driving that. On the CapEx side, you know, as we look at free cash flow, we've been communicating for a number of years now that we, you know, we were going through a cycle, and we expected meaningful step downs. We've set a kind of a target for $40 million of capital spend for the upcoming year. We believe that that is still leaving us ample room to make growth CapEx investments at those levels. So I think that there is still flexibility in that number, and you will see future year periods where the spend will be lower than that. Still. So, I mean, I think we feel comfortable that we've got the business set up to a point where, you know, we can generate meaningful cash flow, and we can do it potentially at lower levels than where we're at today if by chance there was a year where, you know, there were weather or crop conditions that had a negative impact on the business. Mark Smith: Okay. And as we think about capital allocation with lower CapEx maybe invested this year, leverage now under 1x. How should we think about the use of cash going forward? And are there other places from buybacks or anything else where you guys may put cash to work? Bryan Giles: I mean, you know, I think that, you know, when we look at today, our priority is growth. And I think that with the strong performance we've had the last few years, it's provided us with a tremendous amount of flexibility as we look forward. You know, I think that we're always looking for potential opportunities, whether it comes from growth in our existing categories or expanding geographic reach or potentially even bolting on adjacent ones. But our primary focus is doing things that are going to create the most shareholder value. You know? So at this point, I think we feel very comfortable with where our leverage ratio is. We've done a really good job over the last couple of years paying down debt. I think certainly that that affords us now the opportunity to kind of look at a number of different options as we go forward. As you saw this year, we did share buybacks, so history will tell you that we're comfortable doing that. And, yeah, we will continue to look for other ways to, again, maximize that value to shareholders as we go forward with a strong cash position. Mark Smith: Okay. And the last one for me, if I can squeeze one more in here, is just, you know, with the changes in management coming up and congratulations, John, by the way, on the move here. Should we look for any changes in strategy because it sounds like it's really just kind of steady as she goes. John Pawlowski: Yeah. Thanks, Mark. I would offer that, you know, me and Steve have been working really closely together over the last, you know, my entire time here, specifically over the last year on understanding where this boat is and what's the right direction for this boat and how comfortable do we feel with, you know, the team steering that boat. And we're collectively very excited about the organization's direction right now and the team that's helping steer it. Super proud of the results that we've been able to generate and do it consistently for, you know, in a year like '25 where things kind of worked out the way that we had planned even though, you know, there's a lot of work that goes into making a plan actually work. And then in '24 where things weren't exactly to plan, but the team was able to deliver consistently. That being said, to Bryan's point, you know, we're really in an interesting reflection point based on the CapEx that's been spent over the last ten years to generate the infrastructure that's supporting the model that we're so proud of. And I would offer that the commercial outlook from a growth perspective over the next five to ten years is one that we are keenly focused on right now and trying to understand exactly how to deploy that capital appropriately and to line up the right investments to look at organically growing over the next five to ten years and also considering inorganic opportunities as they present themselves. So I think you'll hear more from me on that over the coming months. But the idea is we're really excited with where we are but really want to accelerate how we grow and how we attack some of the global challenges we see ahead of us. We are prepared to do that from a cash position standpoint and are working on how to do that together. Mark Smith: Excellent. Thank you, guys. Steve Barnard: Thanks, Mark. Operator: Our next question comes from Puran Sharma Stephens. You may proceed with your question. Puran Sharma Stephens: Thanks for the question, and congrats on the strong quarter. And then also congrats on the leadership transition here. Maybe just wanted to start off with CapEx. You kind of just talked about it. Mentioned we can still make growth CapEx in that $40 million for next year. Are you able to give us a sense as to how much of that 40 could potentially be growth CapEx? Bryan Giles: Yeah. Yeah, Corinne. I mean, we don't, I mean, there's a lot of things that we do that it's kind of a gray line between whether it's growth or maintenance. I think, you know, we've invested significantly in farming operations that are still fairly young at this point. There's maintenance associated, you know, with keeping them up and running, but there's also still new acreage that's being put in the ground and acreage that's being maintained that isn't yet in production. That I think we'd consider to be growth-oriented. I think on the commercial side of our business, when we look at it, you know, I think, you know, the last few years, there's been investments associated with, you know, certainly investments that we've made associated with growing the business in the UK. I think as we look at Europe going forward, there could certainly be opportunities there as well. And certainly, though, I think we're happy with the footprint that we have in North America today. Maybe needs to add some additional capacity as volume continues to grow over time. But if I had to ballpark it, Corinne, I'd say roughly $20 million of the spend that we have in the coming year is for maintenance, and roughly $20 million of it is geared towards growth. And I don't think that that's kind of an unreasonable mix as we look at years going forward in terms of what the maintenance CapEx requirements are. Puran Sharma Stephens: Okay. Thank you. I appreciate that color there. And maybe just wanted to ask about, I mean, you mentioned key areas of growth. Looks like you were able to reach Europe and Asia this quarter. I did want to ask you that your core infrastructure is built out, including, you know, the UK packing house, Laredo, and some other investments that you have including Guatemala. Where do you see the most upside from growing into your footprint? Are there specific regions or facilities that you'd like to call out? I know you did mention Europe and Asia. But was just seeing if we could get a little bit more granularity here. John Pawlowski: Yeah. Hi, Puran. This is John. Good to hear your voice. I would offer two kind of highlights there. Number one, we did call out, I think I made it in my comments that there's white space when we think about the opportunity to grow into the existing market share franchise here in the United States. We feel that this particular market is one where we have a right to play in a deeper level than we're playing today. And feel that the infrastructure that we built can both support that in meaningful ways with minimal CapEx required to support that type of a move and offering leverage on those assets. The second piece is when you think about our Peruvian production and the Peruvian fruit, there's an opportunity to explore and dive deeper into the European marketplace. And that is high on our list of thinking about how to penetrate and understanding exactly how we want those investments to flow that support both of those things coming together. On top of that, as the Guatemalan fruit comes online over the next two to three years, both of those locations play into operational efficiencies and overhead absorption as we draw into the business. Puran Sharma Stephens: Great. Appreciate that color, John. And maybe if I could just ask about the household penetration goals. I think in the past, you've mentioned that avocados are maybe closer to 70%. And that you wanted to target penetration of maybe other mature fruits that approach about 80 to 90%. Given we're kind of entering a lower pricing environment, you know, how long do you think it takes to get to that level of the other more mature fruits? And then how does being in a lower pricing environment help accelerate that process? John Pawlowski: Yeah. Bryce. Hi, Bryce. That's a good question and you're pulling back on some of the conversations we've had in the past, which thanks. I mean, I wish I had a crystal ball and could tell you exactly how long it's going to take. Right? But these things go in cycles, right, where you have markets that create opportunities with an abundance of fruit or more fruit than is typical, or you have markets where fruit is a little bit tighter. And we're in a cycle here in the next, at least the way we're thinking about 2026, where you're going to have more fruit than is traditionally available during the course of the year. And so these times provide some of the headwinds that, you know, Bryan mentioned in regards to, you know, pricing being a little compressed during that time. But the tailwind there becomes an opportunity to move a lot of fruit. And to run promotions and be strategic with retailers on how to think about household penetration and consumer engagement. If you go back the last fifteen years, you'll see it play out where you had lower-priced environments. Where you had jumps in household penetration, and then the years after that where you had higher-priced environments, lower fruit, you maintained a lot of that household penetration and you kept those consumers engaged with that fruit even at slightly elevated prices. So we're moving into that cycle where we're going to have, at least we believe we're going to have, there's no perfection here, higher availability of fruit, going to be running a lot more promotions over the next twelve months. And yes, you're right. We're in that 70% range on household penetration. I would love to see that, you know, 73, 75% achieved over the next couple of years if we stay in a consistent place with availability of fruits. That to me becomes a two to three-year goal to get to that point. But and which even gives us more tailwinds in the future in regards to thinking about the years after that to think about getting to those 80 numbers, which some of the other categories hold. Hopefully, that helps. Puran Sharma Stephens: No. That's very helpful. I appreciate the color there. Congrats on the quarter again. Steve, congrats on moving to chairman of the board. And John, congrats on the move as well. Looking forward to working with you. Steve Barnard: Thanks, Puran. We're looking forward to it. John Pawlowski: Thanks, Puran. Operator: At this time, there are no further questions. I'd like to end the question and answer session and turn the conference call back over to management for any closing remarks. Steve Barnard: Ladies and gentlemen, that concludes our conference call today. We thank you for attending. You may now disconnect your lines. Operator: Ladies and gentlemen, that concludes today's conference call. We do thank you for attending. You may now disconnect your lines.
Operator: Afternoon, and welcome to the BlackBerry third quarter fiscal year 2026 results conference call. My name is Nick, and I will be your conference moderator for today's call. During the presentation, all participants will be in a listen-only mode. We will be facilitating a brief question and answer session towards the end of the conference. Should you need assistance during the call, please signal a conference specialist by pressing star, zero. As a reminder, this conference is being recorded for replay purposes. I would now like to turn today's call over to Martha Gonder, Director of Investor Relations, BlackBerry. Please go ahead, ma'am. Martha Gonder: Thank you, Nick. Good afternoon, everyone, and welcome to BlackBerry's third quarter fiscal year 2026 Earnings Conference Call. Joining me on today's call is BlackBerry's Chief Executive Officer, John Giamatteo, and Chief Financial Officer, Tim Foote. After I read our cautionary note regarding forward-looking statements, John will provide a business update and Tim will review the financial results. We will then open the call for a brief Q&A session. This call is available to the general public via call-in numbers and via web in the investor information section at blackberry.com. A replay will also be available on the blackberry.com website. Some of the statements we'll be making today constitute forward-looking statements and are made pursuant to the Safe Harbor provisions applicable to US and Canadian securities laws. We'll indicate forward-looking statements by using words such as expect, will, should, model, intend, believe, and similar expressions. Forward-looking statements are based on estimates and assumptions made by the company in light of its experience and its perception of historical trends, current conditions, and expected future developments, as well as other factors that the company believes are relevant. Many factors could cause the company's actual results or performance to differ materially from those expressed or implied by the forward-looking statements. These factors include the risk factors that are discussed in the company's annual filings and MD&A. You should not place undue reliance on the company's forward-looking statements. Any forward-looking statements are made only as of today, and the company has no intention and undertakes no obligation to update or revise any of them, except as required by law. As is customary, during the call, John and Tim will reference non-GAAP in their summary of our quarterly results. For a reconciliation between our GAAP and non-GAAP numbers, please see the earnings press release published earlier today, which is available on the EDGAR, sedar+, and blackberry.com websites. And with that, let me now turn the call over to John. John Giamatteo: Thanks, Martha. And thanks to everyone for joining today's call. Q3 was another quarter of solid results adding to our track record of consistently meeting or beating guidance. Once again, we delivered across the three core metrics of revenue, profitability, and cash. Total company revenue came in at $141.8 million, above the high end of our guidance range. Q3 was another strong quarter of profitability, with adjusted EBITDA beating guidance, and it was also our third consecutive quarter of achieving GAAP profitability. Adjusted EBITDA for the total company was $28.7 million, which represents a 20% margin. GAAP net income improved by $24.2 million year over year to $13.7 million in Q3, and non-GAAP EPS exceeded guidance at positive 5¢. Conversion of profitability into cash was also strong. Operating cash flow was $17.9 million, up three times year over year, reflecting strong execution and disciplined cost management. Moving on to the results from our divisions. QNX delivered an all-time record for quarterly revenue at $68.7 million. This represents 10% year-over-year growth, beating expectations and finishing at the high end of the guidance range. Revenue was driven primarily by solid growth in royalties, with development seat and professional services revenue also growing both sequentially and year over year. During the quarter, we were excited to announce John Wall's appointment as president of QNX. In our opinion, nobody knows the embedded software space, both the technology and the market, quite like John. He has a very strong reputation with customers and partners and within the company. QNX has tremendous opportunities for multiyear growth, and driving our key initiatives to harness those opportunities will be John's number one priority moving forward. We saw more design win momentum in Q3, exceeding our internal targets, and the pipeline of design wins in Q4 continues to grow. This design win growth demonstrates the progress we're making with the initiatives to drive deeper into automotive and wider into the general embedded space. In the quarter, we secured a number of major automotive design wins with top European and Asian OEMs for ADAS and cockpit domains, all being developed on the latest version of the QNX platform SDP8. The number of customers using SDP8 continues to grow each quarter, with many leading OEMs now developing on it. We continue to see traction with other new products as well. We're securing new wins for both QNX Sound and QNX Cabin as OEMs recognize the strategic benefit of these products and time to market for reducing their bill of materials. This was the second quarter in a row that QNX Sound was chosen by a leading Chinese OEM, with this quarter's win being deployed in their luxury EV range. We've also secured another multiyear contract for our cloud-based QNX Cabin product with a top five global automaker based in Europe. A potential needle mover for ASP per vehicle is the vehicle software platform that we're co-developing with leading middleware provider, Vector. Development is progressing well, and the second early access version is scheduled for release by January. Early discussions with a number of OEMs are progressing, and we're targeting significantly higher pricing per vehicle compared to the core RTOS. Once we've secured some wins, we'll provide more color on the potential upside from this product. And finally, for auto, earlier this week, we announced that leading technology market analyst Counterpoint Research has determined that QNX is now powering more than 275 million vehicles on the road. This is a 20 million increase year over year and clearly demonstrates how significant a player we are in the space. In the non-automotive general embedded space, we continue to drive across our target verticals of industrial automation, medical instrumentation, and robotics. Let me provide some additional color on a couple of in-quarter wins with industrial automation companies. The first was with one of our longtime customers, Bentley, Nevada, an industry leader in online condition monitoring used for wind turbines and other applications, who has adopted SDP8. Additionally, two leading industrial automation OEMs, one North American and one European, have also adopted SDP8 to be used in a variety of their applications from robotics to manufacturing production. We also had an exciting development in the aerospace and defense vertical with NASA, who are adding QNX SDP8 to their supported operating systems. Earlier this year, we launched QNX General Embedded Development Platform, or GEDP as we call it, which is a subscription-based solution tailor-made for OEMs in GEM verticals. GEDP aims to accelerate the time to market for developers of embedded systems. And feedback from our customers so far has been extremely positive as they can leverage this platform for all supported versions of QNX across their portfolio. In the quarter, we saw a number of new design wins from customers for GEDP. So in summary, Q3 was another great quarter for QNX. In fact, an all-time record quarter. Moving now to secure communications. In Q3, we delivered revenue of $67 million, beating the top end of guidance and consensus. This was a great achievement for the division as we were faced with a U.S. government shutdown for a portion of the quarter. These strong results were in large part driven by better-than-expected renewals of UEM and navigation of the U.S. government shutdown. As a percentage of revenue for the last twelve months, UEM remains just over half of the secure communications totals, with SecuSmart at slightly more than ad hoc for the remainder. Key metrics for the division remain solid, with annual recurring revenue, or ARR, increasing $3 million sequentially to $216 million, and dollar-based net retention rate, or DBNRR, was at 92%. SecuSmart revenue grew sequentially but was lower year over year due to a tough compare as a result of the strong upgrade cycle from the German government in Q3 of the prior fiscal year. Ad hoc, despite having the most exposure of the three product groups to the U.S. federal government shutdown, delivered year-over-year and sequential revenue growth. Earlier this year, we achieved FedRAMP high certification, becoming the only critical events management solution provider to achieve this stringent level of security, directly enabling significant U.S. government expansions this quarter, including both the U.S. Navy and the Department of Justice. Ad hoc continues to grow outside of North America as well, securing new wins with the National University of Malaysia, Australia's Department of Foreign Affairs and Trade, and key UK energy infrastructure provider, Scottish and Southern Energy. For UEM, in addition to the continued trend for reduced customer churn, we had some significant expansion deals for this product in the quarter. One of these expansion deals included an eight-figure multiyear renewal with the Dutch government. Other strong renewals included the Scottish Police Service and the UK Ministry of Defense, as well as a number of financial services companies. As we mentioned in Q2, BlackBerry UEM became the first solution to be certified by Germany's Federal Office for Information Security, or BSI. And in Q3, we closed our first deal that was enabled by this very demanding security certification. Targeted investment in certifications like BSI for UEM and FedRAMP High for ad hoc are strengthening our portfolio's position at the heart of government secure communication strategies. Overall, this was another solid quarter of performance for our secure communications division. This has been a year of stabilization, with improvements in renewal rates and our ability to close new business. Finally, licensing revenue was $6.1 million, which was in line with expectations. And with that, let me now turn the call over to Tim for more color on our financials. Tim Foote: Thank you, John, and good afternoon, everyone. As John mentioned, we continue to drive strong, reliable results across the board that either meet or beat expectations. For the total company, revenue in the quarter topped the high end of the guidance range at $141.8 million. Total company adjusted gross margins remained relatively flat at 78% and increased three percentage points sequentially as a result of a favorable revenue mix and continued optimization of our cost of sales profile. Adjusted operating expenses were $85.4 million, up 7% year over year as we continue to deploy capital to strategically invest for growth in our QNX business. Total company adjusted EBITDA continues to be strong at 20% of revenue or $28.7 million. Adjusted net income for Q3 was $26.8 million, and GAAP net income was $13.7 million. This is the third quarter in a row that we've delivered positive GAAP net income and the seventh consecutive quarter of sequential improvement. In fact, Q3 had the strongest level of quarterly GAAP net income at any time since 2022, almost four years ago. Adjusted EPS for the quarter beat the top end of guidance at positive $0.05. QNX had its best-ever quarter of revenue, achieving $68.7 million, up 10% year over year and 9% sequentially. QNX gross margins expanded by one percentage point sequentially and were down two percentage points year over year to 84%. We did not have the P&L benefit of grant funding in Q3 from Canada's Strategic Innovation Fund like we did in the first quarters of the fiscal year. Even without this benefit, adjusted EBITDA was a very solid 24% of revenue and hit the top end of guidance at $16.4 million. Secure communications revenue exceeded the top end of guidance for the quarter at $67 million. Gross margin was one percentage point lower year over year and higher sequentially at 72% as a result of leverage and revenue mix. Better-than-expected revenue also drove leverage to the bottom line. Adjusted EBITDA in the quarter was $17.3 million, up 10 percentage points sequentially to a strong 26% margin. Finally, our licensing division delivered results in line with guidance. Revenue was $6.1 million and adjusted EBITDA of $5.3 million. Adjusted corporate operating costs, excluding amortization, came in at $10.3 million in Q3, broadly in line with guidance. This was another good quarter for conversion of profitability into cash. Operating cash flow was $17.9 million, a significant improvement from $3.4 million in Q2 and up over 200% year over year. Free cash flow was $17 million in the quarter. Our balance sheet remains solid with total cash and investments up $111 million year over year and $14 million to $377.5 million. We are deploying BlackBerry's capital to drive growth and shareholder value. We continue to invest organically, especially in our QNX business, supporting the key initiatives that John outlined earlier to go deeper into auto and wider into target verticals. Notwithstanding this increased investment, we continue to deliver positive operating and free cash flow, further increasing our net cash position. So in addition to organic investment, we are also continuing to take advantage of what we believe to be an undervalued share price and repurchase shares through our buyback program. In Q3, we ordered the repurchase of $5 million or 1.2 million shares at an average price per share of $4.13. A portion of these shares settled just after the quarter end on December 1, so it won't show in this quarter's 10-Q filing. All of the shares have been canceled, bringing the total number of shares bought back this fiscal year to 8.8 million. We have therefore more than offset potential dilution from our long-term incentive and employee share purchase plans. Turning now to financial outlook for the fourth fiscal quarter and the full fiscal year. We expect revenue for QNX in Q4 to be in the range of $71 to $77 million. Having just delivered an all-time record in Q3 for quarterly revenue, we expect to set another new record in Q4. For adjusted EBITDA, we expect QNX to be in the range of $17 to $23 million. We are maintaining our full-year revenue guidance at the midpoint while also narrowing the range to $262 to $266 million. For full-year adjusted EBITDA, we're raising the bottom end of our and the midpoint of our guidance such that the range is now $67 to $73 million. As QNX continues to deliver a combination of double-digit growth and strong profit margins. For secure communications, we're increasing the expected revenue for Q4, such that it's now in the range of $61 to $65 million, and for adjusted EBITDA to be between $11 and $15 million. For the third quarter in a row, we are raising our full-year revenue guidance for secure communications, such that the high end of the range we provided last quarter is now the low end of the range, such as now between $247 to $251 million. We're also raising our guidance for adjusted EBITDA, which is now expected to be between $47 and $51 million. For licensing, we reiterate our prior guidance for revenue to be approximately $6 million and adjusted EBITDA to be approximately $5 million per quarter. For the full fiscal year, we're holding revenue guidance at approximately $24 million and adjusted EBITDA at approximately $20 million. We continue to expect adjusted corporate OpEx, excluding amortization, to be approximately $40 million for the full fiscal year. At the total company level, we expect revenue for Q4 to be in the range of $138 to $148 million and adjusted EBITDA to be between $22 million and $32 million. For the full fiscal year 2026, we are raising the guidance midpoint for the total company revenue by $6 million, with a range now between $531 and $541 million, and raising guidance for adjusted EBITDA at the midpoint by $7.5 million to be in the range of $94 to $104 million. For context, when including Cylance, adjusted EBITDA from continuing and discontinued operations for the prior year was $39.3 million. For non-GAAP EPS, we expect it to be between $0.03 and $0.05 in the fourth quarter and to now be between $0.14 and $0.16 for the full fiscal year. Moving on to our cash flow outlook. We expect another sequential increase in operating cash flow for Q4, within the range of a solid $40 million to $45 million. This increase means that for the full fiscal year, we're again raising our guidance and expect to generate between $43 and $48 million in operating cash flow. This does not include the additional $38 million of cash from the second tranche of proceeds from the sale of Cylance to Arctic Wolf that we expect to receive in Q4, which is classified separately as cash flows from investing activities. Therefore, we expect to generate in excess of $80 million of cash in Q4, further strengthening our already solid balance sheet. With that, let me now turn the call back to John. John Giamatteo: Thanks for that, Tim. And before we move to Q&A, let me quickly summarize what has been another strong quarter for BlackBerry. We continue to consistently deliver reliable results across the three core metrics of revenue, profitability, and cash at both the company and divisional levels. QNX delivered its best-ever revenue quarter and a solid adjusted EBITDA of 24%, all while continuing to invest for long-term growth. In addition to these strong financial results, QNX also hit the milestone of powering 275 million vehicles on the road. Secure communications exceeded revenue expectations and demonstrated significant leverage in the model with a 26% adjusted EBITDA margin. To put this in perspective, this time last year, the cybersecurity division had an EBITDA margin of only 9%. Overall, both divisions helped drive another quarter of GAAP profitability and cash generation. So with that, let's now move to Q&A. And Nick, if you could please open up the lines. Operator: Thank you. We will now begin the question and answer session. One on your telephone keypad. Please make sure your line is unmuted. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We request that you limit yourself to one question and one follow-up. And the first question today will come from Kingsley Crane with Canaccord Genuity. Please go ahead. Kingsley Crane: Hi. Thanks, and congrats on a really nice quarter. So we've talked about the GEM opportunity naturally requiring more investment in the near term as you work towards gaining critical mass in key end markets. And, again, really nice wins in the quarter in that segment. But as you think about fiscal 2027, where do you think you need to invest more within that space? Like, what's working? What needs more help? Thanks. John Giamatteo: Yeah, Kingsley. So I think on that one, I think from a product perspective, we're in really good shape. I think the GEDP platform that we talked about is a really good leverage point for us to bring value to our customers. So I think you'll probably see us continue to invest in go-to-market activities. More feet on the street. It's a broader market. Partnerships with distributors and other technology providers that maybe can help bring us to market a little bit faster. So these are probably the areas that we'll continue to invest in as we go into the next fiscal year. Kingsley Crane: Okay. Great. And then the follow-up would be on this luxury China EV win. We're really encouraged by that. What ultimately allowed you to win that deal? Do you think it was cost savings, weight savings, superior software functionality, and then you know, to what extent could this be a blueprint for more success in China? Thanks. John Giamatteo: I think it's honestly, I think it's all of the above. I think it's cost savings, it's weight savings, it's the performance of the product itself. I would say the Chinese market tends to be very price sensitive. So I think the amount of money that they can save leveraging our technology and what that does to their overall BOM is a compelling value proposition. So that probably swayed a little bit more. But the broader value proposition itself is very, very sound. Pardon the pun. But I think the actual savings is probably the lead one on that. Operator: And the next question will come from Luke Junk with Baird. Please go ahead. Hi, good afternoon. Thanks for taking the question. Luke Junk: John, maybe if we could start just in terms of getting to the vehicle award, just if you could talk about the gates you're advancing through right now to get you closer to that outcome? And then as we look forward a couple of weeks to CES, should we expect to hear more about this at CES as well? John Giamatteo: Yes. Yes, Luke, great question. I'll tell you, it's an area that has got a lot of focus right now inside the company. And from a technology perspective, bringing QNX SDP8, the middleware, together and the integration, the connective tissue, making that a seamless kind of product we could bring to our customers. It's a lot of collaboration with our partner, Vector, to really bring that. So I think the product itself is really sound. It's just a matter of the integration with our partner and then bringing that to the marketplace. So a lot of good progress that's moving in this regard. But we're pleased with the progress, and you'll hear more about it. Luke Junk: Okay. And then wanted to your answer about the luxury China EV win. In terms of the cost sensitivity, I mean, certainly that's a well-known factor in the China market. And I'm just wondering in terms of system design or things that are sort of you can bring to the table from a QNX standpoint to put BOM into a more compelling position? Like just what are some of the key areas that you can enable for a Chinese OEM in that respect, John? Thank you. John Giamatteo: Yes. I think, certainly, the cost savings and the time to market capabilities are something that's compelling. But one thing we do think is gonna start getting more traction in the Chinese market is safety secure safety solutions. I think, in the past, they've kind of used some basic technologies. And because they've had some high-profile safety issues, we're excited about the opportunities that could be there for us, for us SDP8 and bringing kind of the core RTOS to the table. Sometimes you get in with maybe sound or cabin or different things like that, and maybe drag along kind of the core product in some ways. But it's I think it's a testament to the broad portfolio of the platform. You might lead with sound and get your foot in the door and then bring the RTOS along. More times than not, it's the other way around. Because that's the meat and potatoes from the operating system level. So we're working every single angle in the Chinese market, but I think they are a little more acutely aware and concerned with the need for having an SDV platform that has safety certifications. Probably more so than they had been in the past. Operator: The next question will come from Todd Coupland with CIBC. Please go ahead. Great. Thanks. Good evening, everyone. Todd Coupland: I wanted to start with QNX. 15% growth last quarter, 10% this quarter guide implies 15% growth. How should we think about the trend in this business, given that fluctuating growth rate as we're thinking about fiscal 2027? Thanks a lot. Tim Foote: Yeah. Great question, Todd. So ultimately, we'll give the guide for fiscal 2027 at the end of Q4. So in ninety days' time. Hey. Look. Double-digit growth has been very solid, and ultimately, we're gonna be giving the backlog number as well in Q4, which will be a good lead indicator of where we're moving. On the backlog, we're actually feeling pretty good as John mentioned in his prepared remarks that after a difficult start, we've actually accelerated pretty well and we've got some really good momentum now as we head into Q4. And conversion of that backlog into revenue, which will start starting FY '27, is gonna really drive that business forward. And what we saw in Q3 was strong royalties and royalties driven by some of these new programs that we've been winning over the last couple of years now starting to come online. So, yeah, it's an exciting time, and some of the growth accelerators such as going up the stack, things like sound and cabin that we've mentioned. And we're starting to see traction from those two. So I'm gonna put a pin in it. And say come back in ninety days, and we'll give you more information on next year. But we feel very positive about the momentum that we've got in this business. Todd Coupland: Great. Thanks, Tim. And then just on SecureCom, you know, the business is trending, you know, probably about half of the decline rates you've been projecting the last couple quarters. Is this the new normal? And, again, similar type of mindset as we think about fiscal 2027. Could this business actually turn into a growth segment with defense spending trending positive and the other segments doing better? So just talk about how we should think about that. Thanks. John Giamatteo: Great. Great question, Todd. That's a really good question. We're actually, you know, right now, as you would imagine, just modeling out next year, taking a look at the pipeline and do tend to be a little lumpy, you know, sometimes in this space. So, you know, I don't think one quarter necessarily translates into but I will say we have a really strong pipeline within SecureComps, one of the stronger pipelines that we've had in a long time. So that bodes well for us probably like Tim said, before. It's next quarter, we'll give guidance for the next fiscal year. But it was a solid quarter. Honest with you, we were happy we navigated the US government shutdown the way that we did. We're a little spooked by that as the quarter was going on, but I think that turned out to be a pretty good result for us in the end. And now it's just a matter of converting the pipeline that we've got in front of us to tee up a really solid fiscal year '27. So we'll come back to you with more insights into that, but certainly pleased with the way that business is performing. Todd Coupland: Great. Thanks for the color. Operator: The next question will come from Trip Chowdhry with Global Equities Research. Please go ahead. Trip Chowdhry: Thank you. Congratulations on a very solid quarter. I have two quick questions. The first regarding the government shutdown, do you think now everything is normal? Or do you think, like, most more than half of the quarter was in shutdown? You think the remaining half made up of the first half? That's the first question. Second question, very refreshing to hear your win in the robotic space. I was wondering if you can put some more color about what kind of robots may be using your technology and any color on the demand side also? That's all for me. John Giamatteo: Thanks, Trip. I'll cover a little bit on government. And we'll cover a little bit on robotics. Trip, just give you some color on it. But, you know, as far as government's concerned, it's been a really interesting year. Like, you know, we started the year with Liberation Day and the uncertainty that that brought. That in some ways created some opportunities and also created some headwinds. We also had in the government space the, you know, the continuing resolutions at one point, then a full-on shutdown at one point. I think the good thing I think what we learned from this experience, remember, Doge was another one. How much how was that gonna impact our business? But one of the learnings that I think we took away from the last six or nine months on the secure comp side is what we do in terms of mission-critical critical events management, mission-critical you know, SecuSuite, encrypted voice data and video. Mission-critical, you know, UEM and, the security that that provides. These mission-critical when it comes time for you know, to take a look at what they're gonna cut, what they're we found they're a little bit hesitant to really take a hatchet to mission-critical types of software solutions. So we were a little concerned about the timing with the in Q3 with, with the US federal government in particular because everything shut down. Their procurements then had a backlog of contracts that they had to process. But I think we were fortunate enough to kinda work through that where it really impact the quarter as much as we initially thought it was gonna be. So there's a lot of different dynamics with the governments. But I have to say, I think we've been successfully navigating a lot of the waves there in some of the changes that's gone on. We'll come back to you, Trip, with more details on robotics and medical instrumentation and industrial automation and the kind give you more colors on the wins. Sometimes we're a little bit some of our customers are a little hesitant to share too much information about the use case and the design win. There's, you know, for confidentiality and different reasons. But, you know, in the robotics space, when we think of humanoids robotics, we think of, you know, the more technology that's going into this vertical. There's more compute power. There's more performance that's required. And that's a sweet spot for QNX. So regardless of the type of robotics, if you need high compute and you need high performance, SDP8 is the solution for them to look at. So we'll bring that a little bit more to life, I think, in the future. Actually, we'll have some demos at the booth where we at CES this year to show it a little bit more. But hopefully, that gives you a little bit more color on robotics and we'll be sure to share some more in the future. Trip Chowdhry: Yes. That's perfect. Thank you so much, and happy holidays. John Giamatteo: Thanks, Trip. Thanks, Trip. Operator: The next question will come from Paul Treiber with RBC Capital Markets. Please go ahead. Paul Treiber: Thanks for taking the questions and good afternoon. You made an interesting comment on the pricing opportunity for the vehicle software platform. You just speak to what you see as a potential ROI or the cost savings that the automakers would benefit from that? And then also, could you speak to the economic, like maybe the split between QNX and Vector or maybe your ability to capture a disproportionate share of the pricing there? Tim Foote: Yeah. Sure. Hi, Paul. So ultimately, what we're providing here and remember this, this has been a pull from the OEMs have come to us and asked if we can help in this area because if we look back over the last couple of years, the OEMs have been very ambitious in terms of trying to write all the code from the OS up to the application layer and really found that to be quite a challenge. So in terms of cost savings, having us do it much more efficiently and actually being able to produce a product that they can get into market is a big advantage for them. We're taking off their hands, off their plate, a load of software integration currently they have a heck of a lot of internal resource working on. So they can divert that resource to the application layer, which is where they're really going to differentiate their brand from other players. So, yeah, we're doing a lot of heavy lifting for them and like I say, this is a pull come to us and say, can you do this for us? In terms of the economics, we're not gonna give, like, the absolute, like, details here, but clearly a portion of the pie is coming from Vector. A significant portion I should add is coming from us, and there will be a split now. We are going to be the billing entities, so we'll take the revenue and the vector portion would obviously be passed on through cost of sales. Paul Treiber: And the second question is just on the Canadian federal government. The budget was out in November and there's a number of new investment initiatives. Just remind us again of the size of your Secure Commerce business for the Canadian government? And then what do you see as the opportunity and what's the strategy to try to expand further with the Canadian government? John Giamatteo: Yes, yes. Great question, Paul. A lot of actually, momentum that we have right now with the Canadian government, especially their, you know, by Canada kind of solution, looking to do more with Canadian providers. We do have a comprehensive relationship with them today around UEM. They use that widely throughout the organization. And we're having really good productive discussions with them about SecuSmart and Ad Hoc and other parts of the portfolio as well. So stay tuned. We've got a lot of activity going on. We've got a multiyear agreement with them today. That's very UEM centric. And as we look to try to expand into SecuSmart, SecuSuite product and the ad hoc portfolio, we're finding, you know, some really good discussions with them right now, particularly as they ramp up their spending on defense. So critical events management is something that is widely deployed in the entire US government. We're hoping we could bring that same value proposition to the Canadian government as they ramp up their defense spending over the next few years. So, we'll keep you posted on it, but be rest assured, there's a lot of activity going on right now with the Canadian government. Operator: This will conclude our question and answer session. I would like to turn the call back over to John Giamatteo, CEO of BlackBerry, for closing remarks. John Giamatteo: Terrific. Thanks, Nick. Before we end the call, I just wanted to flag that we'll be starting off the New Year at CES in Las Vegas. We'll be hosting an investor briefing on January 7 at 11 AM Pacific Time to discuss some of the highlights from the show. You can access the live webcast in the investor information section at blackberry.com. And if you're at the event, please stop by to see some of the exciting new exhibits that our QNX team will have on show. So thanks, everyone, for joining the call today. And I'd like to wish all of you a happy and safe holiday season. See you next time. Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Good day. And welcome to the FedEx Second Quarter Fiscal 2026 Earnings Call. All participants are in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, to withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to FedEx Vice President of Investor Relations, Jenifer Hollander. Good afternoon, and welcome to FedEx Corporation's Second Quarter Earnings Conference Call. Jenifer Hollander: The second quarter earnings release, Form 10-Q, and stock book are on our website at investors.fedex.com. This call and the accompanying slides are being streamed from our website. During our Q&A session, callers will be limited to one question to allow us to accommodate all those who would like to participate. Certain statements in this conference call may be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For additional information on these factors, please refer to our press releases and filings with the SEC. Today's presentation also includes certain non-GAAP financial measures. Please refer to investors.fedex.com for a reconciliation of the non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures. Joining us on the call today are Raj Subramaniam, President and CEO; Brie Carere, Executive Vice President and Chief Customer Officer; and John Dietrich, Executive Vice President and CFO. Now I will turn the call over to Raj. Raj Subramaniam: Thank you, Jenifer. We have only one week left in peak season, and I want to extend my sincere thank you to our frontline workers, pilots, and all of team FedEx as we approach the finish line. These individuals are out there working hard to deliver a successful peak for our customers, and making every FedEx experience outstanding. Before I turn to our Q2 results, I also want to acknowledge that our thoughts and prayers remain with those at UPS along with the families and community affected by the recent tragedy. We are working closely with Boeing, and FAA to ensure the safety of our own MD-11 fleet which we will discuss later on the call. Now let's review our performance in the quarter. In Q2, we provided excellent service to our customers, won new business in high-value verticals, and delivered strong results. High single-digit revenue growth, margin expansion, and high teens adjusted EPS growth. Quite remarkably, we did this while navigating multiple external headwinds, including the unexpected grounding of our MD-11 fleet, nationwide air traffic constraints, weakness in the industrial economy, and, of course, the impact of global trade policy changes. We're extremely pleased with our Q2 performance, especially in the face of these challenges. It's a direct effect of the rigor we have embedded into our culture over the past several years and the resulting transformation from network to auto Tricolor, and structural cost reductions, all enabled by data and technology. We're demonstrating the resilience and flexibility we have built into our network and our ongoing efforts to reduce structural costs are leading to significant improvements in profitability. We remain on track to spin off FedEx Freight on 06/01/2026 as a separately listed public company with the best value proposition in the industry. We recently appointed Marshall Witt as CFO of FedEx Freight. Marshall brings significant and external public company experience having served as a CFO of TD SYNNEX for the past twelve years. He also has deep industry and company expertise from his fifteen years previously working at FedEx Freight, primarily within the finance organization. FedEx Freight's entire executive leadership team is now in place and the team is moving quickly to prepare for the separation. Our conviction in the potential value that will be unlocked from this spin-off is stronger than ever. Turning to our consolidated Q2 results, revenue was up 7% year over year, driven by yield and volume strength across our US domestic package services. We achieved our targeted transformation-related savings and grew adjusted operating income by 17%. Federal Express Corporation or FEC delivered another quarter of strong operating leverage. On an 8% year-over-year increase in FEC revenue, we grew adjusted operating income by 24% and expanded adjusted operating margin by 100 basis points. Nearly half of our revenue growth was driven by B2B services, an important enabler of increased profitability. And this marked our fifth consecutive quarter of year-over-year adjusted operating margin expansion at FEC. In line with ongoing LTL industry trends, freight results remain pressured, driven primarily by lower volumes, partially offset by higher weight, and revenue per shipment. This is the result of our sustained focus on maintaining strong revenue quality. Given the strength of our Q2 results, and our updated assumptions for the second half, we are raising our adjusted EPS outlook to $17.80 to $19.00, well in any environment reflecting the progress of Execute for network, organizational and digital transformation efforts. This quarter truly showcased the importance of network integration and optimization, along with the power of a resilient industrial network. Both shifting global trade patterns and the unexpected grounding of our MD-11 fleet required significant changes to our network which we implemented swiftly and successfully. To that end, let me provide a quick update on how we flex our network during the quarter. From a global trade perspective, we reduced our Purple Tail Transpacific Asia bond capacity by about 25% year over year. We also decreased our third-party or whitetail capacity by nearly 35%. We continue to shift some of our capacity to the Asia to Europe lane, and importantly, these flights typically have an attractive B2B mix of over 75% with high load factors. When we grounded our MD-11 fleet, our focus was always on safety above all making sure our planes would be inspected and as safe as possible. We're also focused on helping our customers and providing technical support to the regulators. Of the 34 MD-11s we own, 25 were in operation at the time of the groundings. Our network planning team immediately implemented contingencies, prioritizing protecting our customer commitments, and stabilizing the network. We revised our number schedule quickly condensing our planning process to three days. And the actions we took included trucking more volume in the United States and stuff of flying, given 18 of our MD-11 flights were US domestic, shifting volume to other types of aircraft within our FedEx-owned fleet, adding capacity via third-party lift, and adjusting the timing of maintenance for our remaining fleet while staying compliant with regulatory guidelines. As a result, we were able to mitigate the operational and financial impacts of the MD-11 groundings, which ultimately pressured our Q2 adjusted operating income by about $25 million. For the final week of peak, we have additional contingencies in place. We lost about 4% of our global cargo capacity before mitigating actions during our busiest season. As a result, our cross-functional teams are working around the clock to minimize any service disruption. And looking beyond peak, we are extremely focused on maintaining high service levels with the benefit of more time to plan. We'll keep you posted on the expected timing of the MD-11 return to service. Network transformation remains a key priority for us. In support of this ongoing transformation in October, we named Cavalpreet as Executive Vice President of Planning, Engineering, and Transformation. Kowal is known for creating high-performance cultures. With nearly thirty years of institutional and industry expertise, a depth of operational and engineering knowledge will support further progress towards our global integrated network. For the past five years, she served as our Asia Pacific regional president. Kowal has a proven track record of relentlessly unlocking efficiencies and driving improved bottom-line results. And I am confident she will thrive in her new role. This global centralized planning and engineering marks an important shift in how we deploy our assets to reduce inefficiencies and increase profitability. Additionally, it provides enhanced oversight of our ongoing drive Tricolor, and network two dot o efforts. We now have about 24% of our eligible average daily volume flowing through 355 network2.o optimized facilities. Additionally, we have closed more than 150 facilities. We also continue to prioritize improving our operations and performance in Europe where the team is making good progress with significant opportunity ahead. We remain focused on driving growth in international and B2B segments which is helping to offset the headwinds created by global trade policy changes. Our European operations teams have done an outstanding job absorbing the growth through improvements in surface hub station, and on-road productivity supported by sustained improvement in net service levels. Data and technology play a foundational role in our transformation, and we are scaling AI adoption across the company to all our 500,000 plus employees. The reality is that AI is becoming an integral part of all business functions from the back office to the frontline. And we want to ensure that every employee is equipped to thrive in this new era. We recently launched a global AI program to help our teams innovate faster, serve customers better, and solve challenges more effectively than ever before. Importantly, we are customizing the curriculum to be directly relevant to each team member's specific role experience level, and existing AI fluency. We also continue to explore new approaches that leverage our real-world operational data platform. We are actively pursuing opportunities to bring digital solutions to the market, starting with logistics intelligence insights. Our recently announced strategic collaboration with ServiceNow marks an important milestone designed to make life easier for those who manage complex sourcing and procurement operations. Through this collaboration, we are giving businesses a single system that anticipates, adapts, and acts before they experience supply chain disruptions. And by integrating into ServiceNow procurement and supply chain solutions, we are beginning to monetize the proprietary insights that only FedEx can provide. Enterprises need access to real-world logistics intelligence to power their AI systems and workflows. And this partnership demonstrates market demand for what we have built. In closing, I want to recognize our team for delivering another strong quarter while navigating a very difficult operating environment. Our ability to grow adjusted earnings per share 19% year over year despite multiple headwinds speaks to the benefits of our transformation, and the strength of our industrial network. I look forward to sharing more information on our strategic initiatives and our medium-term financial outlook at our February Investor Day. I hope to see many of you there. Now over to you, Brie. Thank you, Raj. Brie Carere: First, I want to commend our commercial and operations teams for the job they are doing to support our customers during peak. Successfully picking up 25 million packages on Cyber Monday requires extensive collaboration and agility. Our Q2 performance is a function of momentum we have been building over the past year. Managing key performance indicators to ensure a focus on high-quality revenue growth. The team's hard work and strong execution in Q2 led to a 7% year-over-year revenue growth across the enterprise, BZ, BZ, BZ. At FEC, revenue was up 8% driven by 12% US domestic package revenue growth with strength across all services. 2%. Pressured by lower average daily shipments. We grew average daily domestic volume by 6%. Our recent B2B healthcare win supported robust growth in The United States priority and deferred express services. The onboarding of our new Amazon business, which is focused on large and heavyweight shipments, is also going well. As expected, international export volumes declined, driven again by lower volumes on the China to US lane. Raj mentioned how we're shifting some capacity to the Asia Europe lane, which along with strong growth on the intra-Asia lane is providing a partial offset. Additionally, we continued to grow U.S. International outbound revenue, which further offered another offset and, of course, it has high flow through. At FedEx Freight, weakness in the industrial economy again weighed on our average daily shipments, which were down 4%. This dynamic remains consistent with broader LTL industry trends. Importantly, our growing FedEx freight team positions us well for the eventual recovery. We now have more than 85% of our planned LTL sales force in place, and we expect to have the full team in place by June. And, of course, this is 400 salespeople. We are also very encouraged by our Q2 service quality metrics at freight. With claims and damage performance at some of the best levels in company history. And on-time service is at the highest level since Q3 of fiscal year 2021. Across the enterprise, our strong yield performance this quarter demonstrates the benefits of our efforts to prioritize high-value shipments, the strength of our value proposition, and the continued improvement in the pricing environment. At FEC, US domestic package yield was up over five driven by the strength across all services. International export package yield grew 3%, driven by revenue quality action, higher weight per shipment tied to the de minimis change, plus favorable currency. At FedEx Freight, revenue per shipment increased 2% driven by higher weight per shipment and revenue per 100 weight. Demonstrating our sustained commitment to maintaining industry-leading yield. Now let me share a few highlights on our commercial priorities. As part of our B2B focus, we have developed vertical strategies each with dedicated leadership, and resources in our targeted growth areas. That B2B contributed to nearly half our revenue growth this quarter, this strategy is working. It is helping us sustain and win new business in priority areas like healthcare and automotive. For example, this quarter, we won incremental B2B business from BMW. This win is a result of our global reliability and scale, our strong service for time-critical aftermarket and production deliveries, and our collaborative shipping tool. Further, technology companies are investing extraordinary amounts of CapEx in global data center infrastructure over the next several years. As such, we have formalized our work in creating a data center and infrastructure vertical team. This will better support existing customers and also help us acquire new high-tech customers. I am confident our dedicated sales and solutions team will enable FedEx leadership in the high-value market with significant growth ahead. We are very pleased with how our digital tools are supporting revenue growth while creating better outcomes for our customers and their customers. Wayfair is a great example of how we're using these tools to help our customers improve their shipment-related communication, and support their customer service teams. By using our premium integrated visibility tool, Wayfair is increasing their net promoter score reducing where is my order calls, otherwise known as WSMO calls, and decreasing outages with their tracking data. Turning to our revenue outlook for fiscal year 2026. We now expect 5% to 6% consolidated revenue growth this fiscal year supported by sustained U.S. Domestic yield and volume growth. We expect second-half international export ADV to remain pressured due to the global trade environment with a partial offset from yield. At FEC, the midpoint of our range now implies a 7% revenue growth year over year. Supported by peak trends and our revenue quality actions. Peak ADV is trending in line with our expectation of a modest year-over-year increase. Peak-related demand surcharges at FEC are achieving strong capture, and we expect a year-over-year increase in this surcharge revenue. In light of the recent MD-11 groundings, we have made targeted adjustments to protect network integrity and service reliability. On December 1, we implemented a fuel surcharge adjustment to partially mitigate the added cost required to maintaining high-quality service for our customers. And we expect strong cap of our general rate increase of 5.9%, which goes into effect next month. At FedEx Freight, due to the continued pressure on shipments, we now expect fiscal year 2026 revenue to be approximately flat to slightly down on a year-over-year basis. Yield growth will provide an offset to a low single-digit percentage decline in shipments. In closing, we have a great strategy in place to capture high-value growth with our unmatched industrial network. And our Q2 results demonstrate that this strategy is absolutely working. Our team is doing an exceptional job this peak season. Thank you, team, for delivering the Purple Promise during the holiday season and, of course, all year round. Now with that, I'll turn it over to John. John Dietrich: Thank you, Brie. I'll start by saying that I'm very proud of the team for executing on our strategies to drive margin expansion and operating income growth in Q2. And we achieved these results despite multiple headwinds. Like Raj and Brie, I'm also very grateful for the dedication of our team members who are delivering on the Purple Promise every day especially during this peak season. Turning to our financial results. On a consolidated basis, in the second quarter, we delivered $4.82 in adjusted earnings per share, up 19% year over year. Consolidated revenue grew by 7% which supported 60 basis points of adjusted margin expansion. And 17% adjusted operating income growth. As Brie mentioned, our yield management and strong commercial execution resulted in higher revenue growth from US domestic package services which was the primary driver of our year-over-year adjusted operating income improvement. We grew adjusted operating income by $231 million despite the headwind from global trade policy changes, higher variable incentive compensation accruals, weaker than expected LTL results, a $30 million headwind from the expiration of the postal service contract, and a $25 million impact from the grounding of our MD-11 fleet. At FEC, we grew adjusted operating income by $306 million up 24% and expanded adjusted operating margin by 100 basis points. This was driven by higher yields, continued cost reduction efforts, and increased U.S. Domestic package volume. These drivers were partially offset by higher wage and purchase transportation rates, and the headwinds I previously mentioned. At FedEx Freight, we continue to experience a challenging market environment consistent with trends across the LTL sector. FedEx Freight adjusted operating income declined by $70 million and adjusted operating margin contracted three percentage points. Q2 was weaker than we originally anticipated driven by lower average daily shipments. Additionally, we experienced a $25 million headwind to adjusted operating income as our sales force hiring and other separation expenses accelerated in Q2. That said, I'm encouraged that yields inflected positive in the quarter demonstrating FedEx Freight's disciplined strategy. We remain confident that FedEx Freight is well positioned to see strong incremental margins when demand returns. We remain committed to prudent capital allocation and maximizing stockholder returns. During the quarter, we opportunistically purchased nearly $300 million worth of stock which alongside our increased dividend payout demonstrates our commitment to returning cash to stockholders. We have $1.3 billion remaining under our 2024 stock repurchase authorization and subject to business and market conditions, we'll continue to evaluate repurchasing additional shares during the remainder of FY '26. CapEx year to date is $1.4 billion driven by continued investments to maintain our fleet of aircraft and vehicles network 2.o related facility enhancements, and hub modernization. We continue to target $4.5 billion in annual CapEx for FY '26. Given the healthy status of our pension plan, we are further reducing our expected pension cash contribution. We now anticipate making $275 million in voluntary pension contributions to our US qualified plans in fiscal 2026. Compared to our prior forecast of up to $400 million. Moving to our FY '26 adjusted EPS outlook. I want to note that our outlook is based on information known to us today in our business trends from the first half of the fiscal year. Though the global operating environment remains fluid, our year-to-date results demonstrate our operating leverage and proven ability to successfully drive premium revenue growth. As a result, we now expect to deliver adjusted EPS of $17.8 to $19. This compares to our prior range of $17.20 to $19 and reflects a range of potential scenarios for the back half of the year. At the midpoint of our range, we now anticipate a 7% increase in FEC revenue with adjusted op margin up slightly. Also at the midpoint, we expect revenue for FedEx Freight to be down slightly with margin down year over year. And our expected FY '26 effective tax rate remains approximately 25%. I also want to take a moment to walk through what is implied in our second-half outlook at the adjusted EPS midpoint of $18.4. We expect continued FEC revenue momentum on a year-over-year basis in the fiscal second half. We also expect to benefit from strong operational execution and ongoing efficiency initiatives. At the same time, we anticipate somewhat more limited flow through in the second half versus the first half due to several discrete items challenging comparability year over year. First, variable incentive compensation accruals. For context, in FY '25, we paid variable incentive compensation well below target levels. Given strong year-to-date performance, we have embedded a higher accrual for this performance-based pay in our revised outlook. This is important compensation that our people are earning due to their strong execution in a challenged environment. Second, given the sustained weak LTL industry trends, we've lowered our FedEx freight expectations for the second half of the year. And third, we expect meaningful headwinds in the second half from our MD-eleven groundings primarily in Q3. Taken together, these items represent roughly a $600 million year-over-year headwind to adjusted operating income in the second half. For the full year, they represent nearly a $900 million headwind. Our revised FY '26 adjusted operating income bridge shows the year-over-year elements embedded in our full-year outlook in one midpoint scenario. Resulting in adjusted operating income of $6.2 billion up $200 million versus our prior outlook. Of course, this is just one scenario and the assumptions at the midpoint may vary as the environment changes. In this scenario, for FEC volume-related revenue, net of variable cost, we now expect a $500 million tailwind. This marks a $100 million improvement compared to what we shared in September. This is driven largely by US domestic package services offset by a material headwind from reduced international export demand. With respect to FEC yield, we now expect a $3 billion tailwind. This marks a $700 million improvement compared to what we shared in September. And demonstrates our commitment to revenue quality and pricing traction. Our bridge includes partial offsets to these tailwinds, most remain unchanged from what we shared in September except for the FedEx freight headwind. We now expect a $300 million decline in adjusted operating income at FedEx Freight compared to the $100 million expectation we shared in September. Additionally, we added a bar to reflect the variable incentive compensation headwind I mentioned earlier. As I mentioned last quarter, embedded in our assumptions is the $1 billion in headwind to adjusted operating profit from the global trade environment offset by $1 billion in transformation-related savings. We're pleased with our year-to-date cost reduction progress and are on track to achieve the billion dollars savings target. With regard to Q3 adjusted EPS, we now anticipate adjusted EPS to be sequentially lower than Q2. For further context, we expect Q3 revenue to be essentially in line with Q2 with slight increases sequentially in operating expense due to increased peak demand and higher cost due to the MD-11 grounding. And as a reminder, we are lapping a third quarter that was unusually strong seasonally. We expect Q4 to be our strongest adjusted EPS quarter of this fiscal year these directional trends are consistent with the patterns we typically experience. Before turning to Q&A, I want to provide an update on our spin-off of FedEx Freight, which is on track for 06/01/2026. As previously mentioned, we submitted our confidential form 10 to the SEC as well as a request for a private letter ruling on the tax treatment of the transaction to the IRS. These were important milestones as we move toward the tax-efficient spin-off. We expect the form 10 which will provide more details on our go-forward strategy and financials, to be available to the public in January. As a further update, upon the spin-off of FedEx Freight, FedEx Corp intends to retain up to 19.9% of FedEx Freight's outstanding shares. To preserve the tax-free nature of the spin-off, we expect to monetize these shares within a timeframe permitted by the IRS. Additionally, FedEx Freight will be hosting an Investor Day in New York City on April 8. John Smith and his team look forward to unveiling for you FedEx Freight's forward-looking strategy to unlock significant stockholder value in the years ahead. And as Raj noted, also look forward to seeing you in Memphis at our FedEx Corporation Investor Day in February. With that, let's open it up for questions. Operator: We will now begin the question and answer session. To ask a question, if you are using a speakerphone, please pick up your handset before pressing the keys. Please limit yourself to one question. At this time, we will pause momentarily to assemble our roster. Brandon Oglenski: Our first question today is from Brandon Oglenski with Barclays. Please go ahead. Hey, good evening everyone and thanks for taking the question. Johnny, you just covered a lot in guidance there, and I'm sure we'll have plenty of questions on it. But I guess longer term, it looks like you guys are definitely capturing incremental volume sharing your domestic US business, the package business that is. And seeing quite a bit of pricing upside too. So I wondered if you can talk to some of the dynamics there on both B2C and B2B and maybe if there's more to come on yield gains. Thank you. Brie Carere: Hi, Brandon. It's Brie. I'm happy to answer the question. So from a volume and a market share perspective, yes, we are very pleased with the profitable market share. And, again, from an FEC perspective, we were really pleased with the flow through in the quarter. The incremental margin expansion of 100 basis points at FEC is something we're really proud of. And that was driven by a couple of things. One, continued focus on B2B. We've been building this strategy for over a year. We've been very focused on our KPIs and our metrics within the sales organization. We made a pivot to our sales compensation model as well to make sure that that is balanced from a B2B and a B2C perspective. And then, also, as you heard, we were really really pleased with our overall rate discipline and the capture on surcharges. So our goal is to continue to push on this, continue to acquire new B2B market share, and we're really pleased with the underlying momentum. Jonathan Chappell: The next question is from Jonathan Chappell with Evercore ISI. Please go ahead. Thank you and good afternoon. Brie, I wanted to stick with that topic. The B2B over half the revenue growth in 2Q, I'm just wondering if there's any way to break down how much of that is completely new volume business, how much of that is related to kind of yield and some of the surcharges you're initiatives you're putting in? And should we think about that as being kind of similar magnitude of overall growth as you think about the guide for the back half of the year? Brie Carere: Jonathan. Great question. So overall, from a trend perspective, and I just want to be clear, was nearly half. It wasn't over half. Still very pleased with that metric. Let me be clear about that as well. But we expect that to be pretty consistent throughout the year from Q1 through Q4. To your question on acquisition, I will really say that the quarter had multiple things going. From a B2B perspective, yes, we did acquire new B2B. We also did a great job from a share of wallet, and I should note that also it was the strongest quarter that we had seen from a small business B2B perspective. So it really was the combination of all three combined with our revenue quality strategy. I don't think it was any one of those things. Richa Harnain: The next question is from Richa Harnain with Deutsche Bank. Please go ahead. Hey, thank you. So I wanted to ask about service, more specifically, the cost of service. Recently you shared plans regarding management's annual cash incentive and you added a service component to that, which you know, speaks to the significance you place on service as you work through your network two dot transformation. We would think that comes with additional cost. So, you know, how much do you estimate you're carrying today in terms of those additional costs? And what's worked into the outlook? And how should we think about those costs trickling off? I'm sure, for instance, Canada is being run much more efficiently now than when you started your integration efforts. So how long did it take for that to become fully efficient? Raj Subramaniam: Okay, Richa. Let me answer that question. In fact, let me answer two components of it. One, you started talking about Daniel incentive compensation. And to add to the points that were made earlier, in our prepared remarks, you know, as last year, our AIC payouts were well below target. This year, we have included the service component. And we anticipated several headwinds. And despite that, the team is doing an incredible job of performing in this quarter. So while it's a financial headwind for this for the year, it's absolutely the right thing to do. As our team is going above and beyond the call of duty and delivering on that purple promise. So that's on the AIC. Your question was really around the network two point o and the cost. Listen. First of all, we are not going to compromise on our service good services good quality. Good quality is actually less waste. And, you know, we are very pleased with the progress that we are making there. And, obviously, we have made very good progress in Canada as well. You can typically in the market roughly three to six months. Where we get the efficiency back, and that's all dialed in into our forecast both for the short and long term in network to auto. Thank you again for the question, Richa. Chris Wetherbee: The next question is from Chris Wetherbee with Wells Fargo. Please go ahead. Yes, hi. I wanted to ask a little bit about the LTL the freight business. As you think about some of the I guess, maybe we're curious about potential duplicative costs as you guys get prepared for the spin. Is there a sense of how much or maybe the incremental on the further decline from $100 million to $300 million on the EBIT decline comes from that? I guess, trying to get a sense that there are some temporary costs associated with the spin to stuff come out? Is it really more of a function of what's happening in the broader market? Obviously, are a little bit weaker. Yield's little bit under pressure, too. John Dietrich: Yeah. Thanks, Chris. I'll take that. As I mentioned in my remarks, we had $25 million in this quarter. We are anticipating of the $300 million, $100 million of that is the result of the separation cost that is a combination of the acceleration of the Salesforce hiring, which Brie mentioned is going extremely well. As well as IT and other costs, all in the spirit of accelerating, which we're seeing some of the results in the improved performance. So thank you. Brian Ossenbeck: The next question is from Brian Ossenbeck with JPMorgan. Please go ahead. Hey, good evening. Thanks for taking the question. Maybe first, John, just to clarify the costs you're talking about, are those separate from the spin-off costs which are included or excluded rather from the EPS guide. And then just wanted to hear a little bit more about the MD-11 process, getting them back up to speed. It seems like it'll take a little while, but it also seems like there's an incremental step up in terms of a headwind into the third fiscal quarter. Is that more or less because of the peak season? Think we're expecting that to tail off a little bit, but it seems like it's actually increasing. So additional thoughts around that would be helpful. Thank you. John Dietrich: Yeah. Thanks, Brian. I'll cover the first part. Those are separate costs that I identified than the $600 million. These were included in our reportable earnings. So with regard to the MD-11, yeah, our current outlook reflects that those aircraft will return to service in the fourth quarter. We do have some incremental costs in the third quarter, particularly in December, as I noted, $25 million was in November, but in December, we'll have significantly higher costs incurred on the MD-11 at the peak season and it's an expensive time of year to be getting outsourced lift to begin with, let alone, when you have fleet grounded. So I would say of the remaining $150 million a substantial part of that $175 million will be in the third quarter. Raj Subramaniam: And let me just add one more point on this thing, Brian. Our first priority and will always be safety above all. That's the principle which we have built. We are working hand in hand with the authorities on the protocol to get these aircraft back in flight. I was there with the MD-11 hangar just on Tuesday night. We have a phenomenal set of aircraft technicians who are working on it. And we, you know, we're waiting for the right protocol to get it released. And the timing that John talked about. Thank you. Scott Group: The next question is from Scott Group with Wolfe Research. Please go ahead. Hey, thanks. John, just want to follow-up on that $600 million headwind you talked about in the back half of the year. I think you gave there's three pieces to it. Any way you can sort of break down that $600 million into the three buckets you laid out and maybe how much of that's in Q3? And then maybe just along with that, like, I know you said earnings would be lower in Q3, but any sort of magnitude? I don't know. Maybe the way to think about it, you think earnings are flat, higher, lower year over year? Maybe that'll be helpful if you give a little bit more. Thank you. John Dietrich: Yeah. Thanks, Scott. So of the $900 million we incurred $300 million of in the first half of the year. To your question, for the second half of the year, we've embedded the remaining $600 million in our outlook with about $160 million of that due to expected continued softness in the LTL business. Up to a total of about $175 million for the MD-11 grounding. And the remainder for the majority of which we expect in Q3. About $265 million for increased variable compensation. Increased variable compensation. So with regard to your question on Q3, I'm not going to give Q3 guidance. But what I can tell you is that the Q3 adjusted EPS will be sequentially lower than Q2. We expect revenue sequentially to be essentially in line with Q2. Slight increases as well in operating expense on a sequential basis due to the increased peak demand, some of the increased volumes. Talking about, and higher cost due to the MD-11 grounding. I think an important reminder too is we'll be lapping a third quarter that was unusually strong seasonally. We had a lot of drive benefits in the third quarter of last year. We also expect Q4 to be our strongest adjusted EPS quarter for the fiscal year. And directionally, that's consistent with the patterns that we've typically experienced. Thomas Wadewitz: The next question is from Thomas Wadewitz with UBS. Please go ahead. Yes. Thank you. So wanted to get your sense of you know, I think what we've seen in the past over time is that FedEx can, as they're developing momentum a couple of quarters into margin improvement, they you know, you do tend to run into this refilling of the incentive comp bucket, and that, you know, that tends to be a headwind for a period of time. Seems like sometimes that, you know, that can be, like, the network two point o savings come in or I guess just how do we kind of think about that and then relative to just the progress on your FEC margin, which has been good for, I think you said five quarters in a row, and it seems like you're maybe pausing. Admittedly for a couple reasons. But just kind of how do we think about broader margin improvement? And is this kind of a couple quarter headwind on refilling the incentive comp, or is this something that you know, might carry into kinda, you know, next year as well? Raj Subramaniam: Well, thank you, Tom, for the question. Let me lead off, and if John wants to add to it, he can. As we are looking at FY '26, we're basically, you know, catching back up where we should have, you know, where comparing it to last year. I think, that is not a headwind that we'll have going forward into fiscal 2027. So that's that hopefully answers that question. The second part of it is we are very, very pleased with the underlying momentum that we have in our business. This is now working. The transformation that we have on our network transformation, our organizational transformation, our digital transformation, all are working. Our commercial teams are executing at a high level as you can see the results. So we are pleased with the underlying momentum and the flow through. There are certain things that are happening, you know, peculiarly for this, you know, there are incremental headwinds for this next three to six months. But on an ongoing basis, you know, we are very pleased with the ongoing momentum here. Jordan Alliger: The next question is from Jordan Alliger with Goldman Sachs. Please go ahead. Yes, hi. Just a question. The bridge to the midpoint is very helpful. I'm just sort of curious, though. You know, the $19 are at the high end. Is there a way you could frame up you know, what would push it? Is that mostly tied to volumes looking better, the LTL environment looking better, more acceleration in B2B? Like, how do we think about framing to the north of the midpoint? Thanks. John Dietrich: Yeah. Hey, Jordan. I guess my quick response is all of the above. We're not gonna really speculate as to all the factors that could go into it. You know, obviously, if revenue is stronger, and our cost environment is better than we're anticipating, you're gonna find yourself in the upward end of the range. So there are so many variables in placement. We feel comfortable with the assumptions we've laid out. That we're gonna be within the range. And focused on being as far into the range as we possibly can. Thank you. Bascome Majors: The next question is from Bascome Majors with Susquehanna. Please go ahead. Thanks for taking my questions. The domestic parcel growth rates have been really solid for several quarters in a row now. And as we get, you know, an indication from the guidance is that you expect that to continue. You know, as we get further in the next year and UPS potentially gets some competitive advantages back with the relationship with the postal service. And you know, potentially, maybe some contractual competition three years past the new Teamsters deal and some of the share shift that happened there. Do you think that you know, growth is something that we can maintain at a high level into fiscal 2027? Or could those potentially be headwinds that we should consider tapering the rate? Thank you. Brie Carere: Thanks for the question, Bascome. I do not believe that a relationship between our two competitors is a competitive threat. As we've talked about, our focus right now is high-value segments. B2B, home delivery, ground commercial. These are not services that could be serviced by the post office. And so if that does materialize, I do not see it as a threat to our primary growth strategy. We have a stronger value proposition and, we're very focused on continuing to take profitable market share. Ken Hoexter: The next question is from Ken Hoexter with Bank of America. Please go ahead. Hey, good afternoon. Just on the simplify that freight, John, I guess you've mentioned it a few times, the $300 million impact if you pull out the $100 million in ongoing costs, is that the leftover $200 million is that due to weakening demand? And I'm wondering what your view is of the competitive environment there. And then the $152 million in spin costs, is there anything you can maybe detail or break out what's going into that? Is that just continued? Is that ongoing cost? I just want to understand what's one-time, what's if any, and what is ongoing. Thanks. John Dietrich: Yeah. Ken, I'll start, with the numbers. And basically say the $200 million is the result of lower ADV and pressure on the business that's consistent with the LTL industry. Yeah. With regard to the $152 million those are spin-off preparation costs. So those that's why those are in our adjusted, and those are one-time costs. Thank you. Raj Subramaniam: And, again, if I just add one more point to it on a broader basis. Obviously, this is our performance is in line with our industry at this point, and this is cyclical in nature. It's very difficult to predict when the turn would come. However, we are beginning to see some level of industry consolidation especially in the truckload business. And it while it takes a while, to translate in the LTL, that process seems to have begun. Reed C.: The next question is from Reed C. with Stephens. Please go ahead. Hey, guys. Thanks for taking my question. I want to follow-up real quick on that last answer about consolidation. Does that mean consolidation of LTL carriers, you seem to think will be on the horizon? And then also, in that $200 million that you talked about, there is definitely some LTL industry softness. But I was wondering if any of that is from a understandable, rationalization of volume as you try to maybe take out some less profitable freight before spending that off on its own. Just if any of that is creating some noise in those shipment numbers. Thank you. Raj Subramaniam: I'll start off, and then John can answer the second part. And when I just want to make sure you the what I said was consolidation of capacity in the truckload business. And we can see a reduction of capacity starting to happen. And that will ultimately translate into benefit for the LTL sector. Though it may take a little time. John? John Dietrich: Yeah. And if I could talk, you know, we're actually seeing a bit of positive inflection in the yield, the first increase in yield that we've seen in several quarters. So we're encouraged by that and it also reflects the discipline on the pricing environment in our LTL business. J. Bruce Chan: The next question is from J. Bruce Chan with Stifel. Please go ahead. Hey, good evening, everyone. So kudos to your network planning folks. Certainly, plenty to keep them busy, including you know, what might be an imminent supreme court ruling on the tariffs. Wondering, you know, if we see a decision against the administration whether you view that as a tailwind to trade activity next calendar year, especially maybe in the context of your $1 billion headwind estimate? And I know that's a big question, but, you all are very plugged into Washington. So any perspective there would be very helpful. Raj Subramaniam: Well, Bruce, first of all, thank you for the comments on the network. I mean, these teams have done just an absolutely remarkable job and continue to do so. It's very, very early to answer any question regarding what might or might not happen on the tariff front. You know, any international volume increase, obviously, is beneficial. But we're not counting on any such thing in our outlook. Obviously, we are seeing significant shifts in trade and supply chain patterns and the fact that we have a scaled network in every part of the world stands to our advantage. Because we are able to market signals from the bottom up and we are able to act very quickly and with precision. And that's what is helping us very much. As far as how the environment on global trade changes and how that might impact our volumes at this point? It's very early to comment. And we will update you as the months go by here. Stephanie Moore: The next question is Stephanie Moore with Jefferies. Please go ahead. Hi, good evening. Thank you. I wanted to circle back on peak season. Maybe you could provide a little bit more color on what you've seen thus far. I know you said it's tracked in line, but I think there's been a lot of commentary at a high level that we've seen talking about a k-shape recovery and also some crushing just around the strength of peak season. You also commented a little bit about maybe small business or B2B. So any additional color you can provide on peak season would be great. Thanks. Brie Carere: Hi, Stephanie. It's Brie. So I am really pleased with how we're doing from a peak perspective, both from a planning as well as an execution. Right now, we are basically running right on our forecast for peak. What we had predicted was a mid-single-digit year-over-year growth on ADV. That is absolutely the case. We do have an extra operating day, and so when total volume, you're gonna see a high single-digit growth. From a peak period. From a forecast perspective, as I mentioned, it is basically in line. What we are seeing, however, especially early in peak, is actually our base and our small and medium businesses are slightly ahead of forecast. And our larger retailers are slightly below. Which obviously, from a revenue quality perspective, is a good thing from a result perspective. From a trend throughout peak, what we did see is that right after Black Friday, we had very strong. The second week was a little bit softer. But we have seen building momentum, in the last week. Time in transit is two days. Scott and John are doing a remarkable job of running the network. In addition to that, as you know, we have a market share leader in large package, and the team has done a brilliant job of keeping the port cities clear. They've pulled that volume into kind of the middle of the country. Bypassing some sorts and hubs, which is really important. So right now, we feel really good about peak. I do not want to underestimate that we have still six days to go. We have a lot of work to do. The team is ready as Raj just talked about. I cannot say enough about the incredible airline work, but the team does need to next week without the MD-11. We're very focused on that, and they have demonstrated that this is definitely gonna be a strong peak and could not be more pleased. Ariel Rosa: The next question is from Ariel Rosa with Citigroup. Please go ahead. Good evening. Nice job on the quarter here. Good to see the progress. I'm curious, in the slides, mentioned that you have 24% of volume flowing through Network two point zero automated facilities. I think I'm remembering that correctly. I just want to understand, what does that mean in terms of the margin profile for facilities or kind of the cost structure per package on those facilities versus legacy facilities? And how should we think about the timeline or the pace for that to continue to ramp and kind of going to Tom's question, does that just mean looking at kind of potentially structurally higher margins going forward? Thanks. John Dietrich: Yeah. Thanks, Ariel. And we intend to talk a lot more about this at our upcoming Investor Day. But we also have said previously with regard to network2.o benefits we expect to see the tangible results of that later in FY 2027. So I would say not a material impact financially, but great contribution from an operational efficiency standpoint that Brie was talking about earlier. Conor Cunningham: The next question is from Conor Cunningham with Melius Research. Please go ahead. Hi, everyone. I was just curious if you could talk a little bit about the healthcare and small and medium-sized business markets and then just talk about the opportunity set that you have from here. And then, Raj, you've talked a little bit in the past around just the tech pipeline or the potential there just given the CapEx that's being spent on from the AI players? Just curious on how FedEx kind of fits into that puzzle, if at all. Thank you. Brie Carere: Hi, Conor. It's Brie. So sure. I'll start first from a healthcare and an SMB perspective. As we mentioned several calls ago, we had a phenomenal build last year from a healthcare perspective. We have, I think, the best digital portfolio from a healthcare segment perspective. What do I mean by that? We can give our healthcare customers customized visibility, and they can set their own business rules for intervention and monitoring, which is really important. All customers are important, but patients obviously require that next level of service. As I just talked about some of the service performance, that means that we can actually intervene, reroute, and adjust for healthcare customers at a level of precision that I just believe is unmatched in the network. So we are continuing to onboard healthcare with that tool. We also rolled out a new quality program, which is really important to the pharma segment. That is sort of early days. That actually requires with each one of our pharma customers for us to work with their quality team build out a custom SOP, prove we can execute that to be able to win share of wallet, and that is going quite well. So that will continue, I believe, as the ability to take share. And then from there, we're continuing to expand our cold chain capabilities. Right now, we've got great cold chain in a reactive place. And what do I mean by that? Most of our customers are packing out their shipments. And so we use cold chain predominantly to intervene and ice something or refreeze something if there is a delay in the system. We're moving to end-to-end cold chain. So that's sort of the next wave. Great momentum here in The United States. We're taking these capabilities to Europe and to Asia. So think we've got a long runway. We've got between $9 and $10 billion of healthcare in our base. The market is $70 billion. So this is, you know, a long-term strategy, but the team continues to every quarter. From an SMB perspective, we are, I think, the easiest to do business in The United States. We just had the best quarter in SMB share and performance that I have seen in several years, a huge shout out to both our sales and marketing team. And, again, you know, we're gonna keep chipping away at this, and I believe our value proposition, we'll continue to take share. And then finally, on the data center, well, it's not as big an opportunity as healthcare healthcare is $70 billion. The data center market's probably between $7 and $8 billion. It is rapidly growing. I think global CapEx is predicted to be, like, $550 billion in a market that is moving that quickly, there is opportunity. This market expects precision. I don't know anybody who does precision better than we do. So, yes, we're winning now, but I think there's a long road ahead of more opportunity. David Vernon: The next question is from David Vernon with Bernstein. Please go ahead. Hey, good afternoon and thanks for taking the question. So John, coming back to the question on the Network two point zero stuff, right? I think you guys had mentioned before you were looking at 40% of the volume by the end of FY 2026 running in an integrated facility. I'm trying to sort of reconcile that with the idea that margins are just gonna be up a little. I have thought the idea was that when you get the integration, done, they're you're gonna be running at a higher level of productivity, that would flow through the margin. But I think I heard you maybe say that the financial impact maybe wasn't as great. I'm just trying to kinda get my head around that. Raj Subramaniam: Let me just give you the latest and greatest on what we on Network two point zero. As we said, we are right now 24% of the volume pre-peak the time next peak rolls on, we'll be around 65%. And that's the plan, and that's what we're executing against. The end of the day, when we are finished with it, we're targeting around a 30% footprint reduction by the end of fiscal year 2027. And those represent with along with one FedEx $2 billion in cost savings. And we see the majority of those savings skewed towards '27. I don't know, John, if you want anything more to add. John Dietrich: No. I would just add with regard to our transformational cost savings, targets for this year, there are elements of Network two point zero included in those. And that's what I want to elaborate further on at investor day. I don't want to say there's no savings. It's all part and parcel. We'll go into much more detail on our strategic initiatives, including network dot o when we see you in February. Jeff Kaufman: The next question is from Jeff Kaufman with Vertical Research. Please go ahead. Thank you very much. A lot of my questions have been answered, but let me ask one for John here. John, thank you for explaining the headwinds on the incremental second-half outlook. I want to ask about the non-GAAP add backs. You had a nice chart in the release showing about $720 million net this year. You know, $600 million from the spend, $310 million from business optimization. You still have about $450 million of that to go and two quarters to do it. Can you give us an idea of kind of how that's gonna weigh? Like, did you not do as much network two point o integration because of peak season this quarter and you're gonna do more in the fiscal third quarter. Kind of how should we think about the flow of those expenses? John Dietrich: Yeah. I think the overwhelming majority of them are gonna be tied to freight our freight separation. We also have, a much smaller portion with regard to the change in our calendar fiscal year. And, also, finally, much smaller portion with the ongoing business optimization that has been in play for the last couple of years. So but freight separation is the overwhelming majority. Operator: This concludes our question and answer session. I would like to turn the conference back over to Raj Subramaniam for any closing remarks. Raj Subramaniam: Well, thank you, operator. Before we go, I want to acknowledge how proud and humbled we are by the Memphis Shelby County Airport Authority's decision today to rename the Memphis International Airport in honor of our founder, Frederick W. Smith. It's a fitting tribute to the man who launched FedEx a company that revolutionized the airport, the city of Memphis, the way the world works. We look forward to soon operating our largest hub out of Frederick W. Smith, International Airport. And finally, a big thank you to team FedEx for your outstanding work in Q2 and throughout this peak season with just one more week to go. Happy holidays, everyone. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Afternoon, and welcome to the BlackBerry third quarter fiscal year 2026 results conference call. My name is Nick, and I will be your conference moderator for today's call. During the presentation, all participants will be in a listen-only mode. We will be facilitating a brief question and answer session towards the end of the conference. Should you need assistance during the call, please signal a conference specialist by pressing star, zero. As a reminder, this conference is being recorded for replay purposes. I would now like to turn today's call over to Martha Gonder, Director of Investor Relations, BlackBerry. Please go ahead, ma'am. Martha Gonder: Thank you, Nick. Good afternoon, everyone, and welcome to BlackBerry's third quarter fiscal year 2026 Earnings Conference Call. Joining me on today's call is BlackBerry's Chief Executive Officer, John Giamatteo, and Chief Financial Officer, Tim Foote. After I read our cautionary note regarding forward-looking statements, John will provide a business update and Tim will review the financial results. We will then open the call for a brief Q&A session. This call is available to the general public via call-in numbers and via web in the investor information section at blackberry.com. A replay will also be available on the blackberry.com website. Some of the statements we'll be making today constitute forward-looking statements and are made pursuant to the Safe Harbor provisions applicable to US and Canadian securities laws. We'll indicate forward-looking statements by using words such as expect, will, should, model, intend, believe, and similar expressions. Forward-looking statements are based on estimates and assumptions made by the company in light of its experience and its perception of historical trends, current conditions, and expected future developments, as well as other factors that the company believes are relevant. Many factors could cause the company's actual results or performance to differ materially from those expressed or implied by the forward-looking statements. These factors include the risk factors that are discussed in the company's annual filings and MD&A. You should not place undue reliance on the company's forward-looking statements. Any forward-looking statements are made only as of today, and the company has no intention and undertakes no obligation to update or revise any of them, except as required by law. As is customary, during the call, John and Tim will reference non-GAAP in their summary of our quarterly results. For a reconciliation between our GAAP and non-GAAP numbers, please see the earnings press release published earlier today, which is available on the EDGAR, sedar+, and blackberry.com websites. And with that, let me now turn the call over to John. John Giamatteo: Thanks, Martha. And thanks to everyone for joining today's call. Q3 was another quarter of solid results adding to our track record of consistently meeting or beating guidance. Once again, we delivered across the three core metrics of revenue, profitability, and cash. Total company revenue came in at $141.8 million, above the high end of our guidance range. Q3 was another strong quarter of profitability, with adjusted EBITDA beating guidance, and it was also our third consecutive quarter of achieving GAAP profitability. Adjusted EBITDA for the total company was $28.7 million, which represents a 20% margin. GAAP net income improved by $24.2 million year over year to $13.7 million in Q3, and non-GAAP EPS exceeded guidance at positive 5¢. Conversion of profitability into cash was also strong. Operating cash flow was $17.9 million, up three times year over year, reflecting strong execution and disciplined cost management. Moving on to the results from our divisions. QNX delivered an all-time record for quarterly revenue at $68.7 million. This represents 10% year-over-year growth, beating expectations and finishing at the high end of the guidance range. Revenue was driven primarily by solid growth in royalties, with development seat and professional services revenue also growing both sequentially and year over year. During the quarter, we were excited to announce John Wall's appointment as president of QNX. In our opinion, nobody knows the embedded software space, both the technology and the market, quite like John. He has a very strong reputation with customers and partners and within the company. QNX has tremendous opportunities for multiyear growth, and driving our key initiatives to harness those opportunities will be John's number one priority moving forward. We saw more design win momentum in Q3, exceeding our internal targets, and the pipeline of design wins in Q4 continues to grow. This design win growth demonstrates the progress we're making with the initiatives to drive deeper into automotive and wider into the general embedded space. In the quarter, we secured a number of major automotive design wins with top European and Asian OEMs for ADAS and cockpit domains, all being developed on the latest version of the QNX platform SDP8. The number of customers using SDP8 continues to grow each quarter, with many leading OEMs now developing on it. We continue to see traction with other new products as well. We're securing new wins for both QNX Sound and QNX Cabin as OEMs recognize the strategic benefit of these products and time to market for reducing their bill of materials. This was the second quarter in a row that QNX Sound was chosen by a leading Chinese OEM, with this quarter's win being deployed in their luxury EV range. We've also secured another multiyear contract for our cloud-based QNX Cabin product with a top five global automaker based in Europe. A potential needle mover for ASP per vehicle is the vehicle software platform that we're co-developing with leading middleware provider, Vector. Development is progressing well, and the second early access version is scheduled for release by January. Early discussions with a number of OEMs are progressing, and we're targeting significantly higher pricing per vehicle compared to the core RTOS. Once we've secured some wins, we'll provide more color on the potential upside from this product. And finally, for auto, earlier this week, we announced that leading technology market analyst Counterpoint Research has determined that QNX is now powering more than 275 million vehicles on the road. This is a 20 million increase year over year and clearly demonstrates how significant a player we are in the space. In the non-automotive general embedded space, we continue to drive across our target verticals of industrial automation, medical instrumentation, and robotics. Let me provide some additional color on a couple of in-quarter wins with industrial automation companies. The first was with one of our longtime customers, Bentley, Nevada, an industry leader in online condition monitoring used for wind turbines and other applications, who has adopted SDP8. Additionally, two leading industrial automation OEMs, one North American and one European, have also adopted SDP8 to be used in a variety of their applications from robotics to manufacturing production. We also had an exciting development in the aerospace and defense vertical with NASA, who are adding QNX SDP8 to their supported operating systems. Earlier this year, we launched QNX General Embedded Development Platform, or GEDP as we call it, which is a subscription-based solution tailor-made for OEMs in GEM verticals. GEDP aims to accelerate the time to market for developers of embedded systems. And feedback from our customers so far has been extremely positive as they can leverage this platform for all supported versions of QNX across their portfolio. In the quarter, we saw a number of new design wins from customers for GEDP. So in summary, Q3 was another great quarter for QNX. In fact, an all-time record quarter. Moving now to secure communications. In Q3, we delivered revenue of $67 million, beating the top end of guidance and consensus. This was a great achievement for the division as we were faced with a U.S. government shutdown for a portion of the quarter. These strong results were in large part driven by better-than-expected renewals of UEM and navigation of the U.S. government shutdown. As a percentage of revenue for the last twelve months, UEM remains just over half of the secure communications totals, with SecuSmart at slightly more than ad hoc for the remainder. Key metrics for the division remain solid, with annual recurring revenue, or ARR, increasing $3 million sequentially to $216 million, and dollar-based net retention rate, or DBNRR, was at 92%. SecuSmart revenue grew sequentially but was lower year over year due to a tough compare as a result of the strong upgrade cycle from the German government in Q3 of the prior fiscal year. Ad hoc, despite having the most exposure of the three product groups to the U.S. federal government shutdown, delivered year-over-year and sequential revenue growth. Earlier this year, we achieved FedRAMP high certification, becoming the only critical events management solution provider to achieve this stringent level of security, directly enabling significant U.S. government expansions this quarter, including both the U.S. Navy and the Department of Justice. Ad hoc continues to grow outside of North America as well, securing new wins with the National University of Malaysia, Australia's Department of Foreign Affairs and Trade, and key UK energy infrastructure provider, Scottish and Southern Energy. For UEM, in addition to the continued trend for reduced customer churn, we had some significant expansion deals for this product in the quarter. One of these expansion deals included an eight-figure multiyear renewal with the Dutch government. Other strong renewals included the Scottish Police Service and the UK Ministry of Defense, as well as a number of financial services companies. As we mentioned in Q2, BlackBerry UEM became the first solution to be certified by Germany's Federal Office for Information Security, or BSI. And in Q3, we closed our first deal that was enabled by this very demanding security certification. Targeted investment in certifications like BSI for UEM and FedRAMP High for ad hoc are strengthening our portfolio's position at the heart of government secure communication strategies. Overall, this was another solid quarter of performance for our secure communications division. This has been a year of stabilization, with improvements in renewal rates and our ability to close new business. Finally, licensing revenue was $6.1 million, which was in line with expectations. And with that, let me now turn the call over to Tim for more color on our financials. Tim Foote: Thank you, John, and good afternoon, everyone. As John mentioned, we continue to drive strong, reliable results across the board that either meet or beat expectations. For the total company, revenue in the quarter topped the high end of the guidance range at $141.8 million. Total company adjusted gross margins remained relatively flat at 78% and increased three percentage points sequentially as a result of a favorable revenue mix and continued optimization of our cost of sales profile. Adjusted operating expenses were $85.4 million, up 7% year over year as we continue to deploy capital to strategically invest for growth in our QNX business. Total company adjusted EBITDA continues to be strong at 20% of revenue or $28.7 million. Adjusted net income for Q3 was $26.8 million, and GAAP net income was $13.7 million. This is the third quarter in a row that we've delivered positive GAAP net income and the seventh consecutive quarter of sequential improvement. In fact, Q3 had the strongest level of quarterly GAAP net income at any time since 2022, almost four years ago. Adjusted EPS for the quarter beat the top end of guidance at positive $0.05. QNX had its best-ever quarter of revenue, achieving $68.7 million, up 10% year over year and 9% sequentially. QNX gross margins expanded by one percentage point sequentially and were down two percentage points year over year to 84%. We did not have the P&L benefit of grant funding in Q3 from Canada's Strategic Innovation Fund like we did in the first quarters of the fiscal year. Even without this benefit, adjusted EBITDA was a very solid 24% of revenue and hit the top end of guidance at $16.4 million. Secure communications revenue exceeded the top end of guidance for the quarter at $67 million. Gross margin was one percentage point lower year over year and higher sequentially at 72% as a result of leverage and revenue mix. Better-than-expected revenue also drove leverage to the bottom line. Adjusted EBITDA in the quarter was $17.3 million, up 10 percentage points sequentially to a strong 26% margin. Finally, our licensing division delivered results in line with guidance. Revenue was $6.1 million and adjusted EBITDA of $5.3 million. Adjusted corporate operating costs, excluding amortization, came in at $10.3 million in Q3, broadly in line with guidance. This was another good quarter for conversion of profitability into cash. Operating cash flow was $17.9 million, a significant improvement from $3.4 million in Q2 and up over 200% year over year. Free cash flow was $17 million in the quarter. Our balance sheet remains solid with total cash and investments up $111 million year over year and $14 million to $377.5 million. We are deploying BlackBerry's capital to drive growth and shareholder value. We continue to invest organically, especially in our QNX business, supporting the key initiatives that John outlined earlier to go deeper into auto and wider into target verticals. Notwithstanding this increased investment, we continue to deliver positive operating and free cash flow, further increasing our net cash position. So in addition to organic investment, we are also continuing to take advantage of what we believe to be an undervalued share price and repurchase shares through our buyback program. In Q3, we ordered the repurchase of $5 million or 1.2 million shares at an average price per share of $4.13. A portion of these shares settled just after the quarter end on December 1, so it won't show in this quarter's 10-Q filing. All of the shares have been canceled, bringing the total number of shares bought back this fiscal year to 8.8 million. We have therefore more than offset potential dilution from our long-term incentive and employee share purchase plans. Turning now to financial outlook for the fourth fiscal quarter and the full fiscal year. We expect revenue for QNX in Q4 to be in the range of $71 to $77 million. Having just delivered an all-time record in Q3 for quarterly revenue, we expect to set another new record in Q4. For adjusted EBITDA, we expect QNX to be in the range of $17 to $23 million. We are maintaining our full-year revenue guidance at the midpoint while also narrowing the range to $262 to $266 million. For full-year adjusted EBITDA, we're raising the bottom end of our and the midpoint of our guidance such that the range is now $67 to $73 million. As QNX continues to deliver a combination of double-digit growth and strong profit margins. For secure communications, we're increasing the expected revenue for Q4, such that it's now in the range of $61 to $65 million, and for adjusted EBITDA to be between $11 and $15 million. For the third quarter in a row, we are raising our full-year revenue guidance for secure communications, such that the high end of the range we provided last quarter is now the low end of the range, such as now between $247 to $251 million. We're also raising our guidance for adjusted EBITDA, which is now expected to be between $47 and $51 million. For licensing, we reiterate our prior guidance for revenue to be approximately $6 million and adjusted EBITDA to be approximately $5 million per quarter. For the full fiscal year, we're holding revenue guidance at approximately $24 million and adjusted EBITDA at approximately $20 million. We continue to expect adjusted corporate OpEx, excluding amortization, to be approximately $40 million for the full fiscal year. At the total company level, we expect revenue for Q4 to be in the range of $138 to $148 million and adjusted EBITDA to be between $22 million and $32 million. For the full fiscal year 2026, we are raising the guidance midpoint for the total company revenue by $6 million, with a range now between $531 and $541 million, and raising guidance for adjusted EBITDA at the midpoint by $7.5 million to be in the range of $94 to $104 million. For context, when including Cylance, adjusted EBITDA from continuing and discontinued operations for the prior year was $39.3 million. For non-GAAP EPS, we expect it to be between $0.03 and $0.05 in the fourth quarter and to now be between $0.14 and $0.16 for the full fiscal year. Moving on to our cash flow outlook. We expect another sequential increase in operating cash flow for Q4, within the range of a solid $40 million to $45 million. This increase means that for the full fiscal year, we're again raising our guidance and expect to generate between $43 and $48 million in operating cash flow. This does not include the additional $38 million of cash from the second tranche of proceeds from the sale of Cylance to Arctic Wolf that we expect to receive in Q4, which is classified separately as cash flows from investing activities. Therefore, we expect to generate in excess of $80 million of cash in Q4, further strengthening our already solid balance sheet. With that, let me now turn the call back to John. John Giamatteo: Thanks for that, Tim. And before we move to Q&A, let me quickly summarize what has been another strong quarter for BlackBerry. We continue to consistently deliver reliable results across the three core metrics of revenue, profitability, and cash at both the company and divisional levels. QNX delivered its best-ever revenue quarter and a solid adjusted EBITDA of 24%, all while continuing to invest for long-term growth. In addition to these strong financial results, QNX also hit the milestone of powering 275 million vehicles on the road. Secure communications exceeded revenue expectations and demonstrated significant leverage in the model with a 26% adjusted EBITDA margin. To put this in perspective, this time last year, the cybersecurity division had an EBITDA margin of only 9%. Overall, both divisions helped drive another quarter of GAAP profitability and cash generation. So with that, let's now move to Q&A. And Nick, if you could please open up the lines. Operator: Thank you. We will now begin the question and answer session. One on your telephone keypad. Please make sure your line is unmuted. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We request that you limit yourself to one question and one follow-up. And the first question today will come from Kingsley Crane with Canaccord Genuity. Please go ahead. Kingsley Crane: Hi. Thanks, and congrats on a really nice quarter. So we've talked about the GEM opportunity naturally requiring more investment in the near term as you work towards gaining critical mass in key end markets. And, again, really nice wins in the quarter in that segment. But as you think about fiscal 2027, where do you think you need to invest more within that space? Like, what's working? What needs more help? Thanks. John Giamatteo: Yeah, Kingsley. So I think on that one, I think from a product perspective, we're in really good shape. I think the GEDP platform that we talked about is a really good leverage point for us to bring value to our customers. So I think you'll probably see us continue to invest in go-to-market activities. More feet on the street. It's a broader market. Partnerships with distributors and other technology providers that maybe can help bring us to market a little bit faster. So these are probably the areas that we'll continue to invest in as we go into the next fiscal year. Kingsley Crane: Okay. Great. And then the follow-up would be on this luxury China EV win. We're really encouraged by that. What ultimately allowed you to win that deal? Do you think it was cost savings, weight savings, superior software functionality, and then you know, to what extent could this be a blueprint for more success in China? Thanks. John Giamatteo: I think it's honestly, I think it's all of the above. I think it's cost savings, it's weight savings, it's the performance of the product itself. I would say the Chinese market tends to be very price sensitive. So I think the amount of money that they can save leveraging our technology and what that does to their overall BOM is a compelling value proposition. So that probably swayed a little bit more. But the broader value proposition itself is very, very sound. Pardon the pun. But I think the actual savings is probably the lead one on that. Operator: And the next question will come from Luke Junk with Baird. Please go ahead. Hi, good afternoon. Thanks for taking the question. Luke Junk: John, maybe if we could start just in terms of getting to the vehicle award, just if you could talk about the gates you're advancing through right now to get you closer to that outcome? And then as we look forward a couple of weeks to CES, should we expect to hear more about this at CES as well? John Giamatteo: Yes. Yes, Luke, great question. I'll tell you, it's an area that has got a lot of focus right now inside the company. And from a technology perspective, bringing QNX SDP8, the middleware, together and the integration, the connective tissue, making that a seamless kind of product we could bring to our customers. It's a lot of collaboration with our partner, Vector, to really bring that. So I think the product itself is really sound. It's just a matter of the integration with our partner and then bringing that to the marketplace. So a lot of good progress that's moving in this regard. But we're pleased with the progress, and you'll hear more about it. Luke Junk: Okay. And then wanted to your answer about the luxury China EV win. In terms of the cost sensitivity, I mean, certainly that's a well-known factor in the China market. And I'm just wondering in terms of system design or things that are sort of you can bring to the table from a QNX standpoint to put BOM into a more compelling position? Like just what are some of the key areas that you can enable for a Chinese OEM in that respect, John? Thank you. John Giamatteo: Yes. I think, certainly, the cost savings and the time to market capabilities are something that's compelling. But one thing we do think is gonna start getting more traction in the Chinese market is safety secure safety solutions. I think, in the past, they've kind of used some basic technologies. And because they've had some high-profile safety issues, we're excited about the opportunities that could be there for us, for us SDP8 and bringing kind of the core RTOS to the table. Sometimes you get in with maybe sound or cabin or different things like that, and maybe drag along kind of the core product in some ways. But it's I think it's a testament to the broad portfolio of the platform. You might lead with sound and get your foot in the door and then bring the RTOS along. More times than not, it's the other way around. Because that's the meat and potatoes from the operating system level. So we're working every single angle in the Chinese market, but I think they are a little more acutely aware and concerned with the need for having an SDV platform that has safety certifications. Probably more so than they had been in the past. Operator: The next question will come from Todd Coupland with CIBC. Please go ahead. Great. Thanks. Good evening, everyone. Todd Coupland: I wanted to start with QNX. 15% growth last quarter, 10% this quarter guide implies 15% growth. How should we think about the trend in this business, given that fluctuating growth rate as we're thinking about fiscal 2027? Thanks a lot. Tim Foote: Yeah. Great question, Todd. So ultimately, we'll give the guide for fiscal 2027 at the end of Q4. So in ninety days' time. Hey. Look. Double-digit growth has been very solid, and ultimately, we're gonna be giving the backlog number as well in Q4, which will be a good lead indicator of where we're moving. On the backlog, we're actually feeling pretty good as John mentioned in his prepared remarks that after a difficult start, we've actually accelerated pretty well and we've got some really good momentum now as we head into Q4. And conversion of that backlog into revenue, which will start starting FY '27, is gonna really drive that business forward. And what we saw in Q3 was strong royalties and royalties driven by some of these new programs that we've been winning over the last couple of years now starting to come online. So, yeah, it's an exciting time, and some of the growth accelerators such as going up the stack, things like sound and cabin that we've mentioned. And we're starting to see traction from those two. So I'm gonna put a pin in it. And say come back in ninety days, and we'll give you more information on next year. But we feel very positive about the momentum that we've got in this business. Todd Coupland: Great. Thanks, Tim. And then just on SecureCom, you know, the business is trending, you know, probably about half of the decline rates you've been projecting the last couple quarters. Is this the new normal? And, again, similar type of mindset as we think about fiscal 2027. Could this business actually turn into a growth segment with defense spending trending positive and the other segments doing better? So just talk about how we should think about that. Thanks. John Giamatteo: Great. Great question, Todd. That's a really good question. We're actually, you know, right now, as you would imagine, just modeling out next year, taking a look at the pipeline and do tend to be a little lumpy, you know, sometimes in this space. So, you know, I don't think one quarter necessarily translates into but I will say we have a really strong pipeline within SecureComps, one of the stronger pipelines that we've had in a long time. So that bodes well for us probably like Tim said, before. It's next quarter, we'll give guidance for the next fiscal year. But it was a solid quarter. Honest with you, we were happy we navigated the US government shutdown the way that we did. We're a little spooked by that as the quarter was going on, but I think that turned out to be a pretty good result for us in the end. And now it's just a matter of converting the pipeline that we've got in front of us to tee up a really solid fiscal year '27. So we'll come back to you with more insights into that, but certainly pleased with the way that business is performing. Todd Coupland: Great. Thanks for the color. Operator: The next question will come from Trip Chowdhry with Global Equities Research. Please go ahead. Trip Chowdhry: Thank you. Congratulations on a very solid quarter. I have two quick questions. The first regarding the government shutdown, do you think now everything is normal? Or do you think, like, most more than half of the quarter was in shutdown? You think the remaining half made up of the first half? That's the first question. Second question, very refreshing to hear your win in the robotic space. I was wondering if you can put some more color about what kind of robots may be using your technology and any color on the demand side also? That's all for me. John Giamatteo: Thanks, Trip. I'll cover a little bit on government. And we'll cover a little bit on robotics. Trip, just give you some color on it. But, you know, as far as government's concerned, it's been a really interesting year. Like, you know, we started the year with Liberation Day and the uncertainty that that brought. That in some ways created some opportunities and also created some headwinds. We also had in the government space the, you know, the continuing resolutions at one point, then a full-on shutdown at one point. I think the good thing I think what we learned from this experience, remember, Doge was another one. How much how was that gonna impact our business? But one of the learnings that I think we took away from the last six or nine months on the secure comp side is what we do in terms of mission-critical critical events management, mission-critical you know, SecuSuite, encrypted voice data and video. Mission-critical, you know, UEM and, the security that that provides. These mission-critical when it comes time for you know, to take a look at what they're gonna cut, what they're we found they're a little bit hesitant to really take a hatchet to mission-critical types of software solutions. So we were a little concerned about the timing with the in Q3 with, with the US federal government in particular because everything shut down. Their procurements then had a backlog of contracts that they had to process. But I think we were fortunate enough to kinda work through that where it really impact the quarter as much as we initially thought it was gonna be. So there's a lot of different dynamics with the governments. But I have to say, I think we've been successfully navigating a lot of the waves there in some of the changes that's gone on. We'll come back to you, Trip, with more details on robotics and medical instrumentation and industrial automation and the kind give you more colors on the wins. Sometimes we're a little bit some of our customers are a little hesitant to share too much information about the use case and the design win. There's, you know, for confidentiality and different reasons. But, you know, in the robotics space, when we think of humanoids robotics, we think of, you know, the more technology that's going into this vertical. There's more compute power. There's more performance that's required. And that's a sweet spot for QNX. So regardless of the type of robotics, if you need high compute and you need high performance, SDP8 is the solution for them to look at. So we'll bring that a little bit more to life, I think, in the future. Actually, we'll have some demos at the booth where we at CES this year to show it a little bit more. But hopefully, that gives you a little bit more color on robotics and we'll be sure to share some more in the future. Trip Chowdhry: Yes. That's perfect. Thank you so much, and happy holidays. John Giamatteo: Thanks, Trip. Thanks, Trip. Operator: The next question will come from Paul Treiber with RBC Capital Markets. Please go ahead. Paul Treiber: Thanks for taking the questions and good afternoon. You made an interesting comment on the pricing opportunity for the vehicle software platform. You just speak to what you see as a potential ROI or the cost savings that the automakers would benefit from that? And then also, could you speak to the economic, like maybe the split between QNX and Vector or maybe your ability to capture a disproportionate share of the pricing there? Tim Foote: Yeah. Sure. Hi, Paul. So ultimately, what we're providing here and remember this, this has been a pull from the OEMs have come to us and asked if we can help in this area because if we look back over the last couple of years, the OEMs have been very ambitious in terms of trying to write all the code from the OS up to the application layer and really found that to be quite a challenge. So in terms of cost savings, having us do it much more efficiently and actually being able to produce a product that they can get into market is a big advantage for them. We're taking off their hands, off their plate, a load of software integration currently they have a heck of a lot of internal resource working on. So they can divert that resource to the application layer, which is where they're really going to differentiate their brand from other players. So, yeah, we're doing a lot of heavy lifting for them and like I say, this is a pull come to us and say, can you do this for us? In terms of the economics, we're not gonna give, like, the absolute, like, details here, but clearly a portion of the pie is coming from Vector. A significant portion I should add is coming from us, and there will be a split now. We are going to be the billing entities, so we'll take the revenue and the vector portion would obviously be passed on through cost of sales. Paul Treiber: And the second question is just on the Canadian federal government. The budget was out in November and there's a number of new investment initiatives. Just remind us again of the size of your Secure Commerce business for the Canadian government? And then what do you see as the opportunity and what's the strategy to try to expand further with the Canadian government? John Giamatteo: Yes, yes. Great question, Paul. A lot of actually, momentum that we have right now with the Canadian government, especially their, you know, by Canada kind of solution, looking to do more with Canadian providers. We do have a comprehensive relationship with them today around UEM. They use that widely throughout the organization. And we're having really good productive discussions with them about SecuSmart and Ad Hoc and other parts of the portfolio as well. So stay tuned. We've got a lot of activity going on. We've got a multiyear agreement with them today. That's very UEM centric. And as we look to try to expand into SecuSmart, SecuSuite product and the ad hoc portfolio, we're finding, you know, some really good discussions with them right now, particularly as they ramp up their spending on defense. So critical events management is something that is widely deployed in the entire US government. We're hoping we could bring that same value proposition to the Canadian government as they ramp up their defense spending over the next few years. So, we'll keep you posted on it, but be rest assured, there's a lot of activity going on right now with the Canadian government. Operator: This will conclude our question and answer session. I would like to turn the call back over to John Giamatteo, CEO of BlackBerry, for closing remarks. John Giamatteo: Terrific. Thanks, Nick. Before we end the call, I just wanted to flag that we'll be starting off the New Year at CES in Las Vegas. We'll be hosting an investor briefing on January 7 at 11 AM Pacific Time to discuss some of the highlights from the show. You can access the live webcast in the investor information section at blackberry.com. And if you're at the event, please stop by to see some of the exciting new exhibits that our QNX team will have on show. So thanks, everyone, for joining the call today. And I'd like to wish all of you a happy and safe holiday season. See you next time. Operator: This concludes today's call. Thank you for your participation. You may now disconnect.