加载中...
共找到 25,396 条相关资讯
Operator: Good day, and thank you for standing by. Welcome to the America's Car-Mart Second Quarter Fiscal 2026 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jonathan Collins, Chief Financial Officer. Please go ahead. Jonathan Collins: Good morning. I'm Jonathan Collins, the company's Chief Financial Officer. Welcome to America's Car-Mart's Second Quarter Fiscal Year 2026 Earnings Call for the period ending October 31, 2025. Joining me on the call today is Doug Campbell, our President and CEO; and Jamie Fischer, our COO. We issued our earnings release earlier this morning, and a supplemental presentation is on our website. We will post the transcript of our prepared remarks following this call, and the Q&A session will be available through the webcast. During today's call, certain statements we make may be considered forward-looking and inherently involve risks and uncertainties that could cause actual results to differ materially from management's present view. These statements are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. The company cannot guarantee the accuracy of any forecast or estimate nor does it undertake any obligation to update such forward-looking statements. For more information, including important cautionary notes, please see Part 1 of the company's annual report on Form 10-K for the fiscal year ended April 30, 2025, and our current and quarterly reports furnished to or filed with the Securities and Exchange Commission on Forms 8-K and 10-Q. As a note, the comparisons that we will make today will be the second quarter of fiscal 2026 versus the second quarter of fiscal 2025, unless otherwise stated, and we will make several references to our supplemental materials posted on our website. Doug, I'll turn it over to you now. Douglas Campbell: Thank you, Jonathan, and thank you, everyone, for your interest in America's Car-Mart and for joining to hear more about our quarterly results. Let me start by addressing what's in the numbers and what the numbers don't fully capture. Our reported results reflect a net loss of $22.5 million, which includes approximately $20 million in noncash reserve adjustments and onetime charges related to the strategic actions we're taking to reposition this business. More details are on Page 4 in the supplemental presentation on this. These are deliberate investments in our future, and the underlying trends in our business are moving in the right direction. Let me highlight several developments from the quarter that are notable. First, consumer demand remains strong. Credit applications grew substantially year-over-year, clear evidence that despite economic uncertainty, the need for affordable, reliable transportation is robust. And Car-Mart remains a trusted solution for working families. The effects in the broader wholesale market have subsided since the update in Q1 and while elevated relative to prior year, continue to decline in alignment with what we would see seasonally. In October, we closed a transformative $300 million term loan that removes the capital constraints that have limited our flexibility we referenced last quarter. For example, under our legacy structure, certain covenants limited actions tied to optimizing our store footprint and organizational structure. Now with more flexibility, we're moving more decisively on a multiphase plan to optimize our footprint, cost structure and strengthen capital efficiency. These are hypothetical savings. We've already executed on Phase 1 in early November, which included the consolidation of 5 underperforming stores and the elimination of approximately 10% of our headcount as a company. The second phase will be completed in Q3. And when combined, the results generate more than $20 million in annualized SG&A savings. Between these 2 initial phases, we estimate a 10% reduction in our store footprint. More details here can be found on Page 7 in the presentation. I'll let Jonathan elaborate on additional efforts of the term loan and additional actions which will enhance our capital structure. But at a high level, this represents a fundamental step in removing constraints, unlocking flexibility and aligning our funding model with the needs of a more modern, scalable platform. Our enhanced underwriting platform, LOS V2, which launched in May, continues to deliver measurably better results. During the quarter, we continued to see a shift of our mix towards booking higher-quality customers. We are prioritizing value over volume to build a portfolio that delivers stronger returns. More importantly, this higher-quality underwriting is needed to navigate uncertain environments. As we continue to see customer behavior shift with our Pay Your Way platform, which we relaunched late last quarter, customers continue to migrate from making payments in-store to online, which is an important trend as we look to leverage our new collection CRM. We're also seeing an increase in the accounts with auto recurring payments, which reduces the effort needed to collect. Lastly, customers are utilizing new payment channels like Apple Pay and PayPal. While these do add a level of convenience for our customers, it's also driving more consistent payment behavior, reducing in-store payment-related traffic and associated costs while improving the overall collection efficiency. As adoption continues to grow, we expect these benefits to compound when combined with our collection CRM powered by Salesforce. Jamie will expand more on this in a minute. With this infrastructure now in place or nearing completion, it's creating competitive advantages that will translate into better unit economics and stronger returns. The work we've done positions us to execute from a position of strength, clarity and discipline. And while there's more to do, the building blocks are in place. These efforts are creating a platform that will enable higher-quality growth and improve our financial performance. And with that context, I'd like to turn the call over to Jamie to review our operational performance for the quarter. Jamie? Jamie Fischer: Thanks, Doug. Good morning, everyone. Historically, when the macro environment softens on consumers, our business gets more robust. This quarter was another proof point of that with credit application volume up 14.6% from prior year. This is notable for 2 reasons. The first of which is that the company continued to navigate lower-than-normal inventory levels throughout the quarter. This is particularly evident and reflected on the balance sheet when observing the 6.8% variance between the periods. The second is the fact that this has a knock-on effect of reducing website traffic when less vehicles are advertised. Despite those headwinds, the team was able to deliver a sales volume result within approximately 1% of prior year. This performance reflects the resilience of the team and a vote of confidence from consumers in our offering. The launch of LOS V2 at the start of Q1 gave our store teams the ability to take advantage of the increased customer applications by prioritizing the highest ranked customers more effectively. Customers in these higher ranks demonstrate lower loss frequency and severity, faster time to breakeven and stronger returns on invested capital. In fact, as highlighted in our supplemental presentation on Page 10, you can see that 76.5% of our volume came from our highest ranked customers, ranks 4 through 7, a 12% improvement in higher-quality bookings compared to prior year since the system went live in May. Revenue increased 0.8% year-over-year, primarily driven by higher interest income and a nominal increase in the average retail sales price. It's important to note that the company had a onetime benefit of $13.2 million related to a change in service contract revenue recognition in the prior year. Absent that benefit, revenues would have been up 4.8%, primarily driven by an increase in vehicle price due to increased procurement costs related to tariffs outlined in the prior quarter. Gross profit margin was 37.5% compared to 39.4% in the prior year. Adjusting for the aforementioned onetime benefit, margins improved by approximately 100 basis points year-over-year and 90 basis points sequentially, driven by reduced repair frequency and severity and improved wholesale retention values. Turning to the operational progress from our enhanced payment infrastructure. The benefits of Pay Your Way program are becoming increasingly clear. We're seeing measurable improvements in both the customer experience and payment behavior across the portfolio. Over the past 4 months, we've shown significant momentum in customers enrolled in and utilizing our updated digital payment options. These trends are driving improved collections efficiency, reducing in-store payment traffic and increasing overall payment consistency. During the second quarter, we also exceeded 5% of our portfolio on Auto Pay recurring payments, which represents a 3x improvement to when compared to our legacy platform. This is partially driven by our customers opting to utilize our incremental payment types for recurring payments like debit card, Venmo and PayPal as compared to our previous offering of only ACH. We are encouraged by the early success of the Pay Your Way strategy and expect adoption and efficiency gains to continue as the program matures. As Doug mentioned, we're advancing efforts to enhance collection performance through the rollout of a new Salesforce-based collection CRM. Development is complete, and the tool has begun testing in a live environment in one of our stores. We expect to begin piloting in the second half of the fiscal year. This next-generation platform will deliver immediate benefits, including streamlined workflows, improved account management tools, enhanced data collection, virtual payment modification capabilities and a better customer contact experience. Looking ahead, we plan to introduce additional features such as advanced account routing, AI-driven customer engagement strategies and self-service options. These enhancements will create a scalable solution capable of supporting a larger portfolio without a proportional increase in headcount. With the investments we are making to support our Pay Your Way program and the upgrade of our collection CRM, we believe this data-driven collections platform will generate meaningful results. In Doug's remarks, he mentioned a multiphase plan to optimize operations and reduce SG&A. The process for this plan included an exhaustive review of our footprint and talent to ensure our resources are generating the appropriate returns. We evaluated underperforming stores, mapped customer concentrations and geographical overlapping and assessed market coverage and service levels. From this, we established a phased approach to improve operational efficiency and performance. In November, we executed on Phase 1 by consolidating 5 locations into nearby better-performing stores. The intention with this first phase of consolidation was to specifically solve for underperforming locations that were sharing the same geographical footprint as that of a better performing store. Early results confirm that this approach was sound. Our existing and new customers continue to be served seamlessly from one location in the same geographical area with a larger staff, more inventory selection and the same great service they have become accustomed to at Car-Mart. We also conducted a comprehensive review of both field and corporate headcount. Where technology, automation and process improvements have eliminated manual tasks, we made targeted reductions. These changes were implemented smoothly and operational continuity has been fully maintained. Importantly, these initiatives provide valuable insights that will inform decisions for future phases as we continue to optimize our footprint, cost structure and enhance scalability over the next several phases. As you can see, we are taking meaningful steps to improve the efficiency of our operations with urgency. With this overview, I'll now turn it to Jonathan to cover our financial results. Jonathan Collins: Thank you, Jamie. For the quarter, SG&A totaled $57.2 million, including $3.5 million in onetime expenses, primarily related to store impairment costs from the 5 closures Jamie discussed. On a reported basis, SG&A as a percentage of sales was 20.0% and 18.8%, excluding the onetime charges. Last quarter, I shared that the growth in our SG&A was driven by investments in our people and technology. At that time, I said our goal was to reverse about half of this growth in the second half of the year. I also mentioned that a modernized collections infrastructure would eventually deliver around 5% annualized cost savings, and I outlined that our target to reduce SG&A was to 16.5% of sales. The structured multiphase plan we're announcing today clearly demonstrates that we're making strong and urgent progress toward these commitments. Our first phase covered 4 components: IT spend reduction through contractor and legacy software rationalization, consolidation of 5 underperforming stores, reorganization of headquarters and field roles and optimizing marketing spend. Combined, these actions are expected to generate $4.9 million in savings this fiscal year and $10.1 million annualized. The store consolidations alone, moving customers in the nearby better-performing locations, as Jamie described, are expected to contribute approximately $1 million this fiscal year and $2 million annualized. We've also identified additional opportunities in subsequent phases, estimating to deliver another $3.5 million in this fiscal year and $21.3 million on an annualized basis. Upon completion of all phases, our cost reduction initiatives are expected to generate $31.4 million in annualized savings. This is outlined on Page 7 of our supplemental presentation. Building on Jamie's update on our Pay Your Way program, average collections per active customer increased to $582 this quarter compared to $561 in the same period last year. The strength in collections underscores the quality of the portfolio and the effectiveness of our Pay Your Way platform. I want to frame our credit results around a simple theme. Charge-offs were elevated due to normal seasoning and some macroeconomic pressures, but the leading indicators are improving. Net charge-offs increased to 7.0% from 6.6% in the prior year, reflecting the expected seasoning of the loans originated over the past 18 months. This is not surprising. As newer originations mature, they build loss history. What matters is whether the newer vintages are performing better than the older ones, and they are, as shown on Page 8 of our supplemental presentation. The leading indicators support this view. Delinquencies over 30 days improved 62 basis points to 3.14%. Modification activity declined to 6.19% from 6.91%, loss severity declined from $10,677 to $10,325 per unit sequentially and collections grew 4.6%, outpacing portfolio growth of 2.8%. These metrics tell us the portfolio is getting healthier even as the seasoning math works its way through the P&L. Contracts originated under our enhanced LOS platform now represent over 76% of the portfolio, excluding the nonintegrated acquisition lots, up from 72% last quarter. As legacy originations continue to run off, we expect portfolio quality to improve further. Our allowance increased to 24.19% of finance receivables, up sequentially from 23.35%, but down from 24.72% a year ago. The CECL reserve reflects observed loss history and includes a prudent overlay for macroeconomic uncertainty. While underlying credit quality is improving, we believe it's appropriate to maintain this level of reserve until we see further stabilization. The provision for credit loss was $119.1 million compared to $99.5 million last year. The increase was driven by the 40 basis point rise in charge-offs, reserve builds for macro factors, and continued seasoning such as at our acquired locations. As Doug outlined, we made significant progress transforming our capital structure this quarter. On October 30, we closed a new $300 million term loan facility with Silver Point Capital. The loan is 5 years, matures in October 2030 and bears interest at SOFR plus 750 basis points. Importantly, this transition allowed us to fully repay and retire our revolving line of credit. Additionally, we retired a $150 million uncommitted amortizing warehouse facility. As disclosed in our 8-K, the term loan included warrants issued to Silver Point to purchase up to 10% of our fully diluted shares at the market price at closing with a 6-year expiration. While dilutive, we believe this was the right path forward, striking a balance between deal economics and ensuring stakeholder alignment. Our securitization platform continues to perform well. Since the start of the fiscal year, we've completed 2 ABS transactions, 2025-2 and 2025-3 and called our 2023-1 deal in July. In our most recent securitization offering, our Class A notes were almost 8x oversubscribed and our Class B notes nearly 16x oversubscribed. In light of the turbulence in the bond market related to several subprime auto finance companies, we have proactively engaged with our current and prospective bondholders as well as ratings agencies. To highlight our differentiated business model, the controls we have in place and to maintain confidence in our financial position. We believe this positive engagement reinforces the continued strength of our platform as evidenced by the strong demand on our credit and our ability to attract capital in a challenging environment. The weighted average life of our ABS structures and the maturation of receivables are also important components of our strategy. As ABS notes are retired, the residual collateral becomes available to fund our business in a way that is distinct from our legacy revolving structure. Total cash, including restricted cash, increased to $251 million at October 31 from $125 million at April 30. Debt net of total cash decreased from $652 million to $646 million despite the increase in gross debt related to the term loan. Debt to finance receivables and debt net of cash to finance receivables were 59.2% and 42.6% at quarter end compared to 51.8% and 43.0% a year ago and 51.5% and 43.2% at the start of the fiscal year. Loss per share for the quarter was $2.71. Our net income loss of $22.5 million included approximately $20 million of noncash and onetime charges, $11.8 million from CECL reserve adjustments related to portfolio seasoning and macroeconomic factors, $4.5 million from the retirement of our revolving line of credit and $3.5 million from store closures and impairment costs. Adjusted EPS loss, excluding these items, was $0.79 per share. With that, I'll turn it back over to Doug. Douglas Campbell: Thank you, Jonathan. I want to address what I believe is a significant disconnect between how the market is valuing this business. Our stock is trading at roughly 1/3 of book value. The market sees challenges, our capital structure evolution, macroeconomic pressure on the customers and broader sector concerns. Those are legitimate issues for the industry and for Car-Mart. But here's what I believe the market is missing. In the middle of all of this turbulence, there's been a validation point. Our term loan provider has provided and committed $300 million into this business. They conducted an extensive due diligence on our platform, our locations and the quality of our assets and our path forward. It's not theoretical that sophisticated capital validators putting real money behind what we've been telling you. We have substantial residual equity in our ABS structures, improving credit performance and strong operational fundamentals. At current valuations, I believe the market is significantly undervaluing what we're building here. Looking ahead, our priorities are straightforward: Complete our capital structure transformation with another ABS transaction and our revolving warehouse facility in the second half of the year; normalize inventory levels to meet strong demand we're seeing and to set ourselves up for the tax season; execute Phase 2 of our cost reduction initiatives here in the third quarter and continue demonstrating improving credit performance as higher-quality LOS originations mature. As these initiatives progress, we expect to return to positive GAAP earnings and demonstrate the earnings power of this improved model. We've built the foundation, the path is clear. The demand is there. Now it's about execution. We look forward to updating you on our progress in subsequent quarters. Thank you for your interest in America's Car-Mart, and we look forward to your questions. Operator, please provide instructions for the Q&A session. Operator: [Operator Instructions] Our first question comes from the line of John Hecht with Jefferies. John Hecht: Definitely looks like you're positioning yourself to deal with the ongoing challenges, but also to be better positioned when things actually lighten up a little bit. I'm just wondering, so it looks like just looking at the loss curves, the newer vintages are performing pretty well. Maybe can you -- is there a way to quantify that like maybe cume expectations for cume losses in the newer vintages versus the COVID vintages versus prepandemic vintages? Or any sort of directional way to quantify how the newer -- the new book, I guess, is performing relative to the, you call it, the legacy stuff? Jonathan Collins: Yes, John, thank you for your question. Good to chat. If you recall, in prior quarters, we had a chart in there about a specific static pool. At the time we did the conversion over to LOS, we originated a set of loans, a significant set of loans under ALIS, our old underwriting system and LOS, and we track those over a period of time. And generally, those were in the 18% to 20% differential in terms of improvement. That continues to hold up for those -- that particular pool. What makes the kind of comparison, if you go back, you mentioned a couple of periods like pre-COVID and et cetera, is the significant change in what's happening with customers, our offer, et cetera, the price of the car has almost doubled. Term loans have -- a term on the loans have extended. And so the curves look a little bit different from that perspective. Some of them in some years were influenced by government subsidies. Some of them were influenced by the dynamic of car prices, et cetera. And so how we're measuring ourselves is really against what we presented in the supplemental presentation, which is we feel like the best comparison is our FY '24 vintages, which is most of that fiscal year, which is just before we converted over to LOS. And so both of those pieces are sitting in there. But broadly holding up, broadly, we're still seeing that good differential between specific vintages. John Hecht: Okay. That's helpful. And then, I mean, it feels like to some degree, like you said, everybody is going through the same challenges, but you're spending time on improving your positioning relative to those environmental headwinds. Given that, I got to believe the competitors and particularly the smaller ones are under intense pressure. Maybe can you give us an update on the competitive environment? And does that -- how that affects your thinking about strategy going forward? Douglas Campbell: Sure. The sector, obviously, we play and there are not a lot of public comps, John, as you know. What gives us insight and a little bit of confidence into keeping our pulse on the market is obviously, we had built out and still have an acquisitions team. And so we feel a lot of calls from operators who are interested in either selling their business or partnering, et cetera. And we get a lot of feedback as it relates to that. And the sector is under a lot of pressure. It is really, really difficult for operators to both procure capital, to find inventory. And so these are some of the things that are differentiating us from our peers. And then obviously, in markets where there was prior competition, some of those have eased up for us. And so there's this push and pull dynamic where we're seeing some benefits on supply. You have pricing that had been elevated. And so that's providing a tailwind on recoveries, which flowed through to gross margin, which is nice, but obviously showed itself as a headwind on the procurement. What's interesting about our business is that 5 short years ago, we used to sell a car for $10,000 or $11,000, and now average retail sales price has doubled. And despite that, we're finding homes for these vehicles and customers. And so we don't believe that, that dynamic is going to change, right? We're going to have to adjust. And what we're trying to do is set ourselves up for the future, set ourselves up in this model to be able to serve customers up and down the credit spectrum so that we can continue to grow through that. And that requires technology. We believe our foresight in trying to make sure that we get these things done and what we've been working on for the last 18 months are really important and differentiate us from our competitors, especially when you consider things like AI and how that will change our business and trying to make sure we stay in front of that. John Hecht: Okay. That's super helpful. And then I guess one more question, if that's okay. you mentioned that the ongoing industry challenges, you guys have spent a lot of time managing what you can in terms of execution, the things you can control, expenses and underwriting factors and so forth. Doug, in your mind, though, what -- I think affordability is probably one of the biggest constraints to improving industry. But Doug, maybe give us your thoughts on what other factors are you looking for that present, call it, good signals on the horizon? And what -- how long does it take to get there? What are the, call it, junctures in the road that we're looking for to just tell us that the environment is starting to become more constructive? Douglas Campbell: Yes. I think -- so a great question, John. For us, we have to sort of prepare ourselves to navigate any environment. And obviously, with these changes to our cost structure and optimizing our footprint with this new flexibility that we have, we're preparing to make sure we can weather anything. And I think that's important just given as you look across the industry, sort of what's transpiring. To your point, we have to create our own green shoots in this business. And for us, that means like going after higher-quality customers. That means making sure we have optionality on the type of car we procure and not being so narrow as to the type of vehicle that we're going after. Things like that are going to create optionality within the business. In addition to that, how we collect from our customers, there's a lot of transformation going on given how we've collected historically. And so we're focused on those things that we can control. I don't know when the environment sort of abates and gets a little bit better for consumers. But I think this sort of new normal that we're operating in, in terms of the car price, that's sort of to be expected. And so for us, there are lots of creative ways in this business that we can position this business to generate value, and we're looking at all of them. And so I think as quarters progress, the most important thing for us is to make sure that we optimize our cost structure and that we start to have positive earnings. That's the most important thing. And then we can focus on the flexibility we have as it relates to rebuilding our inventory and trying to capture some of this demand that's out there. We've been in a really sort of positive credit cycle for many, many years. And so it's just now turning the corner and this pressure that's on the consumer is really unfortunate. But it is when our business thrives. Historically, there's been validation points along the way that we have really, really robust times in our business. What's important is to make sure you get to the other side and that you can enjoy the fruits of that. And so we're just making sure that we're going to be set up and positioned for whatever transpires in the business. Operator: Our next question comes from the line of Kyle Joseph with Stephens. Kyle Joseph: With the new debt in place and you guys talked about application flow is really strong, give us a sense for the timing in terms of being able to meet that strong demand. Douglas Campbell: Kyle, thanks for the question. So Jamie referenced the deviation in sort of inventory position through the 2 periods, declining about 7% in terms of total inventory on the balance sheet. We're in that phase of sort of rebuilding inventory. And I think that takes us to work through the quarter and it's more important as we set up for tax time. So in my mind, Q3 is that time to sort of rebuild inventory. And so Q3, just given sort of what's on the slate, we're going to be working on an ABS transaction, rebuilding inventories and then making sure we set up for a tax time and obviously executing Phase 2 on our SG&A plan. So I think we will be set up nicely here for the fourth quarter to make sure that we can get after it in tax time, especially considering that tax refunds are supposed to be elevated here going into the season. So we're excited to take advantage of that. Kyle Joseph: Got it. And then yes, obviously, you guys were able to complete the term debt despite unfavorable market conditions, which is an understatement. And kind of walk us through -- I know you talked about completing another ABS, but in terms of the next phase on the right side of the balance sheet, it sounds like a warehouse. Can you give us a sense for some of the discussions you've had and how you're thinking about structuring that, whether it's 1 or 2 facilities and where you are on that? Jonathan Collins: Yes. Kyle, good to talk to you. Yes, if you go back for a long time as a company, we managed ourselves with a very simple capital structure and ABL. And one of the things that this term loan provides us with is flexibility. And one piece of that flexibility is to move to what we describe as our capital structure. And so we do anticipate putting a couple of warehouses into our capital structure, and that will provide us with some flexibility from that perspective. We'll continue to leverage the ABS market. That's an important platform that we've engaged with and built over time. Going back, we started this process probably about a year ago. And so part of that process was engaging with various warehouse providers that you needed to complete the term loan first to put cash on balance sheet. And so we do believe that the warehouse structure will be a fast follow, and we're actively working on that from that perspective. Kyle Joseph: Got it, Jonathan. Last one for me. Just in terms of credit performance, just a lot of moving parts out there, and it sounds like some are specific to Car-Mart and some are just kind of the macro more broadly. But at least in terms of leading indicators, it seems like credit is getting better. You guys have rolled out LOS V2. Again, we can see the curves there look like there's overall improvement. And then you balance that with higher charge-offs, which I think you guys explained well, the higher reserve and then broader macro uncertainty. Is that kind of a fair way to think about it? Just that what you're seeing at Car-Mart, you're seeing general improvement. But given what's going on in macro, you're not really willing to call it at this point. Is that a fair way to assess how you're seeing credit? Douglas Campbell: That's correct. There's no doubt that this environment is putting a strain on all customers, our customers included. We've been pedaling really, really hard to ensure that the type of customer that we're putting in the portfolio is more durable, and we've spoken about that a number of times through the quarter, the consumer has been navigating continued pressure seen on tariffs and the cost of goods, et cetera. And then, of course, all of the SNAP benefit speculation, et cetera, which we were getting in front of and messaging our fields to ensure that we could deal with that and use the levers within our toolbox to help consumers navigate that. And that was right at the period in closing the quarter. I think that's especially notable just given that we finished off delinquencies at 3.1%, and those continue to trend well. Into November, that low delinquency rate has worked out sort of favorably in terms of the number of unit losses that we take, and that's about down 10% in November when averaged across what we saw in the quarter. I don't know how that plays out through the rest of the third quarter, but it certainly is a good leading indicator, which is why we really focus on that as a key metric, a managerial metric for credit on how we manage our business. And to your point, the dynamic is really fluid. But what's been important to us and this consumer, given our 1 million-plus cars sold in the space, is to ensure that we stick to the playbook on helping customers navigate this environment where we can. And that if it is not going to be successful to call it and get the asset back and ensure that there's quality in the asset and we can recover that and provide good returns to our shareholders. And I think that playbook is working well. Obviously, we'll continue to look at that as we navigate new headwinds like the SNAP thing as an example. But we continue to do that and booking larger amounts of stronger consumers in our portfolio is an important piece of that. Operator: [Operator Instructions] Our next question comes from the line of Vincent Caintic with BTIG. Vincent Caintic: I appreciate all the detail that you provided on the call and on the presentation. You did a particularly good job highlighting the SG&A improvements that we are going to generate as well as what to expect to annualized. I did want to focus on revenues and sales expectations going forward, thinking about all the operational improvements that you've already made and are underway as well as the changes and the flexibility from the new capital structure and then also your underwriting changes. So kind of putting that all together, should we be expecting sales volume, sales per store per month sort of to accelerate from here? If you could maybe talk about your confidence? Or are there some changes like -- I know you talked about some of the store closures and something that where maybe there's a bump in the near term but that results in some strength in the long term. So if you could maybe give us some thoughts on how we should think about revenues, I would appreciate it. Douglas Campbell: Got it, Vincent. That's a really good question. I'm going to try and unpack it here as best as I can. We mentioned that the total impact on store closures here between the first 2 phases is going to be about 10% of the company's store footprint, which is going to be in and around that 15 store range here for the first 2 phases. If you just sort of put a pen to what our average productivity per rooftop is, it would imply that we have some reduction. You can do the math there. However, what we've tried to do is really focus on the geographical overlay between the stores that we're closing and really focus on consolidating. And I use that word carefully because what we want to do is be able to serve the same customer base. And what we've done, and Jamie sort of alluded to some of that work is overlay all the accounts geographically by ZIP. And in many cases where we have some underperforming stores, there's a fair bit of density there. And there's a belief that we can recapture some of those sales through those new locations that we're moving and transitioning customers into. And so it's a little bit unknown in terms of how much retention we'll be able to keep. But if the 5 closures that we executed here in early November are an indicator, it's somewhere greater than 80% of those sales. And so that's been encouraging. And so it makes it difficult to quantify, well, how much should I sort of pencil in, in terms of complete takeout. And I don't think it's fair to sort of deduct those sales from the closures like on a one-to-one basis. We'll be able to retain some of that given our approach on how we're doing that through these first 2 phases. To your question on the near-term sales expectations, inventory is a function of that. And so we're going to work quickly here on rebuilding our inventories on Q3. So I'd expect Q3 to have what I would call the noise in terms of sales results, but that will be sort of largely done building that back through January. I think that we can get that done in the third quarter and more importantly, to capitalize on the tax season. How that affects the tax season will really just be a function of how much we can retain on those stores. And the -- I think the driving distance, Jamie, correct me if I'm wrong, through the first 5 stores we closed, the driving distance for any consumer is about 15 minutes from store to store. And so in this next round, it's in that 20- to 30-minute range driving distance. That's been a big component of how we think it will affect the impact on sales is. And so that leads us some confidence to think that we'll have a high retention on the sales, but we'd have to prove that out. Vincent Caintic: Okay. That's super helpful. And I appreciate and I thought it was great that you highlighted kind of the valuation of Car-Mart stock versus it's trading at 1/3 of book value. With that, I'm wondering if there are any actions you can take to kind of force that issue to close that valuation gap. Normally, we think about share repurchases, but I know there's a lot of capital structure changes upcoming. But you also talked on the press release about the ability to access a substantial amount of the residual equity in the ABS deals. So just kind of throwing that out there, if there's anything you can do, any thoughts from a structure level to be able to realize some of that value? Douglas Campbell: Yes, Vincent, thanks. The -- I think an important piece of closing that gap is information. And in the absence of information, fear sits there. And so as noted in both the press release and the supplemental presentation, we are trying to provide our investor base and the guys who cover us here more information so they understand. And I think actions like articulating out exactly with a level of precision, SG&A actions that we're taking and what the quantifiable benefit that you can expect, both in the fiscal year and annualized are really important components of that. And I believe that will help people sort of understand how they can sort of close that gap. That would be my expectation. In addition to that, behind us results, and that's really what we're focused on. Vincent Caintic: Okay. Great. And last one for me, and I think this one is for Jonathan. Just wanted to maybe talk about the credit allowance percentage. So on that slide that we moved or that talked about the adjusted EPS and removing the onetime impact of the allowance percentage adjustment. I'm wondering then if that implies that the -- I think the 24% where it currently stands, if that's the right percentage we should be thinking about going forward. So I just want to be sure I understood that, that's -- we're now making a onetime adjustment and so 24% is the right place to be. Jonathan Collins: Yes. Thanks, Vincent, how are you this morning. Yes. I mean, if you go back in history, the allowance moves around within a range, right? And it -- there's a piece of it where we're looking at the portfolio itself and how is it performing. But there's also a piece of it where you're looking at the macroeconomic factors. And so we just came out of a period with government shutdown. We kind of came dangerously close to kind of SNAP benefits not happening and et cetera. If you look forward, the consumer, as Doug mentioned, is under stress. I don't know that we can say with confidence that 6 months from now, a year from now, like the macroeconomic environment, there's like a path to like 100% goodness. It doesn't necessarily mean that it's going to be bad or good or whatever. But there's some uncertainty there. I think we could all agree to that. And so some of that uncertainty is built into kind of our allowance. I would expect it to be within this historical range. Is it going to be exactly 24%? I don't know that I would commit to that. But I also wouldn't commit to like it growing significantly higher than what it is today. So I think it will sit within a range. I think we're currently in our kind of historical range as a percentage of receivables. And then time will tell with what happens with the macroeconomic environment. Douglas Campbell: I'd only add there on top of that, Jonathan, the -- it is a bit of a tug of war on that front where you have this deteriorating environment with the consumer. They're navigating and COs are ticking up a bit. There's no doubt that, that's happening. You also have, as every month and every quarter that goes by, improving quality of customer entering the portfolio. And then there's this qualitative overlay that Jonathan alluded to. And like as an example, one of those is a forward-looking outlook on interest rates and inflation. And last quarter, there were certain we were going to get cuts and now maybe not so much and maybe they're pushed into '26. And those things have an impact on what the provision and the allowance is going to stand at. And so we -- it's tough to really quantify that. But given that it's still under where it was a year ago and it's ticked up a bit, like I think it's moving in and moving it around in the ring that it should be, but it's really difficult to tell and understand what the outside environment is going to do that as well. Operator: And I'm currently showing no further questions at this time. This does conclude today's conference call. Thank you all for your participation. You may now disconnect.
Operator: Good morning, and welcome to the REX American Resources Third Quarter 2025 Conference Call. As a reminder, today's call is being recorded. [Operator Instructions] I would now like to turn the call over to your host, Mr. Doug Bruggeman, Chief Financial Officer of REX American. Please go ahead. Douglas Bruggeman: Good morning, and thank you for joining REX American Resources' Q3 2025 Conference Call. With me on our call today are Stuart Rose, REX's Executive Chairman; and Zafar Rizvi, REX's Chief Executive Officer. We'll get to our presentation and comments momentarily as well as your questions. But first, I will review the safe harbor disclosure. In addition to historical facts or statements of current conditions, today's conference call contains forward-looking statements that involve risks and uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect the company's current expectations and beliefs but are not guarantees of future performance. As such, actual results may vary materially from expectations. The risks and uncertainties associated with the forward-looking statements are described in today's news announcement and in the company's filings with the Securities and Exchange Commission, including the company's reports on Form 10-K and 10-Q. REX American Resources assumes no obligation to publicly update or revise any forward-looking statements. I'd now like to turn the call over to our Executive Chairman, Stuart Rose. Stuart Rose: Good morning, and thank you again to everyone for joining us. During the third quarter of 2025, REX American Resources continued to demonstrate the strength and operational expertise that has defined our company for over 4 decades. I'm pleased to report that we are making progress on operational milestones we set out to accomplish and continue to position REX for sustained long-term growth. Our third quarter results reflect our focus on solidifying our core business of ethanol production. Our strong results during the quarter benefited from supportive ethanol industry dynamics, especially export volumes and strong crush spreads. Our One Earth Energy facility expansion to 200 million gallons per year is continuing and is on track for completion in 2026. This expansion will significantly enhance our production capabilities and operational efficiency, contributing meaningfully to future performance. Additionally, we have begun examining potential benefits we can derive in the near term from 45Z tax credits. We are actively engaged with groups to assess our operations and assign a carbon intensity score to our production operations, which we expect to be below the threshold to begin earning credits. The third quarter demonstrated once again that REX's focus on operational excellence, strategic investments and disciplined capital allocation continues to deliver superior results. Our net income per share of $0.71 represents strong performance reflect in our team's exceptional execution and managing input costs and timely execution leading to strong margins. Our continuing strong financial results have allowed us to maintain our strong balance sheet, including approximately $335 million in cash, cash equivalents and short-term investments, even after the to-date spend of approximately $156 million on our capital projects for plant expansion and carbon capture of One Earth Energy. As we have consistently emphasized, our success stems from having great facilities, corn belt locations and most importantly, we feel the most skilled and dedicated team in the industry. Their attention to detail and market awareness continues to set REX apart from our competitors. I want to thank our entire team for their outstanding efforts this quarter and their unwavering commitment to excellence. Now I'll turn the call over to our CEO, Zafar Rizvi, to discuss our operational achievements and strategic initiatives in greater detail. Zafar Rizvi: Thank you, Stuart. The expansion of ethanol production at the One Earth facility continues to progress steadily and remains on track for completion and in operation in 2026. Alongside this project, we are advancing our evaluation of our carbon intensity score and expect favorable outcome as we incorporate assessment from multiple independent experts. Regarding the near-term benefits available under the 45Z program, we continue to position the company to capitalize on these opportunities while we wait final guidance from the treasury department. For our carbon capture and sequestration initiative, the EPA currently estimate that our Class VI injection well permit application will be finalized in June 2026. REX remains in active constructive communication with the EPA throughout this process. As of the end of the third quarter, we have invested approximately $155.8 million in our carbon capture and ethanol expansion projects. We remain within our revised combined budget range of $220 million to $230 million for both initiatives. I will now turn the call over to Doug Bruggeman to review our financial results. Doug? Douglas Bruggeman: Thanks, Zafar. During the third quarter of fiscal 2025, our ethanol sales volumes reached 78.4 million gallons compared to 75.5 million gallons Q3 2024. The average selling price for ethanol was $1.73 per gallon during the quarter versus $1.83 in the prior year. Dried distillers grain sales volumes were approximately 160,000 tons for Q3 with an average selling price of $139.93 per ton compared to 170,000 tons and $147.14 per ton in the prior year. Modified distiller grain volumes totaled approximately 21,000 tons with an average selling price of $57.03 per ton. Corn oil sales volumes were approximately 27.4 million during the quarter with an average selling price of $0.60 per pound. This volume was up from the prior year sales by approximately 17% and an increase in average selling price of approximately 36%, leading to an approximately 60% increase in sales revenue for corn oil. Gross profit for the third quarter was $36.1 million compared to $39.7 million in Q3 2024. This primarily reflects lower prices for ethanol and distiller grains. SG&A expenses were approximately $8.2 million for the quarter compared to $8.4 million in Q3 2024. Interest and other income totaled $3.2 million for the quarter compared to $4.6 million in quarter 3 2024, reflecting lower rates and lower investments. Income before taxes and noncontrolling interest was approximately $35.5 million compared to $39.5 million in Q3 2024. Net income attributable to REX shareholders was $23.4 million or $0.71 per diluted share compared to $24.5 million or $0.69 per diluted share in Q3 2024. We ended the third quarter with cash, cash equivalents and short-term investments of $335.5 million. REX continues to remain in strong financial position with no bank debt. I'll now turn things back over to Zafar. Zafar Rizvi: Thanks, Doug. Our 3Ps: profit, position and policy continue to guide our strategy and execution. This was evident throughout the third quarter. Profit. We have now delivered 21 consecutive quarters of profitability, reflecting the hard work, discipline and operational accidents demonstrated by our team every day. Position. We believe we are strategically positioning the company for long-term organic growth, reduced carbon intensity and enhanced value creation. Advancing our carbons sequestration project and core ethanol business will further strengthen our competitive position heading into 2026 and beyond. We also continued active engagement with the EPA regarding our Class VI well permit application. Policy. We're leveraging the near-term opportunities provided by the 45Z tax credit program to enhance earnings. We expect these benefits to increase as our ethanol production expansion and carbon sequestration facilities comes online and additional gallons qualify under the program. The third quarter was exceptionally strong across all key performance measures. Our core ethanol business benefited significantly from sustained robust export demand and reliable corn supplies. Last quarter, U.S. ethanol exports were running approximately 10% ahead of the 2024 pace. By August, the momentum has strengthened with export 14% higher than the first 8 months of 2024. According to the Renewable Fuel Association, we continue to expect 2025 to set a new record for U.S. ethanol exports. Looking ahead, the USDA project that corn production in South Dakota and Illinois for the 2025, 2026 harvest season will be among the highest result in recent years. This will continue to favor our business driving lower input prices. We are excited about the opportunities ahead as we close out the year and prepare for a successful 2026. We expect the fourth quarter to generate a higher net profit than last year's profitable fourth quarter. As we move into 2026, our strong balance sheet, no debt and expanding business opportunities position us well for another year of growth and improved performance. Now I would like to open things up for questions. Operator? Operator: [Operator Instructions] Our first question comes from Chris Degner with Water Tower Research. Christopher Degner: Good morning, and it looks like a great quarter. I just wanted a couple of questions for you. And kind of curious of your thoughts on key hurdles and timing as you look forward to the 45Z tax credit program. And if you can give us any incremental color on when we could expect some more updates on that? Stuart Rose: Zafar? Zafar Rizvi: Yes, Chris. As you know, the treasury has not issued a guideline so far. We're certainly waiting for the guidelines. Then also, there is a requirement for the prevailing wages and all those information calculation of CI score. We just want to make sure we have all the facts together, and we are reviewing these facts with different experts. And once we have all those numbers back, we will be able to -- next quarter, hopefully, we will be able to explain that how much tax credit we will be receiving. But at this time, we are not willing to really give any numbers. Christopher Degner: Sure. Okay. And then if you step back and think about some of the fundamentals of the industry, like it -- I'd be curious like your view on like the impact of tariffs and then crack spreads as you look forward into 2026. I know it's hard to forecast, but just curious on your view? Zafar Rizvi: I think the tariff is in the beginning, certainly there was a huge impact because we were concerned about Mexico and Canada export. Mexico is the largest importer of DDG and Canada is the largest importer of ethanol. So hopefully, those relations stay the same. I think that will be great. And -- but certainly, on the other side, we can see that Europe and several other countries are beginning to buy ethanol due to pressure from the tariff, our negotiation and others. So that's why we can see that ethanol certainly has -- January to August is approximately $1.4 billion. compared to last year, $1.2 billion. So certainly, there is a great impact -- positive impact on export of ethanol at this time. But on the other hand, I think we see some of those soybeans are not -- soybean or soybean oils are not shipped abroad or China is not buying. There is some impact on the corn oil prices, which has dropped a little bit and also there is some concern about the DDG export. So those are the weak side, but we certainly are very happy to see that ethanol export is increasing and we believe that will continue to increase in 2026. And also, we are very pleased with the, as you know, the corn production in Illinois and South Dakota. It seems to be all-time high, and we believe that will be a positive impact on our cost of production moving forward. Christopher Degner: We do. My family has a farm in Iowa, and it's been a good year. So it's -- as you think through like the carbon sequestration project that you're looking at, like -- how is like the permitting process going with the pipeline? And like is there -- I don't want to put you on the spot, but is there any other key hurdles that you can -- that had -- that you could see through with the Illinois state government? Zafar Rizvi: I think basically, as you know, there was moratorium through July 1st pipeline. And -- but we understand ICC, Illinois Commerce Commission is working on pipelines, all of those requirements, and they already have a couple of public hearings, and we believe they are certainly working on it. But we -- at this time, we really has no clear get guideline when they will start taking the application. But moratorium will be July 1 is the last day. So we certainly will be able to apply after that, if not the earlier. But you probably also know that we have all the easements for our 6-mile pipeline. That pipeline was really 6-mile pipeline. We built it because we just wanted to be away from the aquifer, Mahomet Aquifer. And that's the only reason otherwise, we really didn't need that pipeline. Operator: Our next question comes from Mason Bourne with AWH Capital. Mason Bourne: Just a couple for me. Stuart, I guess, in your prepared remarks, you mentioned recognizing benefits under 45Z and it sounds like you're not yet still sort of assessing where that -- where that score is to start and then where it can go from there. But is it fair to say that you believe you're going to be positively generating credits before the indirect land use change occurs at January 1, and then that would be an incremental step after that? Or is it still too early to say? Stuart Rose: As Zafar mentioned, we are working diligently on trying to obtain credits this year, but we don't know what the regulations are yet. They have not published them, but we will be prepared depending on what the -- they have not actually -- the land us change is correct, but they have not come out with a what qualifies as a carbon intensity score yet. So we cannot guarantee any credits for this year, but we are working on it diligently. Zafar's team, I don't know how many people he has working on it, including outside people, but a lot. And we hope, and I emphasize, hope to achieve credits this year, but we have no way of knowing whether we will or will not at this time. Mason Bourne: So that's something you could recognize retroactively. Is that your assumption? Stuart Rose: That's our hope. Yes. Yes, that's our hope. Mason Bourne: And then second for me on -- I know it's early on this as well, but ADM recently entered into an agreement with Google on some of their excess capacity. I know you guys are planning to have plenty of excess capacity in your carbon capture wells even on one alone, but potentially in all 3, if you have them operating. Just wondering if you could provide any thoughts there on your thinking there and any time line around -- obviously, I assume you get your operation online first. But just any thoughts on potential for partnerships or what that could look like? Stuart Rose: Zafar, do you want to answer that? Zafar Rizvi: Yes. I think, Mason, as you know, we are really trying to concentrate on the well #1 first. And certainly, for the well #2, #3, even for the well #1, we will have enough capacity to have the carbon sequestration from the third party. And we have been in contact with several people and several people have reached out to us recently and even in the past. But we don't want to make some commitment or contract up to the time we have received Class VI permit, and we have put the pipeline. All of those facts are taken care of it. After that, we believe that we will be able to get those -- still those contracts in the future. But at this time, we have really not negotiating with anyone because we are not there where we are supposed to be at this stage. And Mason, let me have that one answer that to you asked about the land use. Yes, our recent calculation, which we are looking at it, as you know, there is land use in this one and the next 2026, they're not going to be land use. We believe that we are already at a score, which can be really without land use, we will be able to qualify it, but we have to still do a lot of calculation to make sure the prevailing wages and other lot of factors and treasury guidelines is clear. Even I can tell you that even some of those accountants who is reviewing our data and information, they are not even sure is that a gross ethanol or is a net ethanol, that means it's a denatured ethanol, and undenatured ethanol will qualify. So there is several different ways we are doing all those calculations to make sure that the numbers are correct before we start talking about how many millions of dollars, et cetera, we are going to get that tax credit. Mason Bourne: That's helpful. And we appreciate your conservatism. So thank you for the details. Operator: We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Stuart Rose for closing comments. Stuart Rose: Thank you. Our quarter was very good, and we expect next quarter ethanol to outperform last year's fourth quarter, and we're continuing to make further progress as we just talked about and capturing 45Z credits. It's a tribute to all our employees, starting with our CEO, Zafar Rizvi, who is recognized by many of the, if not the, one of the top CEOs in the ethanol industry, including all of our employees, who we consider the best in the industry. We want to thank everyone for listening, and we look forward to talking to you after next quarter. Thank you. Bye. Operator: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
Operator: Good morning, and welcome to the Xtract One Technologies Fiscal 2026 First Quarter Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations Adviser. Please go ahead. Chris Witty: Good morning, everyone, and welcome to Xtract Ones' Fiscal 2026 First Quarter Conference Call. Joining me today is the company's CEO and Director, Peter Evans; and CFO, Karen Hersh. Today's earnings call will include a discussion about the state of the business, financial results and some of Xtract Ones' recent milestones, followed by a Q&A session. This call is being recorded and will be available on the company's website for replay purposes. Please see the presentation online that accompanies today's discussion. Before we begin, I would like to note that all dollars are Canadian unless otherwise specified and provide a brief disclaimer statement as shown on Slide 2. Today's call contains supplementary financial measures. These measures do not have any standardized meanings prescribed under IFRS and therefore may not be comparable to similar measures presented by other reporting issuers. The supplementary financial measures are defined within the company's filed management's discussion and analysis. Today's call may also contain forward-looking statements that are subject to risks and uncertainties, which may cause actual results, performance or developments to differ materially from those contained in the statements, that are not guarantees of future performance of the company. No assurance can be given that any of the events anticipated by the forward-looking statements will prove to have been correct. Also, some risks and uncertainties may be out of the control of the company. Today's call should be reviewed along with the company's consolidated financial statements, management's discussion and analysis and an earnings press release issued December 3, 2025, available on the company's website and its SEDAR+ profile. It is now my pleasure to introduce Peter Evans, the Chief Executive Officer of Xtract One. Peter? Peter Evans: Well, good morning, Chris, and once again, good morning, and welcome to all of our investors and all the analysts joining us today. We're going to start with Slide 4 and provide a little bit of perspective on the business and where we are. It seemed just weeks ago that we reported our Q4 results, and here we are once again to talk a bit about the momentum for the business and specifically the first quarter results for fiscal 2026. What I'm most pleased about overall is that we continue to be on track for a transformational year in fiscal 2026 for the performance. With revenue in the first quarter beating the prior year period. And as Karen will review further in a moment, recently increasing our total backlog to a new record of $53 million. What's pleasing to me is the quality of that backlog and the opportunities that have been signed. As we've always seen, sometimes signatures on contracts take a little bit of time, and we might have seen a little bit of top line softness, but we're pleased with the momentum that's behind that $53 million. We've also seen increasing demand for our Xtract One Gateway such that approximately half of the bookings in the quarter were from the education market for the Xtract One Gateway. This speaks volumes to us as a business and reaffirms the strategic investment that we made in the One Gateway. As the expanding interest in this groundbreaking application continue to take more and more traction in the marketplace, the product comprises a growing part of our overall backlog to deploy in this fiscal year. It is due to such demand that we have high confidence in the quarters to come and particularly as we've previously discussed, while we are ramping up our manufacturing partners' production capacity in order to meet this significantly higher demand than we originally forecast for the product. Building on the strong and accretive momentum of the Xtract One Gateway, we also continue to secure a new SmartGateway contracts in a very steady, consistent pace. We recently announced Nova Scotia Health care, and we continue to see more and more opportunities like that, which we are engaged-in and actively working. These wins further expand our already significant backlog, which continues to be actively deployed. Both the SmartGateway and Xtract One Gateway offer distinct capabilities that meet the needs of specific market segments are well aligned with their respective opportunities. This provides balance across our portfolio for further business predictability, and differentiated value for each of our customers with products specifically aligned to each vertical markets specific needs. Our phased deployment of larger, longer-term contracts provides us with greater visibility for the remainder of fiscal 2026 knowing how those phased deployments will roll out week-over-week, month-over-month and quarter-over-quarter, than we might have had in previous years. And given the most recent public offering that we just completed, our cash position and balance sheet is in the best shape ever, allowing us to further invest in business development and growth activities and further increase our production for both of our solutions in order to meet the customer demand. We remain on track for continued backlog growth for continued revenue acceleration and improved bottom line results, as we make continuous progress towards getting to cash flow breakeven in the near term. Let's now turn to Slide #5. I'd like to give some additional color on the continued rollout of Xtract One Gateway. The growing interest for Xtract One Gateway is evidenced by a regular and steady set of new bookings for the product. And as I just mentioned, it means a number of things to us. First, it is a testimony to the success of our sales organization who have actually responded to the inquiries and engaged school districts and other customers and providing numerous demonstrations in addressing the business approaches needed, to make sure that we are able to close the deal in a manner that addresses the customers' outcomes and requirements. Once we showcased our technology, we seem to find that there's a strong aggressive movement towards moving to the contract closure. Secondly, the backlog tells me that it underscores the acceptance and demand for our unique capabilities. In other words, potential customers are impressed with what we can offer versus our competitors in the marketplace. And as an interesting anecdote, I had a recent discussion with a school district who moved to deployment discussion based solely on a simple Zoom demo because the obvious benefits were visible to them, just by seeing the product versus competitive solutions that require an x-ray system. The capabilities are so obviously aligned to that school's needs that they decide to forgo further conversations with any alternatives. Thirdly, what the backlog tells me is it indicates that we, as a company, are able to commercialize a new system and roll it out while navigating through supply chain constraints that have challenged the marketplace for the entire year. And we're being able to do new product introductions in a meaningful manner and work closely with our suppliers to ramp up manufacturing to increase delivery of the product in a phased approach, so we can match our clients' requirements and increase installations in an efficient, productive manner over succeeding quarters. The interest level, I'm happy to report is much higher than I initially expected, and we as a company initially expected at this point. The schools where we've already deployed are very pleased with the product's efficacy and we're now turning those schools into very solid referenceable customers. In addition, we are on track with future installations at these school districts as well as new educational organizations every single month. Most pleasing to me and the business team is that we have closed approximately $15 million worth of Xtract One Gateway orders in a very, very short period of time. And we have a backlog of almost 100 systems that are pending installation, in addition, to the systems already installed previous to this call and previous to this time. Overall, I could not be more pleased with the product rollout, and we're on track to have our contract manufacturing expand production capacity further within our fiscal second quarter, which is critical to continue to grow the shipments of our very large -- to our very large and eager customers and also to strive driving more and more and more revenue growth for the business and meet our operating goals for fiscal 2026. We continue to have over $100 million in our qualified sales pipeline across both of the product lines, and we anticipate that will rise as the year progresses due to ongoing demand trends and the success of our products already on site, and both domestically and internationally. And most importantly, the referenceability of those installed customers to help us gain and close further customers. It's amazing to me how one school board can be very, very successful and very happy with our solution and they start telling all the other school boards. We're very aware of how these key school districts are ready to move forward with new contracts, and they're watching the deployments of the other schools to validate that indeed, we have the model put in place well and we're pleased to say that we do. While the market may slightly slow down to normal seasonal factors, related to things like holidays and closures of certain market segments and then reopening, our revenue should rise sequentially and remain on this trend for the latter half of fiscal 2026 as we continue to convert more and more of that backlog particularly around the One Gateway to more installations and more revenue. As I said last quarter, we are at the start of a major step function change for the business in both the scale and size of the company's operations, given our backlog, the increasing demand for our Gateway Solutions and the investments we've made in the past year to expand our suppliers' manufacturing capacity and the need to do that once again in this quarter. At this point, I'm going to turn it over to Karen to provide a more detailed discussion of our financial results. Karen, over to you. Karen Hersh: Thanks, Peter. I'm happy to review the financial highlights for our first quarter of fiscal 2026, which demonstrates a strong year ahead of us. Turning to Slide 7. Total revenue was approximately $4.6 million for the first quarter versus $3.6 million in prior year period. We're pleased to see sales up year-over-year and continue to anticipate higher top line growth going forward, with revenue back-end loaded for fiscal 2026, in line with production ramps, that Peter talked about. We expect sequential growth going forward and remain on track for a record year from a revenue perspective. As previously discussed, our revenue growth in previous quarters has been a phased development approach, which has been preferred by some of our larger clients, including school districts and healthcare facilities. This systematic structured deployment is still expected to result in higher revenue as the year progresses, and we're very excited to see coming quarters play out, particularly given the record backlog at the end of this quarter. In terms of our key markets, revenue for the first quarter was once again spread across numerous customers and industries with the largest contributors being the education and healthcare sectors. As always, this mix of business will continue to fluctuate and diversify given the order of acceleration and interest in our products across an expanding array of industry. Our gross profit margin was 58% for the first quarter versus 64% in the prior year period. As previously stated, margins were expected to be somewhat negatively impacted in the near term by costs related to the initial production and installation of the Xtract One Gateway. However, we expect this will improve over time with broader commercial deployment later in fiscal 2026, leading to operating leverage and efficiencies in our supply chain. That being said, the gross margin for SmartGateway remains healthy, and we do not expect market pressures to impact the SmartGateway in upcoming quarters for both upfront and subscription deals. Now turning to Slide 8. New bookings for the quarter were $8.4 million compared to the prior year quarter bookings of $4.2 million, of which a substantial portion of these were upfront contracts meaning that a majority of these new contracts will translate to revenue relatively quickly. As it can be seen from the bar chart, approximately 60% of our Q1 bookings were for the Xtract One Gateway, which speaks volumes for the increasing traction and higher demand for this unique product offering. It should come as no surprise given these orders that approximately 51% of new bookings were in the education sector this quarter, up from 44% last year, while 36% were in healthcare versus just 14% in the first quarter of fiscal 2025. The continued expansion into these markets reflects our diversification strategy as well as an excellent product market fit across both of our product lines as some sectors such as sports, entertainment facilities and certain healthcare facilities continue to prefer the SmartGateway application. We are aggressively pursuing a number of new industries and applications to further broaden our base of business and accelerate growth as we ramp up production this year. Moving to Slide 9. Our contractual backlog and signed agreements pending installation rose again to another record level, as Peter previously mentioned. At the end of the quarter, our backlog collectively totaled $53.2 million, almost double of last year's backlog of $26.9 million. This backlog was comprised of $14.1 million of contractual backlog with an additional impressive $39.1 million worth of signed agreement pending-installation. Approximately 2/3 of the signed agreements pending-installations are upfront deals with the remaining 1/3 being the subscription deal. Overall, we expect the majority of agreements pending-installation to be deployed within the next 12 months. Given our current total backlog of over $53 million and a substantial pipeline of opportunities reflecting strong bid activity and expanding interest in both of our Gateway products, we anticipate bookings to continue to increase, keeping us on track for record results in fiscal 2026. Now let's turn to Slide 10, which shows first quarter operating costs year-over-year for each of our key expense categories. Sales and marketing expenses were $1.9 million in the quarter versus approximately $1.7 million in the prior year period, reflecting increased business development initiatives across a wider array of industries while costs associated with R&D were $1.7 million in the quarter versus $1.8 million in the prior year period from continued streamlining of R&D activity. General and administrative expenses were approximately $2 million for the quarter versus $1.9 million last year. Overall, there was a modest increase in total operating costs year-over-year as we grew our backlog and invested in the rollout of Xtract One Gateway. We will continue to actively manage operating expenses while growing the business, demonstrating the scalability of our business model as we move forward on our path towards cash flow breakeven. Finally, on Slide 11, I'll discuss cash flow. During the quarter, the company had operating cash usage of $1.2 million compared with $2 million in the prior year period, and excluding changes in working capital, we spent $1.8 million compared to last year's $1.9 million. We ended the quarter with $9.1 million in cash and cash equivalents on hand. Subsequent to the quarter, in November, the company closed another successful public offering of a Bought Deal that raised aggregate gross proceeds of approximately $11.5 million, including the full exercise of an over-allotment option. This funds as with the prior raises will be used to fuel growth, which includes enhancing the production capability of our Gateways, as Peter alluded to earlier in the call and for general corporate purposes. Our balance sheet is the strongest it's ever been, which puts us in an excellent position to meet current and future demand for our weapon detection solutions. We anticipate fiscal 2026 will be a transformational year for the company given our backlog, increased interest in our products and an expanding array of target markets and the strength of our balance sheet. With that, as always, Peter and I welcome any questions investors may have. Operator: [Operator Instructions] And our first question today comes from Amr Ezzat with Ventum Financial. Andrej Vukovic: This is Andrej on behalf of Amr. Last quarter, you flagged customer side friction, construction delays, internal reorganizations, but also noted that deployment friction was easing and installation momentum was improving as you enter Q2. So I was wondering if you can update us on that and specifically what measurable indicators give you confidence that installation friction is, in fact, easing as we move through Q2 and into the rest of the year? Peter Evans: Yes. So let me add my first thoughts on that. Thank you so much. It's a great question. And in some cases, with some of these customers, we are starting to see things ease, particularly in those areas that are associated with the federal government. Things pause quite a bit due to some of the government cost-cutting measures earlier in the year, as we're starting to see some stabilization. We're starting to see things moving once again. So that's very, very pleasing to us with particular customers where we have contracted business, but they've been going through various reorganizational changes. In other cases, I think I might have mentioned, for example, a professional sports organization who is undergoing an arena kind of rebuild. We're still seeing that activity paused a little bit, but starting to now move towards conversations about how we can participate in things like CAD/CAM drawings and things. So some of these things take a little bit of time to work their way through but we are starting to see the easing and starting to see the movement of systems again to those delayed customers. Andrej Vukovic: Okay. Great. That's helpful. And switching gears on the One Gateway. You noted demand running ahead of expectations, clearly, a good problem to have and that you're doubling capacity by the end of Q2. Can you walk us through what specifically surprised you on the demand upside there, like whether it was higher unit count per customer, faster adoption in certain verticals or higher win rates or partner channel contributions or trial activity converting more quickly than you modeled? Peter Evans: I think it's a couple of things, sort of two, three thoughts immediately come to mind. When you introduce a new product to the marketplace, particularly hardware products, there's always a little bit of reticence of people to be the first adopters. They want to make sure that the hardware has got its kinks worked out. We all are familiar with the old analogy, don't be the first one to buy the new version of a car or the new iteration of a car model. And so I think there's always a little bit of that reticence. But once we have more customers out who can attest to the quality of the product, and there's that referenceability, it starts to alleviate any of those concerns. The second is that there has been, I think, a lot of organizations, particularly schools who want to deploy weapons detection systems, but there is air quotes, the laptop problem that has always plagued the industry. If 100% of the children are walking with a laptop and 100% of laptops are alerting, there's been all sorts of workaround solutions, whether it's bag inspections, X-ray machines, kids holding laptops above their head, that made the whole ConOps very clunky. And so as more of the early adopters for schools saw some of these issues, they tapped the brakes on further deployments. Well, now that they've had the chance to experience the One Gateway as a solution that overcomes those issues and is delivering on the vision of what they were expecting, there's been a pent-up demand that is suddenly coming to our door and asking us to get in their environment, do demonstrations and see what we can do about deploying the product. So I think what we're seeing is the initial early adopters had some disappointments with the broad marketplace solutions. They slowed down some of the adoption, but the pent-up demand never went away, and we're being the generous beneficiary of that pent-up demand. Karen Hersh: I would also add to that, that the size of the deals, which is one of the things you mentioned is definitely turning out to be larger than we perhaps initially anticipated. The customers that are approaching us have very, very large installations. These districts are large. We're also seeing other different school boards elsewhere that have very, very large installed base. So I think that was something that we maybe hadn't initially anticipated when we were sort of doing our initial projections. Andrej Vukovic: Okay. Great. And one last one for me on the bookings that came in at a healthy $8.4 million in the quarter, double versus last year. I know you mentioned half the bookings were from education. I'm wondering if you can break out the remaining vertical composition behind that bookings figure? And obviously, given the growing contribution from education, is there any identifiable seasonality in terms of deal flow, for example, when districts tend to evaluate trial and sign contracts that we should consider when interpreting quarterly bookings? Peter Evans: So let me add my few cents here -- or go ahead, Karen. You go first, and then I'll add my thoughts, please. Karen Hersh: Sure. I'll just give a little bit of a breakdown. It's -- it wouldn't take long. The education, as you said, was just over 50% of the bookings this quarter. Healthcare came in really strong with 36%, and then really, it was interesting -- an interesting split between nonprofit, real estate, automotive, these were sort of the areas. I think it really is a testament to the fact that we just have -- every quarter, we see a different mix of industry and the applications just continue to grow, and new ones keep popping up all the time in areas that we hadn't really anticipated. So definitely strongly towards education and health care this quarter. But as I said, all kinds of interesting things like real estate and nonprofit that are also showing up on the board. So I'll turn the rest over to you, Peter, from there on. Peter Evans: Yes. And to kind of answer the question, one would expect that there might be some seasonality, particularly for things like schools. Schools wanting to deploy in the July, August time frame before the kids come to back to work. you would expect that, but it's not true. We are actively engaged just this month alone, I can think of probably 6 different school boards that we're engaged with, with demos, if not more. And so there's interest throughout the year and once they've determined a solution, they go apply for the grant money. So there isn't really seasonality in health care organizations. There isn't seasonality in manufacturing. There is not some seasonality in schools. If anything, we might see it with a little bit with budget applications in office areas and also with sports arenas and stadiums, who tend to get their budgets on a certain period of time, and that's when they start spending. But overall, if there's anything around seasonality, I'd say it's really the sports stadiums. Operator: And our next question comes from Scott Buck at H.C. Wainwright. Scott Buck: Peter, I was hoping to get a little more detail on gross margin and kind of the headwinds you're facing there in terms of ramping up a new product. Is it quality control issues with these initial machines? Is it just volumes? What kind of added color can you provide there? And then what can we be thinking about in terms of kind of run rate gross margin. Can we get back to 70-plus percent on a regular basis? Peter Evans: Yes. So good question, Scott. It's good to hear from you again. I hope you're doing well. The first part of the answer is like any new product, as you add more volume, you get buying leverage on your supply chain, so the cost of parts goes down with higher volumes. You also get buying leverage on your subcontract manufacturer. When they're initially building the first 10 products, for example, it's a little bit more hand managed, a little more costly. But when you get to a run rate, we're just kind of cranking through tens or hundreds of systems and just think like a Henry Ford's manufacturing line, you start to get a lot of cost efficiencies, not only on the labor, but on the time it takes to build the system, as well as the leverage on the supply chain. So you start to see the overall gross margins for the bill of material cost, if you will, and the assembly costs decreasing over time. We saw that with the SmartGateway probably 3, 4 years ago. We were in mid- to high 50s, and we're now kind of bumping up to 70s, and we expect the same thing to happen with the One Gateway over time. There's nothing about it that is unique that we can't repeat the same sort of volume -- critical volume that once we get to that kind of that flywheel going, that we're not going to see the bill of material costs go down as well as the support cost, the selling cost and any other thing that we add to our cost of sale. Scott Buck: Perfect. That's very helpful, Peter. And then my second question, I'm just kind of curious if you could give us an update on what you're seeing outside of North America. It seems like things are pretty local-centric at the moment, but curious what kind of momentum you might be seeing in Europe or even Asia? Peter Evans: Well, Scott, if we were face to face, you'd see me smiling to myself right now with that question. Just having this conversation with Karen. As a company, we've got demand where I'm starting to look at, okay, this week in January, how do we get to 4 different countries and do those properly, with some very, very compelling activities. Just this past week, I saw a note out of Australia, they're working on Jack's law, which is their variant of Martyn's law out of the U.K. So the demand for weapons detection solutions globally is expanding and expanding very rapidly. We are seeing our business take off very well in the U.K. and we're starting to build a very quality pipeline there as well as Asia. So the demand is there. I'd say it's probably lagging what we're seeing in North America by 1 year or 2, but it's picking up momentum. Operator: [Operator Instructions] Our next question comes from [ John Hyde with Strategic Investing Channel ]. Unknown Analyst: Peter, Karen, first one I had was on One Gateway in particular. You guys -- I think we know SmartGateway-wise, you guys have said that you are not production constrained. But will it be safe to say that with One Gateway right now, you guys are? Peter Evans: There's a reason that we're investing in increasing the capacity, John, and that's because the demand is outstripping the manufacturing capacity today. And that's why we're working very closely and very quickly on doubling that capacity. And as demand increases, we will double capacity again. So I think the capability to expand assuming the demand is there, but we're not going to overinvest in underutilized manufacturing capacity until we see the demand that -- and we have those kind of early sensors, if you will, that are out there watching the pipeline, watching the quality of the pipeline so we can make those decisions and try and expand that capacity within a quarter. Unknown Analyst: Okay. That's good to hear. And then on the One Gateway as far as outside of schools, obviously, schools right now is kind of your main market there. But outside of schools, when we think about things like anti-theft, distribution centers, things like that. Can you give us any updates, anything that you're seeing trends, anything like that? Peter Evans: I'd say that where we're seeing the kind of after schools, the next kind of highest level of interest is in convention centers. There is a strong interest in antitheft, but that's still an early application and a lot of folks are working their way through what does that mean to their business operations and the changes. And in many of these environments where you think about antitheft, you've also got considerations for the employees, for the unions and other items that have to be worked through. So it's not an overnight sale into antitheft for distribution sales centers, but I think it's going to be a very, very strong market for us, and we're engaged. It will just take a little time for it to mature. Operator: And our next question comes from [ Stephen Garcia ], Private Investor. Unknown Attendee: Mr. Evans and Ms. Hersh, I just wanted to ask about the bookings chart that you guys had on Slide 8. I noticed that quarter-over-quarter, we kind of see how it's under $5 million in bookings and then over $10 million and then under $5 million again, then over $10 million. And the last quarter, we see kind of -- we're moving upwards here on this graph, which looks good. But I was just wondering if you can maybe kind of give us a little bit more information on the nature of that pendulum there. Is that maybe some seasonality that you guys are noting in the industry, just market conditions? Or does it have something to do with the way Xtract One is going about pursuing these bookings that's kind of having it move in this pendulum direction? Peter Evans: Well, I'll give my quick views on that. Karen, I invite you always to add your thoughts too. But sometimes, Steve, first off, it's a great question, Steve. And if we could force customers to sign exactly when we want them to, that would be a wonderful skill. But sometimes internal approval processes with customers take a little bit longer than we would expect. 3, 4, 5 deals or 1 very large deal for a school district that we are expecting to close within the quarter might slip a week or 2 or a month. And that's okay because those businesses haven't gone away. Their interest in Xtract One hasn't gone away. Just a time for them to get through their reviews of contracts or, in some cases, one customer that I know that we're working with quite closely. They want to make sure they've got everything figured out in terms of the hiring of staffing that they want to add to their security organization, going through all their training activities, going through all the internal policy decisions. And so sometimes, we -- like we've got a very, very healthy pipeline. We spend a lot of time kind of forecasting what will happen when, but sometimes there are things beyond our control where a deal might slip from one quarter to another. So you see a little bit of that pendulum swing. Over time, as we continue to grow, we expect that to smooth out with a larger and larger set of customers that we're engaged with. Unknown Attendee: Appreciate the extra information there. Peter Evans: Thank you, Steve. The headline that I would say, is the takeaway. The deals never go away. Sometimes they just take a little longer. Operator: And there appear to be no further questions in the queue. So I'll turn it back to Mr. Evans for any closing remarks. Peter Evans: Well, first off, everyone, again, it seems like we were just talking a few weeks ago. I cannot emphasize how pleased I am with where we are as a business, how pleased I am with where we are with One Gateway and the demand that we're seeing. It's -- we're very, very busy, but it's good, busy. I smile every morning when I wake up when I see all the demand that's coming from our customers, and now it's just a matter of us continuing to execute. Thank you, everyone, for your continued support. Thank you, everyone, for taking the time out of your day to join us today on this call. And we look forward to the next call and continue to provide further updates through announcements in the press and these earnings calls. Operator: Thank you, sir. This 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, ladies and gentlemen. Welcome to the Zumiez, Inc. Third Quarter Fiscal 2025 Earnings Conference Call. [Operator Instructions] Before we begin, I'd like to remind everyone of the company's safe harbor language. Today's conference call includes comments concerning Zumiez Inc. business outlook and contains forward-looking statements. These forward-looking statements and all other statements that may be made on this call that are not based on historical facts are subject to risks and uncertainties. Actual results may differ materially. Additional information concerning a number of factors that could cause actual results to differ materially from the information that will be discussed is available in Zumiez filings with the SEC. At this time, I will turn the call over to Rick Brooks, Chief Executive Officer, Mr. Brooks? Richard Brooks: Hello, and thank you, everyone, for joining us on today's call. With me today is Chris Work, our Chief Financial Officer. I'll begin with remarks about our third quarter performance and the momentum we're building as we head into the holiday season before discussing our strategic priorities. Chris will then take you through the financials and our outlook for the balance of the year. After that, we'll open the call to your questions. We're very pleased with our third quarter performance delivering top and bottom line results that were up meaningfully versus last year and exceeded our expectations. Comparable sales grew 7.6% on top of a 7.5% increase in the year ago quarter, representing our sixth consecutive quarter of positive comparable sales growth. Once again, it was our North American business fueling our performance as comps in the region accelerated to double digits, bolstering our confidence heading into the critical holiday season. After a successful back-to-school period, sales remained strong throughout the quarter, reflecting the effectiveness of our merchandise assortments and attracting customers who pay full price even during less busy seasons. Encouragingly, our third quarter comp performance was driven by contributions from multiple areas of our business, led by women's and hard goods, which were up strong double digits along with low to mid-single-digit gains from both accessories and men's. High single-digit comps and robust full price sales boosted gross margin, which combined with improved expense efficiency raised operating income significantly year-over-year. Earnings per share reached $0.55 in the quarter, well above the high end of our guidance of $0.29. Looking forward, we are increasingly confident in closing out the year with strong holiday results. The fourth quarter is off to a good start with comparable sales through this past Tuesday, up 6.6%, including an 8.7% comp gain over the Black Friday, Cyber Monday period, which bodes well for the remainder of the holiday season. We are pleased with the momentum we have seen in our results as the year has progressed and are encouraged that we're now seeing comparable sales growth on top of comparable sales in the prior year. We believe that our strategies have the company well positioned to build on our progress over the near and long term. Due to this, we remain focused on the same 3 strategic priorities that have driven our success. First, driving revenue growth through customer-focused strategic initiatives. Our commitment to refreshing our product mix with innovative, distinctive offerings continues to generate exceptional customer response. Momentum from introducing over 100 new and emerging brands annually has carried forward into 2025 with these new and emerging brands representing an increasingly important component of our sales mix and validating our merchandising strategy. Private label performance remains a standout success story, continuing to reach new heights and representing our highest penetration levels in company history. This sustained expansion demonstrates organization's ability to identify emerging trends and create compelling products that resonate with our customers, while simultaneously enhancing our margin profile. Our investments in delivering exceptional customer experiences across both physical and digital touch points, continue to yield results. The enhanced staff development programs and technological capabilities we've implemented allow us to engage with customers through increasingly personalized and meaningful interactions, strengthening the relationships that have been the foundation of our success. Second, sustaining our rigorous commitment to profitability optimization across our geographic footprint. Within North America, our premium pricing strategies continue to support both margin expansion and market share growth. While the operational improvements we've executed throughout the year are generating meaningful benefits. Our continued focus in this area is key to establishing a more efficient and profitable business framework that positions us for sustained success. Regarding our international operations, while Europe continues to face challenging market conditions, we remain committed to our long-term strategy in these markets. We're actively working to drive revenue through our distinctive product offerings, while maintaining our commitment to premium pricing and disciplined expense management. While European comparable sales are down low single digits, the trend line improved from the second quarter, and we continue to see product margin gains through disciplined full-price selling. We have confidence in the long-term potential of these markets, particularly given our ability to identify trends locally in each of the markets before they expand internationally. Third, capitalize on our solid financial foundation to manage volatility by funding strategic expansion. Our financial position remains exceptionally strong, providing us with the flexibility to continue investing in our strategic objectives, while delivering value to shareholders. This financial stability enables us to navigate the ongoing uncertainties in the macro environment, while simultaneously positioning the company for long-term growth. Despite operating in an environment characterized by economic volatility, evolving trade relationships and global instability in certain regions, I'm increasingly confident in our ability to generate value for all of our stakeholders. The fundamental strategies that have powered our success throughout our history, continue to demonstrate the relevance and our team's proven adaptability and execution capabilities fuel my optimism about our trajectory. Our direction remains clear and consistent, maintain our dedication delivering distinctive fashion-forward merchandise through customer connection strategies that have driven our growth, while preserving the operational discipline that has strengthened our financial performance. We've demonstrated our resilience through previous market cycles, and I'm confident we're strategically positioned to continue that tradition. Before turning things over to Chris, I want to express my appreciation to our entire organization for their continued commitment and adaptability. Your dedication to our values and our customers remains the foundation for all of our achievements. With that, let me hand things over to Chris for our financial review. Christopher Work: Thanks, Rick, and good afternoon, everyone. I'm going to start with a review of our third quarter results. I'll then provide an update on our fourth quarter-to-date sales trends. Third quarter net sales were $239.1 million, up 7.5% from $222.5 million in the third quarter of 2024. Comparable sales were up 7.6% for the quarter. As Rick mentioned, the primary driver was our North America business, which shows outside strength even as macroeconomic uncertainty spurred by global trade policy continues. For the third quarter, North America net sales were $202.8 million, an increase of 8.6% from 2024. Other international net sales, which consist of Europe and Australia, were $36.3 million, up 1.7% from last year. Excluding the impact of foreign currency translation, North America net sales increased 8.7% and other international net sales increased 3.1% year-over-year. Comparable sales for North America were up 10%, marking the seventh consecutive quarter of comparable sales growth in the region. Other international comparable sales declined 3.9% in the third quarter, but showed sequential improvement from the second quarter. From a category perspective, women's was our largest positive comping category, followed by hard goods, men's and accessories. Footwear was our only negative comping category. The consolidated increase in comparable sales was driven by an increase in dollars per transaction and an increase in transactions. Dollars per transaction were up for the quarter, driven by an increase in average unit retail, while units per transaction were roughly flat year-over-year. Third quarter gross profit was $89.8 million, up 14.7% compared to $78.3 million in the third quarter of last year. Gross profit as a percentage of sales was 37.6% for the quarter compared to 35.2% in the third quarter of 2024. The 240 basis point increase in gross margin was primarily driven by 110 basis points of leverage in store occupancy costs on higher sales and the closure of underperforming stores, 100 basis points of improvement in product margin and 30 basis points of benefit from lower inventory shrinkage. SG&A expense was $78 million or 32.7% of net sales in the third quarter compared to $75.9 million or 34.1% of net sales a year ago. The 140 basis point decrease in SG&A expense was driven by a 110 basis point decrease in non-wage store operating costs and 80 basis points of leverage of store wages tied to higher sales and the closure of underperforming stores. These benefits were partially offset by a 40 basis point increase related to annual incentive compensation. Operating income in the third quarter of 2025 was $11.8 million or 4.9% of net sales compared with operating income of $2.4 million or 1.1% of net sales last year. Net income for the third quarter was $9.2 million or $0.55 per share. This compares to a net income of $1.2 million or $0.06 per share for the third quarter of 2024. In the third quarter of fiscal 2025, we benefited from a onetime tax items, which increased diluted earnings per share by approximately $0.09. Our effective tax rate for the third quarter of 2025 was 26.1% compared with 63.4% in the year ago period. The year-over-year decrease in the effective tax rate was primarily driven by improved operating results, the allocation of losses across the jurisdictions in which we operate and the previously mentioned onetime tax item. Turning to the balance sheet. The business ended the quarter in a strong financial position. We had cash and current marketable securities of $104.5 million as of November 1, 2025, compared to $99.3 million as of November 2, 2024. The increase in cash and current marketable securities over the trailing 12 periods was driven primarily by $50.5 million in cash provided by operating activities and the release of $3 million in restricted cash. This was partially offset by share repurchases and capital expenditures of $38.3 million and $12.5 million, respectively. As of November 1, 2025, we have no debt on the balance sheet. During the third quarter, we repurchased 300.000 shares at an average cost, including commission of $18.61 per share for a total cost of $5.4 million. Fiscal year-to-date through November 1, 2025, the company has repurchased 2.7 million shares at an average cost, including commission of $14.18 per share and a total cost of $38.3 million. As of November 1, 2025, we had $1.7 million remaining on the $15 million repurchase authorization approved by the Board on June 4 of this year. We ended the quarter with $180.7 million in inventory, down 3.5% compared with $187.2 million last year. On a constant currency basis, our inventory levels were down 5.1% from last year. We feel good about our current inventory position. Now to our fourth quarter-to-date results. Net sales for the 31-day period ended December 2, 2025, increased 7.5% compared to the 31-day period in the prior year ended December 3, 2024. Comparable sales for the 31-day period in December 2, 2025 were up 6.6% from the comparable period in the prior year, and we are seeing changes in foreign exchange positively increased total sales growth by approximately 1.7%. From a regional perspective, net sales for our North America business for the 31-day period ended December 2, 2025 increased 6.7% compared to the 31-day period ended December 3, 2024, while our other international business increased 10.6%, excluding the impact of foreign currency translation, North America net sales increased 6.7% from the prior year, while international net sales increased 2.5%. Comparable sales for North America increased 7.8% for the 31-day period in December 2, 2025 compared to the same weeks in the prior year, while comparable sales for our other international business increased 2.6%. From a category perspective, hard goods was our strongest comping category followed by women's, accessories and men's. Footwear was our only negative comping category quarter-to-date. The increase in comparable sales was driven by an increase in dollars per transaction, partially offset by a decrease in transactions. Dollars per transaction were up for the period, driven by an increase in average unit retail and an increase in units per transaction. With respect to our outlook for the fourth quarter of fiscal 2025, I want to remind everyone that formulating our guidance involves some inherent uncertainty and complexity and estimated sales, product margin and earnings growth given the variety of internal and external factors that impact our performance. This is even more pronounced in today's environment with the current tariff situation that adds additional uncertainty and complexity to pricing and the potential to limit the ability of our customer to continue to spend. Our recent trend line in North America has been very encouraging and provides confidence as we head into the heart of the holiday selling season. That said, we think it is prudent to balance our current domestic momentum with some near-term conservatism given the general uncertainty in the macro environment and recent trends where we have seen nonpeak consumer traffic soften. We are anticipating total sales will be in between -- sorry, will be between $291 million and $296 million for the 13 weeks ended January 31, 2026, representing sales growth of 4% to 6%. Total comparable sales are planned to be in the 2.5% to 4% range. This reflects continued strength in North America and comparable sales planned in the 4.5% to 6.5% range. Comparable sales in our international business are planned to be tougher as we anniversary promotional trends from the fourth quarter of 2024. Internationally, we expect comparable sales to be down in the low single digits, with overall growth in product margin dollars year-over-year as we continue our efforts to drive full price selling. For the fourth quarter, we are expecting product margin to increase modestly from the fourth quarter of last year. Consolidated operating income in the fourth quarter is expected to be between 8% and 8.5% of sales, and we anticipate earnings per share will be between $0.97 and $1.07 compared to EPS of $0.78 in the prior year. We estimate that our fourth quarter diluted share count will be approximately 16.5 million shares, which excludes any stock repurchases beyond the end of the third quarter. Regarding full year 2025 results, we have performed well in North America during the important back-to-school season and start to the holiday shopping, which is generally a reasonable indicator for overall holiday performance, but continue to experience headwinds with our international business. Overall, borrowing a significant downturn in the economy for the full year, we believe that we'll see year-over-year total sales growth between 4.5%, 5%, and despite the closure of 33 stores in fiscal 2024 and approximately 21 store closures planned primarily in late 2025, which combined, are estimated to have a negative impact on sales of roughly $15 million for the year. We anticipate 40 to 50 basis points of growth in product margin in 2025 on top of 70 basis points of improvement in fiscal 2024. We anticipate driving additional gross margin leverage through other expense categories such as occupancy, distribution and logistics, and finally, we believe that we can hold our 2025 SG&A costs relatively flat as a percentage of sales with our fiscal 2024 results through continued focus on expense management, while also investing in important long-term strategic initiatives. This is inclusive of the previously mentioned $3.6 million settlement of a wage and hour lawsuit in California as well as meaningful growth in our incentive costs on stronger performance. Combined, these expectations will drive a year-over-year increase in operating margins and net profit for fiscal 2025, with anticipated earnings per share between $0.57 and $0.67 compared to a loss of $0.09 in 2024. Included in these fiscal 2025 expectations are the following: 6 new store openings during the year, including 5 in North America and 1 in Australia. We also plan to close approximately 21 stores in fiscal 2025, including up to 18 in the United States, 1 in Canada and 2 in Europe. We expect our capital expenditures for 2025 to be between $10 million and $12 million compared to $15 million in fiscal 2024 and $20.4 million in fiscal 2023. We expect that depreciation and amortization, excluding noncash lease expense, will be approximately $22 million, in line with the prior year. And while the effective tax rates have fluctuated significantly by quarter, we anticipate our full year effective tax rate will be roughly 51% to 54% in fiscal 2025. We are currently projecting our diluted share count for the full year to be approximately 17.2 million shares, which excludes any stock repurchases beyond the end of the third quarter. And with that, operator, we'd like to open the call up for questions. Operator: [Operator Instructions] Our first question will come from the line of Mitch Kummetz from Seaport Research Partners. Mitchel Kummetz: Rick, maybe we can start on hard goods. Could you elaborate on what's driving the strong performance there. I think you said it was double-digit comp in the quarter, and it seems to be your leading category for 4Q to date. I mean, the bulk of your hard goods business, if I recall, is skate. I'm wondering if you're getting any contribution from snow in Europe? Or what kind of trends in skate are you seeing in the U.S. that's driving this? Richard Brooks: Thanks, Mitch, for the question. The driver here to be clear is skate. And it is true across our global regions here in North America as well as improvements in Europe and Australia, too. And I think what we're finally seeing, Mitch, is the reversal of a multiyear negative trend, which has been very painful for us over the last few years. And as you know, and we've discussed in 2020, we reached an all-time high, I think, like a lot of things with bikes, hiking, camping gear, all so much volume got moved into 2020, things you could do outside on your own because of pandemic. And our skate hard goods business at that point reached an all-time high for us. And here in '24, we reached -- in '24 reached an all-time low. So I think what we're finally seeing, Mitch, is a turn in that business. And we're cautious, optimistic now that we're going to see that turn play out over the next few years as we typically would in a new skate hard goods cycle. We'll have to see how that goes on holiday though. And our holiday typically is a good -- and as reflected in November, typically is a -- skate is a good gift-giving category in holiday. So I feel, again, optimistic about how we're positioned there. But I think Mitch this was the long awaited after 4 painful years of massive declines in skate hard goods, this is the long-awaited turn that we've been looking for. Mitchel Kummetz: That's helpful. And then Chris, on the fourth quarter outlook, you guys were obviously performing well through the first 31 days of the quarter. What are your comp assumptions for the balance of the quarter? I mean, I think you said that you're taking a conservative approach just based on some consumer uncertainty. But can you kind of fill us in on kind of what sort of comp is embedded over the balance of the quarter to get to your guide for 4Q? Christopher Work: Yes. I think, Mitch, as we think about the guide, we are assuming on the North America side, that it will just be a little bit softer than what we saw here in November. We saw good November. Obviously, highlighted, as Rick pointed out in his commentary by the Black Friday and Cyber Monday weekend was our strongest point, but we would expect it to slow a little bit here in the interim weeks between Black Friday, Cyber Monday and obviously, the important holiday week right at the end of December. So we are planning just a slight deceleration from November for North America. And on the Europe side, we're really encouraged by where November came in positive comparable sales and margin growth as well, really magnifying the impact to product margin dollars. But we also know, as we commented in the call that we had some promotional activity in December and January of last year, and that resulted in a benefit to sales, but obviously a detriment to margin. And so as we look to anniversary in 2025, we are looking for that trend line to decelerate and turn negative again after being positive in November. But at the same time, driving product margin dollars. So what you would expect to have product margin increases that would offset that sales decline. And that's what we are planning the business at. So the run rate from here for December and January is a negative comp in Europe that would offset those gains that we had in November. Mitchel Kummetz: Got it. And then on the private label business, just maybe speak to the performance in the quarter, where is the penetration today? And how much contribution are you getting from private label in terms of your product margin? Christopher Work: Yes, I'll take a shot at some of the -- quantifying it and then let Rick add whatever he'd like to add. I mean we are incredibly encouraged by our private label as we've talked about for a number of quarters here. And I think what we're really proud of our teams here is their ability to drive trend. I think that we are seeing more and more customers come into our store, asking for our private label brands because they see them as brands and they're willing to pay full price for the value and what they see in those brands. And so that's an exciting thing for us. As you pointed out, we have seen continued penetration in private label. It's up just right around 200 basis points year-over-year to date, meaning it's growing 2 full percentage points as a percent of our overall sales. So really happy with that and happy with how the business is trending. It does run at a higher product margin, but it also is part of our overall ability to continue to add value for our customers, too, where we run 4 for $135 is a promotion, which is 2 tops and 2 bottoms for $135, and that's something that resonates with our consumer. And while we have some branded product in there, it's primarily our private label product that's driving that. So really happy with the trajectory of where private label is at. Richard Brooks: And I'd just add to Chris' comment, Mitch, that it's also -- it's more than -- it's really about a 5-year window here of where we've really worked hard at private label, reinvented our trend process, internally in the organization. And I think what you're seeing is a really great collective effort of our entire organization around what we believe is a requirement now of most new brands and the speed of brand cycles. Most new brands never get to doing cut and sew product. They're screenable businesses. So we have committed ourselves to owning that business through our owned brands. And then the only last point I just want to make that Chris echoed here is we're a full price, full margin here. And I think in these categories, these cut and sew categories in our private label business, I mean, we're in some cases, we're the premium price player amongst our competitors in the market. So it really says we're doing some special for customers. Mitchel Kummetz: And are you seeing more strength on the women's side than the men's? And is that contributing to the outperformance of women's right now? Or is that not really the situation? Richard Brooks: We have good strength across our private label brands in both men's and women's. The mix is different in terms of penetration, but there's good strength in both sides. Operator: And our next question is of the line of Jeff Van Sinderen from B. Riley Securities. Jeff Van Sinderen: Just a follow-up on Mitch's questions on private label. Maybe I missed it. Did you give the penetration of private label roughly what that is now? Christopher Work: Yes. Year-to-date, we're running right just under 31% of total product and to Rick's point earlier, 5 years ago, we were right around 11% or 12%. So we have seen a large run in private label. Jeff, you've been around the story for some time. We've been over 20% in our past. In fact, we were over 20% as recently as 2015. And we saw that decrease that 11% to 12% across the end of the last decade, really on a heavy brand cycle. And now I think we're seeing our private label drive higher numbers than we've seen in the past because I think it's really hitting on trend. Jeff Van Sinderen: And so just -- I know this is a tough question, but where do you think private label penetration peaks out? Does that go to 40? Or is it -- are we kind of probably -- maybe you didn't expect it to get to 31, I don't know. Christopher Work: I think it's a really good question, Jeff. And one, obviously, as you would expect, we spent a lot of time talking internally. But it will go where the customer wants it to go. I think, is kind of our answer here. I mean, we really appreciate working with our brands and the relationship we have with brands. And as we think about the cycles I laid out on your first question, I mean, when we went from 21% to 11% we weren't trying something different. We just saw brands really accelerate and saw brands become more important to our customers. And that's the direction we went in. I will say we grew product margin during that period too. And of course, in this cycle that we're in, we're seeing our private label brands really take off. And along with some of our brands. I don't want to paint any picture that our comp trajectory is just private label. We definitely have brands that mean a lot in this cycle. But I think we'll kind of let it go where the customer wants it to go, but I don't see some situation where we are more predominantly private label in our stores or anything like that because I think the branded element of what we sell is so important to what we're doing, and it's important to who our consumer is. I mean, you have to remember, this is a consumer that wants to individuate and be unique and different and we've talked over time about 20% to 30% turnover in our top 10 and top 20 because they're on to what's next. And that's an exciting thing about what we sell. It's also a challenging thing about what we sell because you've got to bring in newness. And I I'm just really proud of our buying team that they're able to do that both across our private label to bring in newness and also our brands. Richard Brooks: And I would just add to Chris' comments, Jeff, that I agree with everything you said, and I'll just give you maybe a context is we will have another brand run again. As gate goes off, it's low, it's almost -- it is for us a completely a branded product cycle in skate hard goods. So we'll have runs there. So I think we may see situations where penetration looks like it's going down, but I don't think dollars are going to go down in private label. We'll still grow our business from a dollar perspective. So I think we'll have brand cycles, but I think where we dominate with our owned brands, we'll still be able to grow the business on that side of the business. So it will just be a shift in mix relative to the strength of branded cycles. Christopher Work: It's a really good point because footwear is in that same bucket. Where in footwear, we just don't do private label. So we have a large chunk of our business that is going to be branded. Jeff Van Sinderen: But Footwear has been kind of negative lately, correct? Christopher Work: No doubt. This has been our toughest category. Yes. Jeff Van Sinderen: Okay. And then -- so let me ask you this, whoever, which one of you wants to answer. What -- or who do you think you're taking market share from in North America? Do you think it's from the independents? Do you think it's from -- I mean, wherever you feel like however you want to answer that question. And then also, do you think that the demographic you're selling to is changing or evolving? Do you think you're picking up new customers with more private label, maybe more on the women's side? Maybe just I don't know if you give us any thoughts around those ideas. Richard Brooks: Yes, I'll start, and Chris can add on, Jeff. I mean, we are laser-focused on our core customer and that the same core customer we've always been focused on, which is a young person, as Chris said a moment ago that wants to individuate and self-express their identity, they move through adolescent more so than their broader age demographic. So where we're, I think, benefiting is from this, and we may be drawing some people into that because of the faster nature of how I think how forward we are on trend. We may be trying some broader people. But I want to be clear, our focus is on our core consumer. And I think that's always a winning strategy as you think about how you serve your customers. You've got to start with your core consumer and hyper-serve them in this world. And that is our focus. And yes, maybe we are picking up in other areas, but it's because we're winning with, I think, what is one of the most influential consumers in the marketplace today, the person who's willing to lead on trend, that's our core consumer. And they may be bringing others along with them because of our ability to execute on behalf of that core consumer. Jeff Van Sinderen: Okay. And then I'm sorry, on taking market share, any thoughts on who you might be taking some share from? Richard Brooks: I don't have any significant thoughts on that. I think what's happened in -- and again, let's be clear, I think most of our gain, as Chris just laid out here, we've had some. We're starting to see some small transaction gains, but most of our gains has been through executing in, I think, on trend, partnering with our great brand partners and most of our gains have been driven by AUR over the last year, 2 years actually. Now I think we're starting to win some transactions. So I'm not sure -- I think we're reflecting the reality of the market that we discussed about the volatility of the market, too. And I think what it really speaks though, is that our execution levels is we're able to probably own more wallet share, maybe what we're really doing here because it's been AUR over the last 2 years that has really driven our gains. Jeff Van Sinderen: Now in the November period that you just finished, I think the transactions, I believe you said were down slightly. I'm just curious, what did you see in store traffic during this latest period? Christopher Work: Yes, I'd have to break it into 2 different regions because on a consolidated basis, we were down slightly. We were up in North America, and we were down slightly in Europe. Even though Europe ran a comp, again, more AUR, DPT driven than transactions. So we did see a transaction gain in North America. And I think what we saw traffic-wise was decent comps actually throughout the month with week 4 being by far our strongest though. We saw, I think, a really good pickup similar to how we saw Q3 where we saw back-to-school be really strong. And then it actually stayed more stable than we anticipated through the back 2 months of Q3. We saw the same thing in November, where it's stable and good comps, weeks 1 through 3, but week 4, definitely more impressive. Richard Brooks: And the longer term here, Jeff, what I'd tell you is, as consumer's income levels catch up with the rates of inflation we've had over here. I think we're -- the next phase, we're starting to see that. I think as we saw in back-to-school, we ran comp gains as Chris saying here in North America in November. As consumer incomes catch up with the rate of inflation, I think we're going to turn and we'll now be capturing transaction rates. Victor, do we have any more questions from the group? Unknown Executive: I'm not sure if Victor dropped. This is Jill. Jeff, I see you have a follow up? Operator: [Operator Instructions] I see Jeff Van Sinderen is still in the stage. Jeff Van Sinderen: My questions were answered. Operator: And I'm not showing any further questions in the queue at this moment. I'd like to turn the call back over to Rick for any closing remarks. Richard Brooks: All right. Thank you, Victor. And I'll close with just my best wishes to all our -- to all those people who I greatly appreciate following what we're doing here at Zumiez, and wishing you all a very happy holiday season. Thanks very much. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
Operator: Good morning, and welcome to The Kroger Co. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Rob Quast, Vice President, Investor Relations. Please go ahead. Rob Quast: Good morning. Thank you for joining us for Kroger's Third Quarter 2025 Earnings Call. I am joined today by Kroger's Chairman and Chief Executive Officer, Ron Sargent; and Chief Financial Officer, David Kennerley. Before we begin, I want to remind you that today's discussions will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. The Kroger Co. assumes no obligation to update that information. After our prepared remarks, we look forward to taking your questions. [Operator Instructions] I will now turn the call over to Ron. Ronald Sargent: Thank you, Rob, and good morning, everybody. Thank you for joining our call today. We're happy to deliver another quarter of strong results, reflecting meaningful progress on our strategic priorities. This quarter, we continue to focus on what matters most: serving our customers, running great stores and strengthening our core business. These efforts are improving the customer experience and creating a strong foundation for long-term growth. Today, we're going to talk about the things we got done this quarter, the proof points of our progress and the ways we're positioning Kroger for continued success. I'd like to start with sharing the results of our e-commerce strategic review. It marks an important step in how we're evolving our business to meet customer needs and also to improve profitability. In today's world, having a strong e-commerce offering is key to delivering a differentiated customer experience and also represents an important growth driver for our business. We've made good progress, building a more than $14 billion business and achieving 6 consecutive quarters of double-digit sales growth. Earlier this year, we formed our new e-commerce team headed by Yael Cosset, designed to align all of the teams who contribute to the online customer experience. By bringing these teams together, we've created a more integrated structure to support our strategy. Building on that foundation, we conducted a comprehensive review of our entire e-commerce model. This review helped us to identify where we can be more efficient and better meet customer demand. Customers increasingly value speed, flexibility and convenience and better leveraging store-based fulfillment helps us meet those expectations. As a result, we're evolving our hybrid fulfillment model by using automated fulfillment in geographies where customer demand supports it and also leveraging store-based fulfillment through our pickup business and relationships with well-established third-party delivery partners. These changes are fully consistent with our broader organizational goals to improve operational efficiency, to drive profitability and to more effectively utilize our stores. We will make these changes to our network through a phased approach, ensuring we maintain flexibility to adjust our plans while minimizing operational and customer disruption. In recognition of this shift, we announced the closure of 3 automated fulfillment centers that haven't met operational and financial expectations. We expect these fulfillment centers to close by the end of January 2026. Based on our customer and store level analysis, in those geographies where we will close sites but continue to operate stores, we expect to retain most of our customers and their e-commerce spend through store-based fulfillment and in-store shopping. We expect these closures to have a neutral impact on identical sales without fuel. With more fulfillment occurring in stores, we recently expanded our relationships with third-party delivery providers, Instacart, DoorDash and Uber Eats. By using our store network, we're improving both geographic coverage and speed with delivery in as little as 30 minutes. Each of our delivery partners brings unique strengths and specific benefits to our customers. They will also create new opportunities for our media business, both on our platform and on theirs, something David will cover later. So in summary, this refreshed hybrid model helps us attract new customers, improve delivery speeds and leverages our growing store network. We expect these decisions to contribute approximately $400 million in e-commerce profitability improvements in 2026, making our e-commerce business profitable in 2026. Turning now to store operations. Running great stores and delivering an exceptional customer experience are central to our strategy. Our internal composite scores, which measure key metrics such as in-stocks, fresh quality and customer service continue to show steady improvement. We're also investing in experiences that matter most to our customers, including adding store hours to improve checkout speed, increase service and improve in-stocks. These investments are delivering tangible results, including significant year-over-year reductions in wait times for our customers. To support these changes, we're utilizing an AI-powered workforce management platform, which enables better coverage during peak periods and gives associates greater flexibility. This tool combines real-time labor insights with intelligent scheduling, allowing store leaders to proactively fill open shifts and ensure the right staffing at the right time, especially during high demand periods like weekends and holidays. Finally, as part of our commitment to simplifying our business, we are making good progress in reviewing all noncore assets to determine their ongoing contribution and role within the company. All of these actions strengthen our business and position Kroger for long-term growth. Before I talk about the results, I want to take a moment to just share what we're seeing from customers and how that's shaping our approach going forward. Macroeconomic uncertainty continues to influence customer behavior, and we're seeing a split across income groups. Spending from higher-income households continue strong, while middle-income customers are feeling increased pressure, similar to what we've seen from lower-income households over the past several quarters. They're making smaller, more frequent trips to manage budgets, and they are cutting back on discretionary purchases. Food spend has been more resilient than nonfood spend. Categories like natural and organics continue to perform well, reflecting continued interest in healthy and premium options. At the same time, customers are turning to promotions and Our Brands as smart ways to save without sacrificing quality. Ready-to-eat and other meal solutions are providing another way for households to get quality and convenience at a great value. Inflation and uncertainty around government funding, combined with the pause in SNAP benefits during the final weeks of the quarter, added incremental pressure to our third quarter identical sales without fuel. These trends reinforce the importance of delivering value through lower prices, affordable quality in Our Brands products and more promotions for customers to save. Turning to our third quarter results. Identical sales without fuel grew 2.6% year-over-year and accelerated on a 2-year stack basis, up 4.9%. Sales growth was led by pharmacy and e-commerce. Gaining market share continues to be a top priority. In a challenging macroeconomic environment, we delivered share trend improvement again this quarter after adjusting for closed stores, reflecting the progress we're making in strengthening our competitive position. We also increased our price investments this quarter. Toward the end of the quarter, when SNAP benefits were held up, we increased promotions to help customers save. We are disciplined in those investments, balancing our gross margin rate to ensure we deliver value in a sustainable way. Our Brands had another strong quarter with sales outpacing national brands. Customers continue to choose these products because they deliver high quality at a great value. Our premium lines, Simple Truth and Private Selection were the strongest performers again this quarter. Our Brands products carry a more favorable margin profile and also improved profitability during the quarter. These results highlight the strategic importance of Our Brands, driving sales, building loyalty and improving profitability. E-commerce sales were strong again this quarter, growing 17%, led by delivery. We also improved e-com profitability with both pickup and delivery showing strong quarter-over-quarter improvement. We're encouraged by the early results from our DoorDash relationship. In its first month alone, we fulfilled 1 million orders, bringing new customers and incremental meal occasions to Kroger. As we evolve our hybrid model, we expect to continue to ramp up both sales and profitability. This quarter's results show the progress we're making. We also know we have more to do. Looking toward the future, as we've shared previously, we're accelerating expansion of our store footprint. We expect to break ground on 14 new stores in the fourth quarter, marking a meaningful acceleration in activity. Earlier this quarter, we announced expansion plans for Harris Teeter, one of our strongest and most successful banners. These plans include opening additional new stores in the Southeast and entering Jacksonville, Florida, which is an important adjacent geography that positions us to grow households and gain share. Looking ahead, we plan to accelerate capital investment in new stores beyond 2025 to strengthen our competitive position, expand into high potential geographies and support long-term growth. As we expand our footprint, our approach to site selection and store format starts with the customer, then prioritizes improving ROIC with a focus on delivering greater shareholder value. We also see significant opportunity to continue taking cost out of our business, starting with procurement. Both cost of goods sold and goods not for resale are areas with significant potential for savings, and we are acting to capture those benefits. At the same time, we are rethinking how we work. This includes leveraging technology and artificial intelligence to simplify tasks and operate more efficiently, putting talent closer to the customer and building a more streamlined organization. As part of this effort, we are returning to in-office work 5 days a week to strengthen collaboration, accelerate decision-making and better support our stores. Working together also creates a better environment for our associates to learn and develop. These changes will allow us to move faster and lead to a more efficient organization. We're also looking to emerging technologies such as Agentic AI to enhance the customer experience. We plan to introduce new agentic shopping capabilities, starting with Instacart's AI-powered Cart Assistant on the Kroger website and mobile app in the first quarter of 2026. The Cart Assistant will help customers shop more effortlessly by making it easier to build personalized baskets, find meal ideas and save time. We'll embrace this technology while making sure it complements what differentiates Kroger today, fresh products, unique Our Brands products and an industry-leading loyalty program. While the landscape continues to evolve, we're confident we'll be able to use technology to improve the customer experience. Finally, we're continuing the foundational work toward refreshing our go-to-market strategy with the customer of the future in mind. This includes a deep dive into customer data and a rigorous assessment of our competitive positioning. This work is shaping the foundation for our next phase of growth. Now I'll turn it over to David, who will review our financial results in more detail. David? David John Kennerley: Thank you, Ron, and good morning, everyone. Kroger delivered another strong set of results this quarter, driven by solid execution in our core grocery business and continued growth in e-commerce and pharmacy. In a challenging environment marked with cautious consumer spending, the government shutdown and a pause in SNAP distributions, we improved market share trends, excluding the impact of store closures by delivering meaningful value for customers. We delivered these results while continuing to balance the right investments for the customer with disciplined margin management. I'll now walk through our financial results for the third quarter. We achieved identical sales without fuel growth of 2.6%, moderating slightly from last quarter as we cycled the impact of last year's Hurricane Helene and port strike as well as the pause in SNAP distributions during our final week of the quarter. On a 2-year stack basis, identical sales without fuel accelerated by 20 basis points to 4.9%, reflecting continued strength in our business. Our identical sales without fuel growth was again led by strong pharmacy and e-commerce results. Food inflation increased moderately compared to the prior quarter with notable inflation in certain commodities, particularly beef. Our pharmacy business delivered another strong quarter, fueled by growth in both core pharmacy scripts and GLP-1s. While the strong growth in pharmacy sales impacts our margin rate, it contributes positive gross profit dollar growth and supports our overall operating profit. Our FIFO gross margin rate, excluding rent, depreciation and amortization and fuel, increased 49 basis points in the third quarter compared to the same period last year. The improvement in rate was primarily attributable to the sale of Kroger Specialty Pharmacy, Our Brands performance, lower supply chain costs and lower shrink, partially offset by the mix effect from growth in pharmacy sales, which has lower margins and price investments. After excluding the effect from the sale of Kroger Specialty Pharmacy, our FIFO gross margin rate increased 24 basis points. As we communicated last quarter, we expect our gross margin rate for the full year on an underlying basis to be relatively flat as we balance the impact of pharmacy mix, margin enhancement initiatives and price investments. The operating, general and administrative rate, excluding fuel and adjustment items, increased 27 basis points in the third quarter compared to the same period last year. The increase in rate was primarily attributable to the sale of Kroger Specialty Pharmacy and investments in associate wages and benefits, partially offset by lower incentive plan costs and improved productivity. After adjusting for the sale of Kroger Specialty Pharmacy, our adjusted OG&A rate increased 9 basis points on an underlying basis. As we did in the first quarter this year, we took the opportunity to make an accelerated pension contribution in Q3, which was worth 8 basis points on our OG&A rate. This reflects a proactive approach to reducing future liabilities and most importantly, helps secure long-term benefits for our associates. Our LIFO charge for the quarter was $44 million compared to a LIFO charge of $4 million last year, resulting in a $0.04 headwind to EPS this quarter. Our adjusted FIFO operating profit in the quarter was $1.1 billion and adjusted EPS was $1.05, both reflecting 7% growth compared to last year. Fuel is an important part of Kroger's strategy and builds loyalty with customers through our Kroger Plus fuel rewards program. Fuel sales were lower this quarter compared to last year, attributable to fewer gallons sold. Fuel profitability was in line with expectations, just slightly ahead of the same period last year. We expect gallons sold to remain lower on a year-over-year basis for the fourth quarter. Turning now to e-commerce. Our e-commerce business delivered 17% growth this quarter, driven by an increase in both households and order frequency. Orders delivered within 2 hours or less grew by more than 30%, reflecting the growing immediacy demand. Building on what Ron shared earlier, the recent update to our e-commerce strategy reflects a thoughtful evolution of how we serve our customers and drive sustainable growth. Our refreshed hybrid fulfillment model allows us to leverage the strength of both automation and store-based fulfillment to meet evolving customer expectations. This also allows us to optimize the performance and use of automated fulfillment centers when the right conditions exist and utilize third-party partners for faster delivery while reaching new customers and incremental trips. Our new model positions us for both strong sustainable growth and improved flexibility. From a financial perspective, we're significantly accelerating the profitability of our e-commerce business. Closing 3 fulfillment centers and increasing store-based delivery will deliver approximately $400 million in incremental e-commerce operating profit in 2026. As a result, we now expect our e-commerce business to be profitable in 2026. The benefits from these decisions will be primarily used to reinvest in our business to increase value for customers and improve the shopping experience as we look to accelerate sales. We also remain focused on expanding operating margins and a portion of these benefits will be used to increase shareholder value. Given the financial performance of our automated fulfillment network and the closure of specific sites and as previously announced, we recorded an impairment and related charges of $2.6 billion in the third quarter. We will continue to monitor our retained sites with a focus on improving operating efficiency and strengthening financial performance. Our updated hybrid model also creates new opportunities for our media business. Our broad reach and unmatched food retail capabilities are attractive to delivery partners, and we structured these relationships to benefit our media business. For example, our unique approach to collaboration with Instacart, DoorDash and Uber unlocks new media opportunities across both platforms, and we're already seeing strong interest from several large CPG brands. By integrating our customer data and loyalty insights with third-party platforms, we can bring more targeted and innovative media campaigns to reach new customer segments and create additional monetization opportunities. Our media business had a strong quarter with double-digit growth and continues to be a meaningful contributor to profitability. We're encouraged by the momentum and believe we have an opportunity to accelerate growth even further as we leverage new capabilities and improve coordination between our media and merchandising teams. I'd now like to turn to capital allocation and financial strategy. Kroger delivered strong adjusted free cash flow this quarter, which reflects the strength of our operating performance. Free cash flow is important to our model, providing liquidity for our operations and strengthening our balance sheet. At quarter end, our net total debt to adjusted EBITDA ratio was 1.73, which is below our target ratio range of 2.3 to 2.5. This provides us with financial flexibility to pursue growth investments and other opportunities to enhance shareholder value. We expect to return to our target leverage ratio over time, and we'll share more details about our plans for 2026 next quarter. Our capital allocation priorities remain consistent and are designed to deliver total shareholder return of 8% to 11% over time. We are focused on investing in projects that will maximize return on invested capital over time while remaining committed to maintaining our current investment-grade rating, growing our dividend subject to Board approval and returning excess capital to shareholders. During the third quarter, we completed our $5 billion ASR program under Kroger's $7.5 billion share repurchase authorization. We are currently executing open market repurchases and expect to complete the remaining $2.5 billion under the authorization by the end of the fiscal year, which is contemplated in full year guidance. Improving ROIC is a key priority. As we shared earlier, we expect our updated hybrid e-commerce model and investments in new storing to drive stronger returns going forward. Building on that, we continue to sharpen our focus on cost structure. We've made meaningful progress so far, but we see greater opportunities ahead by modernizing operations and ways of working across our organization from stores to support centers. We also see opportunities to improve procurement to unlock additional cost savings. The combination of disciplined cost management and capital deployment positions Kroger to deliver stronger returns and create more shareholder value. I would now like to provide some additional detail on our outlook for the rest of the year. We are pleased with the continued momentum in our business, supported by strong performances in pharmacy and e-commerce. Given our year-to-date results and outlook for the remainder of the year, we are narrowing our range for identical sales without fuel growth to a new range of 2.8% to 3% and raising the lower end of our adjusted earnings per share guidance to a new range of $4.75 to $4.80. This includes the impact of LIFO, which is now expected to be a $0.07 headwind compared to what we expected at the start of the year. As we move into Q4, we expect a slight improvement in our OG&A rate to help mitigate the impact of a slight decline in FIFO gross margin rate. One additional factor to note is the impact of the Inflation Reduction Act on our pharmacy business. Beginning on January 1, this legislation is expected to reduce Medicare drug prices on 10 highly utilized medications. Sales on these medications will be recorded at the new reduced prices. Kroger will continue purchasing these drugs at current acquisition costs and manufacturers will fully reimburse Kroger for the difference through rebates, which will then be recorded as an offset to cost of goods sold. As a result, we expect that this will lower Q4 identical sales without fuel by approximately 30 to 40 basis points, but will have no impact on our earnings. This is reflected in our updated guidance. I will now turn the call back to Ron. Ronald Sargent: Thank you, David. In closing, we're encouraged by the progress we're making. Our priorities are clear, and we're executing with greater speed and discipline. We're strengthening our core business and investing in areas that will contribute to long-term growth. We're taking decisive actions today that will make Kroger stronger now and in the future and deliver greater value for our shareholders over time. Before we move into Q&A, I want to provide a brief update on the CEO search. Our Board remains actively engaged and is making good progress. While we don't have a specific time line to announce today, we're engaged in a thorough process and expect to appoint a new CEO during the first quarter of 2026. We'll now open it up for questions. Operator: [Operator Instructions] The first question goes to John Heinbockel of Guggenheim. John Heinbockel: Ron, can you talk to -- the accelerated storing program, right, maybe talk about that cadence. And then when you think about -- you've got obviously a fairly far-flung network. How do you think about concentrating that? And as part of this -- I know the digital review is different. When you think about the portfolio that you currently have, is there -- are there opportunities or are you looking to -- do you exit some places? Do you double down in others as part of the storing effort? Ronald Sargent: Sure. Let me kind of try to answer several of those questions. First of all, we're pretty excited about kind of the new investments in storing because that drives a lot of goodness from the top line and the same-store sales line. And we think we've got a great long runway to grow stores. I think when you think about the things that go into making stores successful, obviously, the right location, the right market. You've got to have great operational infrastructure as well as talent. And obviously, you're not going to open a store unless you think it's going to deliver a terrific return. In the fourth quarter, we're going to complete about -- or in the fourth quarter, we plan to complete about 4 major store projects. We're going to break ground on another 14 stores. And when you look at 2026, we expect to increase new store builds by 30%. In terms of -- and I guess the other thing I should just mention is how excited we are about our entry into Jacksonville with Harris Teeter. Harris Teeter runs a great business. They already operate in Florida in Amelia Island, which is about 40 miles from Jacksonville. Florida itself is a large state. It's a growing state. We expect to do very well there. I think Jacksonville is the 10th largest city in the United States, and I think it's the largest city in Florida. And I think that's kind of an indication of we're going to continue to expand in adjacent markets. I think we also have opportunities to grow through acquisition, and we haven't ruled that out despite our last few years with Albertsons. And I think when you look at our long-term aspiration, we expect and plan to be a national retailer. So I'm not sure that answers all your questions. Concentration is important. We'll certainly fill up Jacksonville before we move to adjacent markets. But we think we've got great opportunities to grow stores. And I think, frankly, that's been one of our biggest challenges over the last few years is we haven't allocated enough capital to growing stores because we have allocated a lot of capital in other areas like fulfillment centers. John Heinbockel: Great. And maybe just a follow-up, totally unrelated. The CEO search has been one of the longest, right, I think we've seen in a while. I'm curious, you and the Board, what are you looking for, maybe characteristic-wise, capability-wise, and what does the business need from that person? Ronald Sargent: Sure. Yes. I think, as you know, we've been pretty deliberate in the process. We've also been very thorough in the process. We're working with an executive search firm, and we have identified and engaged with really several very highly qualified candidates. I think we have announced publicly that our next CEO will be external. And I think we expect them to bring in fresh perspectives to the organization and also to complement the culture that we have today, which is pretty strong at Kroger as well. In terms of what we're looking for, we want a deep understanding of retail transformation. We want somebody who's very close to the customer. We want somebody who has a demonstrated success operating at scale, who knows how to operate and frankly, cultural fit and alignment with Kroger values is critical as well. And like I said, we're getting closer. We're making good progress, and we expect that decision will be announced in the first quarter. Operator: The next question goes to Ed Kelly of Wells Fargo. Edward Kelly: I wanted to -- maybe first, Ron, could you just kind of step back and maybe talk about how you're feeling about the current grocery ID trend? It seems like you want that to be better. The competitive environment seems like it may be ticking up a bit. And you did mention some investment in price towards the end of the quarter. How should we think about all of that in the context of maintaining underlying gross margin stability going forward? And I think what you were implying for next year based upon the way you're talking about e-comm is EBIT -- at least maybe some EBIT margin expansion. Ronald Sargent: Sure. Yes. Let me just talk a little bit about sales. I think this morning, we announced that sales came in a little lighter than we expected, and that was primarily later in the quarter. And that's due to a combination of factors. We saw increased caution and uncertainty among consumers, particularly in October and November due to the concerns about the government shutdown. Also, the pause in SNAP benefit distributions created some headwinds at the end of the quarter. I think consumers are becoming more selective. They're buying more on promotion. They're reducing the discretionary purchases, things like general merchandise. General merchandise comped negative during the quarter. And also, we had a tougher ID comparison in Q3 from the prior year. Despite all that, our 2-year stacked identical sales were up 20 basis points, and I think that might have been one of the higher quarters of the year. But I think what we're doing going forward is our focus remains on value and serving customers during a pretty uncertain time. If you look at Q4, well, Q4 to date, we're feeling pretty good about our quarter-to-date sales. We're slightly ahead of our guidance that we provided this morning. But we don't anticipate any meaningful improvement in the consumer environment in Q4. Also, when you do the math, looking at the top line, we're also going to lap harder comparisons in Q4. Last year, we benefited from some weather and maybe we'll have weather again this year. Also, we benefited from egg inflation last year that we won't see this year. And then finally, and I think David mentioned this one is we'll see some headwinds relating to the Inflation Reduction Act in pharmacy, and that will hit us in January to the tune of about 30 basis points in overall ID sales. You asked about competition. I think the environment remains very competitive as it always is in the retail world. I think especially true today when consumers are looking for great value. Frankly, our focus is just running the Kroger playbook. We want to run great stores. We want to drive e-commerce business. We want to grow alternative profits. We continue to lower prices. We took down another 1,000 items in Q3. And I think we will continue to ramp up promotions during the holidays to drive traffic as well as basket sizes. The good news is that vendor funding continues to be strong to support our initiatives. Maybe I'll give you one example of that, the Thanksgiving meal bundle that we announced a few weeks ago. We lowered the price this year over last year, and we did not cut the menu to do so. I think the bundle fed 10 people for less than $5 per person. So in answer to your question, yes, the environment remains competitive, and we expect that to continue. David John Kennerley: Just a couple of things to build on Ron's comments. I think also important to note that in the quarter, our share trends improved. So despite the impact on sales from the things that Ron talked about, we saw sequential improvement in our share trends, which was good. And then in terms of gross margin, I think Q3 shows that we manage gross margin in a very, very responsible way. And I think despite what we've guided to for Q4, you guys should think about us continuing to do that in a responsible way. If you look at actually the breakdown of gross margin, selling grocery itself actually declined as we invested in pricing, but we were able to offset that with mix on our brands, good sourcing improvements, shrink and other supply chain costs. And I think I'd expect a similar dynamic to what we saw in Q3 going forward. Operator: The next question goes to Michael Montani of Evercore ISI. Michael Montani: I guess one thing that I was going to ask about was when you look at the pharmacy drug pricing headwind, should we anticipate that, that annualizes closer to 100 bps for next year? That was part one. And then part 2 is just can you parse out some of the tailwinds you might have to offset when you think about Express Scripts impact? Where is that now? How does that mature? DoorDash and Uber Eats? Just trying to see what there might be there as offsets. David John Kennerley: Thanks for the question. David here. So obviously, we're not getting into 2026 guidance today. We'll obviously get into more details on that in our next quarterly earnings. But let me just add a little bit more color on the Inflation Reduction Act impacts that we'll see this quarter and then how you might think about some of the tailwinds that we've got. So I think to provide a little bit more detail. So starting January 1, Medicare will pay 60% to 70% less for the first 10 negotiated drugs. And I think important to stress that this is really only Medicare. Those lower reimbursements will translate into lower sales, i.e., the price at which we sell, and that creates the headwind that we've talked about. I think also important to note that manufacturers will offer rebates to us to offset that. So this will have no margin impact in the quarter and no earnings impact, and we expect that dynamic to continue on an ongoing basis. As we think about the tailwinds that we have to maintain really good performance in our ID sales, our long-term trends are -- we're seeing units improve in our core business. We've got -- expecting to continue to invest in making sure our price gaps. We've got headroom on Our Brands. We've got, I think, a whole range of different initiatives to keep core momentum in our business moving along strongly to offset some of the impacts from what we're going to see going forward on our pharmacy business. Operator: The next question goes to Kell Bania of BMO. Kelly Bania: Can you just maybe help parse out more specifically the impact of pharmacy on the quarter? It sounds like you're estimating some slight market share improvements, but I think a lot of investors are really just trying to understand what's happening with the core grocery business with inflation and units and market share? Any color you can give there? And then also just going back to the reinvestment of the e-commerce losses. Maybe can you talk about how much you're planning there? How much is planning to go towards price versus store standards and maybe just your assessment of those 2 key factors on where your price positioning is and your store standards? Is this going to be a broad-based investment across many stores, more targeted in certain areas? Any color on how we should think about that and what that might do for next year? David John Kennerley: Kelly, let me take that initially, and then I'll turn over to Ron. So I think pharmacy in the quarter, I would think of the impact of pharmacy business similar to what we've been seeing over recent quarters. So I don't think there's a material change in what we've seen from a pharmacy performance this quarter. I think your second question was around units and what we're seeing on the core business. We did see a slight deceleration in our unit trends in Q3. If you sort of dissect where that's coming from, actually discretionary categories were probably the most impacted. We also saw some impacts in our meat business due to the higher inflation that we've been seeing. But I think it's also important to say that actually unit trends improved or held up in a number of areas. We saw good improvement in the deli. And actually, natural and organic foods held up really, really well. And I think these trends changed given some of the broader dynamics that Ron talked about at the beginning, SNAP and the sort of broader macro consumer environment. In terms of the tailwind that we have next year from our e-commerce business, we haven't yet declared how we're going to split that money up. Obviously, we'll provide more details when we get into 2026 guidance. But as we've said, we expect to use some of the money to reinvest back into pricing to make ourselves even more competitive. We've got a whole range of different opportunities to invest to improve the customer and in-store experience, which we believe will also help improve composite scores. But we're also committed on an ongoing basis, as we've said, to improve the operating margins of the business, and we expect to do that next year as well. Ronald Sargent: And David, the only area I would add would be kind of technology. I think we've got some technology spend that is in the pipeline that we want to make sure that we can continue to grow not only our retail business, but also our e-commerce business, which is rapidly evolving. Operator: The next question goes to Michael Lasser of UBS. Michael Lasser: Two-part unrelated question. The first is, as you went through your e-commerce review, how did you think about the risk of leaning so heavily on third-party providers to fulfill a core competency, which is to interact with the customer at the point of delivery versus having that key function more in-house? And also, as part of the e-commerce review, you mentioned that it's going to be profitable next year. Is that simply a function of the $400 million of losses going away? Or are there other factors that we should consider to drive that profitability? And just one last unrelated point. As you think about 2026, do you expect the rate of growth for the grocery industry just to be more sluggish overall given this 100 basis point headwind from the pharmacy change along with what could be a headwind from SNAP next year? Ronald Sargent: Sure. I'll start, and then I'll turn it over to David. In terms of -- you asked the question about the providers that are going to be doing some more of our delivery. One, we're really excited about the connection. I think each of those partners really brings distinct customer -- serves distinct customer needs as well as occasions. Some are full basket stock-up delivery companies and some are really more about immediate convenience. I think we're looking at these incremental -- as these partners as incremental sales opportunities and customer opportunities. The vast majority of our e-comm sales come from the Kroger website, and we feel like they give us operational flexibility as well as strategic flexibility. You think about Instacart, which is our largest partner, they deliver broad geographic reach. They've got great scale. They can handle very large basket sizes. They also -- we also can offer agentic shopping capability on Kroger's iOS platform. Uber Eats, that leverages Uber's existing customer base and the Uber app. And I think the benefits here are add-on economics. Customers can order grocery items and do with the restaurant orders. And that certainly appeals to younger customers who want more speed, more convenience. And I think those represent new and younger customers for the company. And then DoorDash, David talked about how successful that launch has been. And there, again, we're focusing on speed. We're focusing on convenience. It is ideal for quick small basket needs. And again, it appeals to younger customers. In terms of the $400 million, I'll ask David to weigh in on that one. David John Kennerley: Yes. So Michael, the way I think about e-commerce profitability is, I mean, as we've been saying, we're already making good improvements in profitability on the business as it exists today. In fact, in quarter 3, we actually cut the losses that we've been making in half. So we're making really, really good quarter-over-quarter improvements in profitability, and I expect that to continue into next year. You then take the $400 million that we've talked about, which is from closing the automated fulfillment centers. You then add in the business that we believe is highly incremental from the new third parties that we're working with, so DoorDash and Uber Eats as well as continued growth from our Instacart business. You've got the media business that we expect to continue to grow and importantly, the media sharing opportunities that we have with our new partners. And when you put all that together, that allows us to expect that we will make money in e-commerce next year. Ronald Sargent: And Michael, your third question, I'm not sure I'm qualified to speak for the rate of the grocery industry growth rate for 2026. And I certainly don't want to get into any guidance at this point. We'll do that next quarter. But I don't know that there's any reason why there should be this dramatic slowdown in the grocery industry. And certainly not for us. We've got new store growth coming. We're closing kind of unproductive and low-performing stores. E-commerce has been -- has had a great year and continues to accelerate. It seems like every month more and more. So the mix might change a bit there because e-commerce will grow faster than physical stores. But we've got a lot going on in fresh categories. Our brands continues to grow faster than the house. And then finally, we want to continue to execute very well in our stores and customer service matters. And I'm not sure that I see a slowdown for 2026. Operator: The next question goes to Jacob Aiken-Phillips of Melius Research. Jacob Aiken-Phillips: So on the last call, you talked about how you're kind of working on how you discuss the retail media business with vendors or across the organization. And today, you highlighted some new opportunities with the 3P partnerships. I'm just curious, like as more missions originate on the partner platforms, how are you structuring the relationships so that you have the right level of first-party data? And should we think of the economics as comparable first party versus third party for retail media? David John Kennerley: Jacob, let me take that one. It was a little hard to hear your question. Your line is breaking up, but hopefully, I got the gist of it. So we're seeing good performance from our retail media business today. So in Q3, we saw another quarter of double-digit growth, and we think we've got good plans for Q4 and our plans lead us to believe actually that, that business will accelerate into Q4. And obviously, we'll share more specific guidance as we get into next year. I think the foundation of this is great tools with best-in-class capabilities for the brands that choose to operate on the platforms. Now as we think about the new partnerships that we've got going forward, the really important thing that was important for us as we structured those relationships is to make sure that we got to participate in the media opportunities that exist and that may originate on their platform rather than our platform. Obviously, I don't want to get into the details of the specifics of how we structured those agreements. But we structured them in a way that we benefit what I would call appropriately from that in a way that's very favorable to our economics. Operator: The next question goes to Seth Sigman of Barclays. Seth Sigman: I think there was a comment that you feel good about quarter-to-date. I'm not sure if that implies trends have improved or not. But is there anything more you can share about that and what may be driving that if it is improving? And you mentioned price investments. I'm just curious, is that playing a role? And then a bigger picture question on price investments. You were doing a lot of testing this year. Is there anything else you can share about what is working versus what is not working? Ronald Sargent: Yes. I think it's a little early to kind of opine about the fourth quarter. We're just 3 or 4 weeks into the quarter. Just to be clear, I said that quarter-to-date, we are trending ahead of our guidance that we shared with you this morning. In terms of price investments, it's a little hard to know those in real time. We continue to make price investments. We will continue to do that throughout the quarter. I think what we're seeing with our promotional kind of environment out there is that customers are responding to promotion, and we will continue to do that. I don't know, David? David John Kennerley: Yes. Just sorry, one slight clarification just to make sure the point on Q4 is crystal clear. We're trending quarter-to-date slightly above the midpoint of our Q4 guidance. So let me take that one. I think there was a second question on there, Seth, about price investments. Listen, we continue to make sure that we offer great value for the consumer. As Ron talked about, a great example was towards the end of the quarter when we knew consumers were struggling given SNAP benefits being withheld. We invested in what we believed was an appropriate way and also a very responsible way with our margins to bring the cost of a Thanksgiving dinner down as well as lower prices through promotions on a number of critical items for households. And I think we'll continue to do that. Value is at the foundation of what we do, and we'll continue to do that in a responsible way. Operator: The next question goes to Simeon Gutman of Morgan Stanley. Simeon Gutman: Two questions. The first, e-commerce. Now that you'll be in the green next year, can you talk about the scalability or maybe incremental margins? Does it move quicker or it's still a long evolution? And part 2, since you've been in your role, Ron, there's been some significant change, strategic change, tactical change. Today's call sounded a little more urgent with some pricing, folks coming back to work, et cetera. I don't know if that's a fair read or not. Can you say if it is? And then, I guess, new CEO should be very little interruption as far as execution goes because it sounds like the plans are all being built today. Ronald Sargent: Let me ask David to cover the first one, and I'll cover the second. David John Kennerley: Yes. Let me take the first one. So obviously, the economics of our e-commerce business with the outcome of the strategic review have changed. So we now move from a business that was in the red to a business that's now in the green. We've had a really good growing business now for many quarters. And I think with the new partnerships that we've signed, with the stores that we're building, with the strong growth that we're really seeing across all elements of our e-commerce business, I think what that allows us to do is continue to scale the business in a way that we now make money. So I think as you think about that going forward, I'm not sure we see a dramatic change in the growth rate, but I'd expect us to see continued strong double-digit growth from the e-commerce business going forward with the change being that, that business is now profitable. Ronald Sargent: And Simeon, just to get into the second point, I've been here. I think this is my 10th month. And my only objective is to set up the company for future success. We got to do the right things, and we're going to do the right things even if some of the decisions are hard. And you asked about urgency. I'm not sure there's any more urgency. I'm always urgent about everything. And I think going fast needs to be a key element of our culture. I think being willing to make the tough decisions needs to be a key part of our culture. And to the support, we've gotten great support. The Board has been very supportive of those things that we need to do to set the company up for future success. And frankly, our management team has really embraced the speed, the decisions, the focus on the customer, the focus on kind of moving some of the influence from our corporate office to our divisions where our customers are. And then 5 days a week, it's frankly just a function of the fact that, that's just retail. I mean we need to be here. We need to collaborate. We need to be able to respond quickly. And we need to be able to support our stores that operate 7 days a week as long as our -- as well as our manufacturing facilities and our distribution facilities. So I wouldn't say there's more urgency, but I would say that there's plenty of urgency. Operator: The next question goes to Thomas Palmer of JPMorgan. Thomas Palmer: In the release discussing the fulfillment center closures, there was the mention, right, of the $400 million in savings. Could you maybe get a little bit of a breakdown of where these savings will be seen? I think some of it might be depreciation, some of it other operating costs. And then when we're thinking about the reinvestment, how much of this is investment that you probably would have undertaken anyway, and this just gives you kind of better ammo to fund it versus things that might not have occurred if the closures had not occurred? David John Kennerley: Yes. Let me take that one. So as you think about the $400 million, you're right that splits across what I would call kind of operating profit, kind of EBITDA, kind of more cash-related items. And then, of course, there's a component of it that relates to depreciation. So it is split across both. In terms of investments, the way I would think about that, obviously, and we'll get more into that in terms of -- when we get into guidance for next year, it's a combination. Clearly, it gives us fuel to be able to make investments that we were likely already going to make, but it also gives us incremental flexibility to invest in things that perhaps we were not going to be able to make. So we'll get into more details on that as we get into 2026 guidance, but hopefully, that gives you sufficient color. Ronald Sargent: And just to add, I mean, the key of e-commerce, it's one of our fastest-growing businesses, and that will continue. In fact, it continues to accelerate. It's 11% of our sales. The focus is we got to make money on a business that's growing that fast. And it was all about we've got to get profitable. We got to get profitable fast because that e-commerce is a key part of our future here. Operator: The next question goes to Rupesh Parikh of Oppenheimer. Rupesh Parikh: So just going back, I guess, just to CapEx. So going forward, more aggressive store openings, obviously, a change in your e-commerce strategy. Does anything change in terms of how to think about the baseline CapEx spending for the business? Ronald Sargent: CapEx? David John Kennerley: I don't think anything changes in the immediate term about the CapEx. I think what we're doing is prioritizing the mix differently. So we're reallocating more into our storing program and less into other areas of the business. We think this is good for the ROIC of the company and the returns on our capital as we get good returns from major storing programs. So think of it more as a mix shift. Operator: The final question goes to Chuck Cerankosky of Northcoast Research. Charles Cerankosky: In looking at your store development, well, let me back up a bit. It sounds like you talked about the mid-tier customer pulling back some more in line with the lower income customers. Is that a change that you saw during the quarter? And in looking at store development, anything going on at Fred Meyer that you might want to talk about? And could you perhaps talk about how its larger exposure to general merchandise as you're thinking about that banner? Ronald Sargent: Sure. Yes, I can give you some big picture kind of comments about the -- what we're seeing on the consumer side. As you've been reading, consumer sentiment has declined a lot over the last 4 months. And there's a lot of reasons behind that, whether it's a slowing job market or the government shutdown, the SNAP benefits, concern about inflation and categories like beef and coffee and chocolate. I just think customers are managing their budgets carefully. And they're making more trips. They're making smaller trips. The idea of stocking up is declining a bit. And we're seeing this economy where high-income premium shoppers, they continue to spend while lower income customers are pulling back more aggressively. In terms of that middle bucket, I would guess, again, they're also looking for value. And the best indicator of that is our Q3 was softer in the later parts of the quarter because of the pause in SNAP benefits. So that would be kind of -- I think going forward, I think the consumer is going to remain cautious. I think there's going to be more focus on food items and less on discretionary categories. Does that impact Fred Meyer? I think it probably does from their mix of higher mix of discretionary and GM merchandise. But it's also -- we're seeing in adult beverages, snacks. I think the good news is that we're seeing this continued shift from restaurant purchases to food at home purchases, which should be good for our business. And then I think the other big trend we're seeing is e-commerce continues to grow a lot faster than physical stores. Fred Meyer, I don't want to point out a specific division, but Fred Meyer continues to perform well. We've got Todd out there, our President, Todd Kammeyer, running it. And I was out there a few months ago, and I'm feeling pretty good about Fred Meyer. David John Kennerley: I think maybe just one thing just to add on stores and store formats as to how we think about that. We will continue to build kind of large stores around 123,000 square foot. We've also got a 99,000 square foot format that we're going to continue to build. And I think as we think about the future, we're going to continue to experiment to make sure that we have the right array of store formats to cater to consumers wherever they may be located. Operator: Thank you. That concludes today's question and answer. I will now hand back to Ron Sargent, Chairman and Chief Executive Officer, for any closing comments. Ronald Sargent: Okay. Well, thanks, everybody. Thanks. We had a lot of great questions today. Before we conclude our earnings call, we'd like to share a few comments with our associates who are listening in. The progress we've made and the strong results we shared today reflect your hard work and your commitment. This year, we focused on running great stores, delivering a strong customer experience and strengthening our core business, really priorities that are essential to our success going forward. Your efforts are creating a strong foundation for Kroger's long-term growth. We're very proud of what we've accomplished so far, and we're excited for the work ahead. So thanks for everything you do and for your hard work during a really busy holiday season. Thanks, everybody, for joining us on the call this morning. We look forward to speaking with all of you again soon. I hope to see you in our stores, and happy holidays, everybody. Operator: Thank you. This now concludes today's call. Thank you all for joining, and you may now disconnect your lines.
Operator: Thank you for standing by. Welcome to the UP Fintech Holdings Limited's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, December 4, 2025. I would now like to hand the conference over to your first speaker today, Mr. Aron Lee, the Head of Investor Relations. Thank you. Please go ahead. Aron Lee: Thank you, operator. Hello, everyone. We appreciate you joining us today for our UP Fintech Holding Limited's Third Quarter 2025 Earnings Call. The earnings release was distributed earlier today and is available on our Investor Relations website at ir.itiger.com and through GlobeNewswire. On the call today with us are Mr. Wu Tianhua. Chairman and Chief Executive Officer; Mr. John Zeng, Chief Financial Officer; Mr. Huang Lei, CEO of U.S. Tiger Securities; and Mr. Kenny Zhao, our Financial Controller. Mr. Wu will provide an overview of our business operations and key corporate highlights, followed by Mr. Zeng, who will discuss our financial results. They will both be available to answer your questions during the Q&A session afterwards. Before we begin, I'd like to address the safe harbor statement. The upcoming remarks will contain forward-looking statements as defined by the U.S. Private Securities Location Reform Act of 1995. Actual results could differ materially due to various factors. For more details on these factors, please refer to our Form 6-K furnished today, December 4, 2025, and our annual report on Form 20-F submitted on April 23, 2025. We are not obligated to update any forward-looking statements unless required by law. Now it's my pleasure to introduce our Chairman and CEO, Mr. Wu, who will begin his remarks in Chinese, followed by English translation. Mr. Wu, please proceed. Tianhua Wu: [interpreted] Hello, everyone. Thank you for joining the Tiger Brokers' Third Quarter 2025 Earnings Conference Call. In the third quarter, Tiger once again achieved impressive performance, with all revenue segments and profit showing encouraging growth and reaching new historic highs. Our total revenue reached USD 175.2 million, representing a year-over-year increase of 73.3% and a quarter-over-quarter increase of 26.3%. We have maintained our strategy of prioritizing user quality and product experience, which has further improved our ROI and laid a solid foundation for ongoing profit growth. All of our licensed entities achieved profitability in the third quarter, resulting in a net income attributable to UP Fintech of USD 53.8 million, up 30% from the previous quarter and 3x the same quarter last year. Our non-GAAP net profit reached USD 57 million, growing 28.2% quarter-over-quarter and 2.8x year-over-year. Non-GAAP net profit hit new historical highs and has maintained double-digit quarter-over-quarter growth for 5 consecutive quarters. In the third quarter, we added 31,500 new funded accounts with Singapore and Hong Kong being the primary contributing markets. In the first 3 quarters of this year, we have acquired 132,200 new funded accounts. The total number of funded accounts reached 1,224,200, representing an 18.5% year-over-year increase. As of today, we've already achieved our annual guidance of acquiring 150,000 newly funded accounts. In addition, we are glad to see better brand recognition from Hong Kong users. In the third quarter, for the first time, Hong Kong accounted for over 30% of our quarterly new funded users, becoming a key growth engine alongside Singapore. More importantly, user quality in Hong Kong remains strong with average net asset inflow for newly acquired clients holding around USD 30,000 for 3 consecutive quarters. Meanwhile, ROI-driven acquisition strategy delivered standout results in Singapore. The average net asset inflow for newly acquired clients in the third quarter surpassed USD 60,000, a historical breakthrough and leads group average this quarter to above USD 30,000 for the first time. Regarding total current assets, net asset inflow remained robust, mainly driven by retail investors, coupled with the mark-to-market gains, total client assets reached a new record of USD 61 billion, up 17.3% quarter-over-quarter and 49.7% year-over-year, marking 12 consecutive quarters of growth. In the third quarter, all the overseas markets delivered double-digit quarter-over-quarter growth above 20% in client assets, with Hong Kong and U.S. increasing by more than 60% and 50%, respectively. In the third quarter, we continued to refine our product features to make global investing more accessible and convenient. As the leading tech-driven brokerage in Singapore, we constantly enhance the user experience for local investors. To enable more local investors to easily participate in stock market, Tiger Singapore has waived the Singapore Exchange quarterly custody fee for accounts with no [frills], thereby reducing the holding cost for long-term investors. In Hong Kong, we have expanded our product offering by introducing Japanese market derivative services, such as Nikkei futures, for the first time in the third quarter, further solidifying our global multi-asset strategy. Additionally, in September, we launched cryptocurrency trading in New Zealand, providing local users with investment services in major cryptocurrency, like Bitcoin and Ethereum. During the third quarter, Tiger platform enhanced cryptocurrency-related features by adding unique data such as macro market insights and holdings information for companies, assisting users for recognizing investment opportunities and making better investment decisions. Tiger AI has seen a rapid increase in usage with user numbers growing nearly fivefold year-over-year and the number of conversations increasing tenfold. Meanwhile, the intelligent investment analysis tool, TradingFront AI, provides real-time portfolio analysis and market insights for asset management business, helping investment advisors enhance their analysis efficiency and decision-making quality. Our 2B business also maintained strong momentum, significantly boosting other revenue by doubling them quarter-over-quarter, achieving a historic high for a single quarter. In the third quarter, we underwrote 5 U.S. IPOs, all serving as the sole bookrunner, including Linkhome and Yimutian. Additionally, we underwrote 5 Hong Kong IPOs and 1 Hong Kong public follow-on offering, including Geek Plus and Boss Zhipin. With the IPO market being active, supported robust growth in our IPO subscription business with the number of subscribers increasing by 39.3% quarter-over-quarter and subscription amount surging by 121.5%, reflecting our platform's enhanced underwriting capability. In ESOP business, we added 46 new clients in the third quarter, bringing the total to 709, a year-over-year increase of 19%. Now I'd like to invite our CFO, John, to go over our financials. John Zeng: Great. Thanks, Tianhua and Aron. Let me go through our financial performance for the third quarter. All numbers are in U.S. dollars. We saw encouraging growth in all revenue components this quarter. Commission income was $72.9 million, increased 77% year-over-year and 13% quarter-over-quarter. Interest income was $73.2 million, increased 53% year-over-year and 25% quarter-over-quarter in line with our sequential growth in margin and securities lending balance. Total revenue reached $175.2 million, up 73% year-over-year and 26% quarter-over-quarter. Cash equity take rate was 7.1 bps this quarter, increased from 6.4 bps of last quarter. The uptick in cash equity take rate was mainly due to the increased trading volume of fewer low-priced U.S. stock during the third quarter, as we charge commission per share for U.S. stock trading. Within commission revenue, about 67% comes from cash equities, 25% from options and the rest from futures and other products. Now on to cost. Interest expense was $21.9 million, increased 40% year-over-year in line with the increase in interest income from margin and the securities lending business. Execution and clearing expense were $4.5 million, increased 27% from the same period of last year, in line with the increase in commission and trading volume. Employee compensation and benefits expense were $47.2 million, an increase of 64% year-over-year due to the headcount increase to strengthen overseas growth and R&D. Occupancy, depreciation and amortization expense were $2.8 million, increased 28% year-over-year due to the increase in office space and relevant leasehold improvements. Communication and market data expense were $11.8 million, an increase of 21% year-over-year due to the increase in user base and IT-related services fees. Marketing expenses were $12.9 million this quarter, increased 57% year-over-year as we beefed up user acquisition, particularly in Singapore and Hong Kong markets. General and administrative expense were $10.3 million, an increase of 49% year-over-year, due to an increase in professional service fees. Total operating costs were $89.4 million, an increase of 51% from the same quarter of last year. As a result, bottom line increased on both GAAP and non-GAAP basis. GAAP net income were $53.8 million, up 30% quarter-over-quarter and 3x of last [indiscernible]. Non-GAAP net income were $57 million, a 28% increase quarter-over-quarter and 2.8x the same quarter of last year. The non-GAAP net profit margin further expanded to 33% in the third quarter. That has concluded our presentation. Operator, please open the line for Q&A. Thanks. Operator: [Operator Instructions] And our first question will come from Pu Han from CICC. Han Pu: First, congratulations on the exciting results achieved this quarter. This is Pu Han from CICC. I have two questions. The first one is regarding the AUM breakdown. So how much is from clients net asset inflow and how much from mark-to-market gain? And in terms of the net asset inflow, how much is from retail investors and how much from institutions? The second question is about the take rate. We see both the blended take rate and the cash equity take rate increased a lot this quarter. So could you please share the reason behind the increasing take rate? That's my two questions. Tianhua Wu: [interpreted] In the third quarter, client assets saw a meaningful increase of about 17%, reaching a historic high of USD 61 billion. So of this increase, roughly 30% were from the net asset inflow and 70% were from the mark-to-market gains. More than 60% of the net asset inflow came from Singapore and Hong Kong markets, with retail clients being the key contributor. John Zeng: For cash equities, the take rate increased from 6.4 bps in second quarter to 7.1 bps in the third quarter, primarily due to some U.S. local penny stock were particularly active in the quarter. Since we charge commission per shares for U.S. stock, this led to an increase in cash equity take rate. As for the blended take rate, aside from the increase in cash equity commissions, futures trading volume dropped from around 7% in the second quarter to about 4% in the third quarter. As we count notional value for futures trading, the decrease in futures trading volume, while increasing commission income, contributed to a notable increase in our overall blended take rate. This expense while our stock trading volume showed a quarter-over-quarter increase consistent with the increase in commission income, but the total trading volume was actually down. Thanks. Aron Lee: Operator, please move on to the next question. Operator: And our next question will come from Cindy Wang with China Renaissance. Yun-Yin Wang: This is Cindy from China Renaissance and congrats for the great third quarter results. I have two questions here. First, could you give us the breakdown of 31,500 new funding accounts by regional in third quarter? And second, customer assets in overseas markets enjoyed significant sequential growth in third quarter. Could you please provide details on the onshore user assets quarter-over-quarter change and their contribution in overall client assets in third quarter? Tianhua Wu: [interpreted] So to your first question, in the third quarter, about 40% of newly funded accounts came from the Singapore market, approximately 35% were from the Hong Kong and 20% from Australia and New Zealand market and the rest 5% from the U.S. market. So in the third quarter, client assets for the onshore investor also saw a double-digit quarter-over-quarter increase with both institutional and retail clients experiencing net asset inflow and mark-to-market gains also boosted the quarter-over-quarter increase. Due to our global expansion over the past few years, the growth pace for client assets in overseas markets has been faster. By the end of the Q3, client assets of onshore retail users as a percentage of our total client assets has dropped to below 15%. The new account opening rules require onshore investors to hold value overseas, including Hong Kong identification to open accounts with us. It has been the same rule across the whole industry. We remain optimistic about the Greater China market because many high net worth individuals in Greater China already have overseas identities and the requirement for the Hong Kong Quality Migrant Admission Scheme gradually becoming less, I would say, stringent. The global asset allocation for investors is just getting started, presenting tremendous market potential. Just by serving this cohort, we will be able to sustain strong growth in client assets and trading volumes. Thanks, Cindy. Aron Lee: Operator, let's proceed. Operator: And our next question will come from Emma Xu from BofA Securities. Emma Xu: So the first question is about the operations so far in the fourth quarter. In particular, could you share any early trends around the trading volume, client assets and new funded accounts? And the second question is about your clearing cost, which decreased quite significantly in the third quarter. So what are the major reasons behind? And do you believe the current clearing cost is sustainable or you have further room for reduction? Tianhua Wu: [interpreted] Okay. So regarding trading volume, the market remains quite active. Our trading volume for the first 2 months of the fourth quarter is already on par with the entire Q3, partly due to the increase in futures trading volume. Cash equity trading volume in the first 2 months of the fourth quarter is more than 2/3 of the cash equity trading volume in the third quarter. In terms of client assets, net asset inflow quarter-to-date remains robust, and are expected to be slightly better than the Q3. However, some users had mark-to-market loss due to the market volatility in the fourth quarter, we will have a better idea of the total client assets movement by the end of December. As of new funded accounts, we have already achieved our annual target of acquiring 150,000 clients for the year. The number of new funded accounts in Q4 are expected to be roughly in line with it in Q3. We will continue to prioritize future quality, ensuring our growth aligns with healthy business model. John Zeng: So our commission income increased by 13% quarter-over-quarter. Clearing costs decreased by 17% this quarter, bringing the quarterly clearing costs to a historic low of 6%. The key reason is SEC in May announced that it will no longer charge transaction fee. Since majority of the trading volume on our platform are in U.S. securities, this changes in the asset fee has largely helped us reduce clearing costs. We believe the current clearing cost rate is quite sustainable as we are self-clearing for all core products, only a small number of stock and derivatives are cleared by third parties. Aron Lee: Operator, let's move on to the next question, please. Operator: Our next question will come from Ling Tan from Haitong. Ling Tan: I will quickly translate my questions. Congratulations on a very good, solid third quarter result. My first question is regarding the overall operating costs and expenses. I noticed that in third quarter, there is a notable increase in the overall cost and expenses, particularly in R&D as well as employee compensation, which is higher than the previous guidance of 10% to 20% year-over-year growth. Could management explain a little bit on what's the reason behind the increase? And looking forward, do you expect the overall operating costs and expenses to remain at the current level? Or do you expect it will gradually go up or trend down? My second question is regarding Hong Kong market. In third quarter, Hong Kong contributed to roughly around 40% of the total new -- newly funded accounts. Could management explain a little bit more on Hong Kong's contribution regarding net asset inflow, total revenue as well as net profit? And also looking forward, how do you plan to maintain the strong growth in Hong Kong, given Hong Kong is a highly competitive and highly penetrated market? John Zeng: So the rise in labor costs can be attributed to several factors. First, with our global expansion, the staff headcount has increased, and we have higher experienced R&D personnel to enhance our product offerings. Second, we have accrued more bonus given the recent performance. In addition, our asset management unit performed well in the third quarter, so we paid performance bonus to our fund managers. So as a result, labor costs in the third quarter were higher than normal single quarters. As for G&A expense, the increase is mainly due to -- as we grow globally, we are required to have more professional services related to AML, audit consulting and legal services. We anticipate those expense will remain at this level in the near future. So in the third quarter, Hong Kong accounts for about 35% of new users and approximately 1/4 of net asset inflow, making it a large key growth engine [indiscernible] Singapore. As for bottomline, Tiger Brokers Hong Kong has been profitable over the past years, though, its contribution to group profit was still relatively low. Considering the high user quality in Hong Kong, our current focus is to further improve our product offerings and increase market share rather than prioritizing profit contribution from the Hong Kong market. We are quite satisfied with the growth pace since entering Hong Kong. Our user base is very diversified, including existing investors using other brokers and the younger generation entering the market. We believe our product experience combined with competitive pricing are fundamental to Tiger's growing presence in Hong Kong and the reason why different users choose us. Since entering the Hong Kong market, client assets have consistently seen double-digit growth quarter-over-quarter with over 60% increase in the third quarter. The average client asset per user for both new and existing clients exceeded USD 30,000 and both velocity and ARPU are the highest across all our markets. As we increase our user acquisition in Hong Kong, along with the ongoing enhancement of our product offering like cryptos, we remain optimistic about future growth in this market. It's only a matter of time Hong Kong becomes another major profit contributor for the group. Aron Lee: Operator, let's move on. Operator: And our next question will come from Dennis Bai from UBS. Weizhou Bai: Congratulations on the strong results. My first question is about client acquisition cost, perhaps CAC. We've seen an uptrend. In 2024, the CAC was about USD 150. And in the first 3 quarters, the average CAC is about $250 and in Q3, particularly the CAC exceeds USD 400, and there's no new market entry. Could you please break out the Q3 CAC by market and share your outlook for CAC in Q4 and next year? And my second question is about the interest income. We saw a sharp Q-o-Q increase in Q3, but the margin financing and stock lending balance remained flat sequentially. Could you please explain what drives the interest income growth and whether this trend is sustainable? John Zeng: So overall, we privatize user quality and dynamically adjusting customer acquisition costs based on market conditions. As a result, average CAC can fluctuate across different periods and for different markets. This year, we have continued to optimize our customer acquisition strategy by eliminating channels that do not meet our ROI standards and focus on attracting high net worth users, particularly in the Singapore market. As a result, average CAC in Singapore has been rising from just over $100 back in 2024 to over $400 this year. At the same time, the quality of new users from Singapore keeps improving with the average net inflow per new users exceeding $60,000 in the third quarter. From a lifetime value perspective, we believe this will be for our profitability in the long term. The Hong Kong market has always been competitive, leading to a higher average CAC, which remains stable in the $300 to $400 range. Back in this quarter, it was about USD 300. However, due to the high quality of the local users, the payback period is still the shortest among all the markets we entered. In Australia and New Zealand, and U.S., we adopt a long-term approach to gradually earn local users' trust, resulting in a relatively stable average CAC around $200. Looking ahead, we will continue to adjust our customer acquisition strategy based on market conditions and competitive dynamics. So there are two key reasons for this interest income increase but margin balance relatively flat. So the #1 reason is the directed growth of client asset handing to an increase in client per cash adding approximately $1 billion from second quarter to third quarter. Additionally, as our profitability expense, our return earnings contributed to an increased cash balance as well. Both of those will boost interest income, but not reflected in increase in the margin financing or securities lending balance. The second reason is that while the overall margin and security lending balance remains flat from second quarter to third quarter, but the balance of high spread business, such as margin financing and the securities lending increased, while balance of lower spread business like [indiscernible] decreased, results in flat margin and security imbalance, while interest income had a big jump. Thanks. Aron Lee: Operator, let's move on to next question. Operator: And I'm showing no further questions from our phone lines. And I'd now like to pass it back to Aron Lee for any closing remarks. Aron Lee: Thanks. I'd like to thank everyone for joining the call today. I'm now closing the call on behalf of the management team here at Tiger. We do appreciate your participation in today's call. If you have any further questions, please reach out to our Investor Relations team. This concludes the call, and thank you very much for your time. Operator: Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. [Portions of this transcript that are marked [interpreted] were spoken by an interpreter present on the live call.]
Operator: Good morning, and welcome to the BMO Financial Group's Q4 2025 Earnings Release and Conference Call for December 4, 2025. Your host for today is Christine Viau. Please go ahead. Christine Viau: Thank you, and good morning. We will begin the call today with remarks from Darryl White, BMO's CEO; followed by Tayfun Tuzun, our Chief Financial Officer; and Piyush Agrawal, our Chief Risk Officer. Also present to answer questions are our group heads: Matt Mehrotra from Canadian Personal and Business Banking; Sharon Haward-Laird, Canadian Commercial Banking; Aron Levine, U.S. Banking; Alan Tannenbaum, BMO Capital Markets; Deland Kamanga, BMO Wealth Management; and Darrel Hackett, BMO U.S. CEO. [Operator Instructions] As noted on Slide 2, forward-looking statements may be made during this call, which involve assumptions that have inherent risks and uncertainties. Actual results could differ materially from these statements. I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results, management measures performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. Darryl and Tayfun will be referring to adjusted results in their remarks unless otherwise noted as reported. I will now turn the call over to Darryl. Darryl White: Thank you, Christine, and good morning, everyone. This morning, we reported adjusted EPS of $3.28 for the fourth quarter and $12.16 for the year. Fiscal 2025 was a strong year for BMO. We made meaningful progress against our financial and strategic commitments, strengthening profitability, delivering for our clients and supporting the communities we serve. At this time last year, we laid out specific financial commitments and a clear path. And through 2025, we delivered against each of those commitments with disciplined execution. Here are some highlights. Our top imperative is rebuilding our ROE together with profitable earnings growth. These priorities are not mutually exclusive, but mutually reinforcing as we demonstrated in 2025. We increased full year ROE by 150 basis points from 9.8% to 11.3%, and we exited Q4 with momentum at 11.8%. At the same time, we delivered EPS growth of 26% and record net income of $9.2 billion. We made progress across each of our 4 strategic levers. The most important driver was strong operating performance in each of our businesses with PPPT up 18% for the year to $15.8 billion. We met our long-standing commitment to positive operating leverage, achieving 4% for the year. Operating leverage was positive in each segment, driven by disciplined expense management and solid revenue performance. Our efficiency ratio improved by 230 basis points to 56.3%. Strength in risk management remains a core differentiator for BMO. As expected, impaired provisions moderated from the peak in Q4 '24 to 44 basis points this quarter. We built allowances during the first half of the year to account for a slower economy and trade uncertainty, and we are well reserved for potential risks in the environment. Finally, we're actively optimizing our capital position. Over the course of 2025, we returned over $8 billion in capital to our shareholders through buybacks and dividends. And today, we announced a dividend increase of $0.04 to $1.67 per share, up 5% over last year. Our CET1 ratio of 13.3% remains above our target, and we're maintaining steady execution of our share buyback program. Our strategy is clear and consistent and team BMO is executing with pace and momentum. Our digital-first AI-powered strategy is reshaping how we operate to serve our clients while putting AI in the hands of everyone. To support this, we recently introduced a leading Gen AI productivity tool to all BMO employees and award-winning learning modules to help them unlock the power of artificial intelligence with over 80% active users. We're creating value through strategic partnerships and investments we've made in data, risk governance and talent that are accelerating our AI capabilities to realize even greater efficiencies and business growth. We've executed and captured benefits from Gen AI tools like Lumi and Rover, digital assistants that support our frontline employees, enabling faster customer advice and insights. We're the first Canadian bank to access the IBM Quantum network and are actively using machine and reinforcement learning models in credit and capital markets and across the bank. Turning to highlights in each of our businesses. Starting with Wealth Management, our highest ROE business, which had a very strong year with record revenues and net income driven by continued growth in client assets and constructive markets. Clients are rewarding us with more business as we continue to deliver competitive investment returns and innovative solutions to meet their needs. This quarter, BMO Global Asset Management received 12 Lipper Fund Awards recognizing continued excellence in delivering strong risk-adjusted returns for clients across a diverse range of investment solutions. And with Burgundy Asset Management joining BMO on November 1, we're positioned to further expand private wealth solutions for the benefit of our clients. Capital Markets is a key contributor to BMO's diversified earnings. PPPT growth for the full year was strong with each quarter above our expectations. We strengthened our platform and enhanced client coverage to achieve and advance our position as a leader across priority markets and products, including in our globally leading metals and mining business, while expanding our equity derivatives and U.S. rate businesses. In Canadian Investment Banking, this year, we ranked #1 in M&A deals and #2 in ECM league tables. Our flagship Canadian P&C business delivered record revenue this year and strong PPPT growth of 8% as we're acquiring high-quality accounts and deepening client relationships through market-leading digital sales, engagement and experience. We continue to offer innovative solutions to clients -- to help clients make real financial progress. And this quarter, we launched joint programs with Instacart and Walmart to deliver convenience and savings to Canadians. In Canadian Commercial Banking, steady client growth supported by increased referrals between commercial, wealth and capital markets and continued momentum in digital engagement led to good loan growth of 7% and deposit growth of 5% despite a complex environment. A key driver of client and deposit growth is through our leading North American Treasury and Payment Solutions platform, which offers clients a comprehensive product suite, including real-time payments, virtual account management and payment APIs that connect directly to their enterprise resource planning and treasury systems. Turning to U.S. banking. This is the first quarter reporting under the unified structure with teams integrated to deliver the full power of BMO to our clients and momentum is building. We've made strong progress this year on improving the ROE in our U.S. banking towards our 12% medium-term target, executing against deliberate action plans to support this priority. Through a disciplined focus on stronger connectivity across our businesses, funding optimization and redeployment of resources to higher returning relationships, profitability has strengthened across key metrics. Execution of pricing optimization led to increased deposit spreads and margin expansion of 15 basis points from Q4 of last year. To date, we've completed optimization actions for approximately 80% of the loans we identified as nonstrategic and below our return targets and reduced RWA by USD 4.6 billion. We continue to expect these activities to be largely completed by the second quarter. At the same time, we successfully grown recurring fee revenues, up 10% this year. Commercial TPS fees grew 23% year-over-year and strong growth in net new assets and AUM drove a 12% increase in private wealth fees. Momentum continues to build in retail banking with 60% higher growth in net new checking accounts year-over-year. The results are evident in our fiscal 2025 performance. PPPT growth accelerated to 7% with positive operating leverage of 3% and meaningful improvement in PCL, all leading to ROE improvement of 170 basis points to 8.1% for the full year. We recently announced the sale of 138 branches in certain markets where we did not have local scale to compete and are strategically reinvesting to strengthen our network and densify our presence in key markets where we can achieve local scale and have the greatest opportunity for long-term growth. We plan to add 150 new branches over the next 5 years with a focus on further densifying in California, where we recently opened a newly integrated financial center in Manhattan Beach. We've also invested in key talent positions, adding and promoting over 100 frontline commercial and private bankers in the U.S., building significant capacity to further accelerate performance. Overall, 2025 was a productive year, realigning our U.S. banking structure and optimizing the portfolio. We're now advancing to the next phase of our strategy, positioning the business for growth, leveraging the strength and scale of all 3 businesses to drive greater synergies and continued ROE improvement. As we look ahead to 2026 with the -- while the economic environment has remained resilient, GDP growth has been modest and is expected to grow 1.8% in the U.S. and 1.4% in Canada. The Canadian unemployment rate is likely to remain above 7% through the middle of next year, presenting some challenges, particularly to consumer credit. While trade uncertainty persists pending the review of the USMCA agreement, at the same time, I'm encouraged that initiatives to invest in Canada and diversify trade relationships to strengthen the Canadian economy over the medium term are beginning to move forward. We're well positioned to benefit from a renewed CapEx cycle given our advantaged position in commercial banking and in capital markets. At BMO, we've set the foundation for continued momentum in 2026 and are moving forward with pace. I'm pleased to announce that we plan to host an All Bank Investor Day on March 26, where we will share with you more details on our strategy and our progress. In summary, we're delivering world-class client experiences grounded in one client leadership and fostering a high-performing, winning culture to drive progress for our clients and our performance. We continue to invest and leverage our digital-first AI power strategy, reshaping how we operate and serve our clients. Our consistent focus on superior risk management is foundational and through continued discipline and improving credit market conditions, we expect PCL to continue to normalize over time. Our #1 imperative continues to be our ROE rebuild, and I'm confident in the momentum we've built this year and that it will continue to deliver profitable growth and long-term shareholder value. With that, I'll turn it over to Tayfun. Tayfun Tuzun: Thank you, Darryl. Good morning, and thank you for joining us. My comments will start on Slide 9. On a reported basis, fourth quarter EPS was $2.97 and net income was $2.3 billion. Adjusting items are shown on Slide 46 and included a goodwill write-down related to the announced sale of certain U.S. branches. The remainder of my comments will focus on adjusted results. Adjusted EPS of $3.28 was up significantly from $1.90 last year with net income of $2.5 billion, driven by strong PPPT growth of 16% and lower PCLs. Return on equity of 11.8% improved 440 basis points and return on tangible common equity of 15.4% improved 570 basis points. Revenue increased 12%, with broad-based growth across all businesses, including continued strong fee growth in wealth and capital markets and NIM expansion. Expenses grew 9% or 5% excluding higher performance-based compensation and the impact of stronger U.S. dollar, and we delivered positive operating leverage of 3%. Total PCL decreased $768 million from the prior year with lower impaired and performing provisions. Piyush will speak to this in his remarks. Moving to Slide 10. Average loans grew 1% year-over-year, driven by higher residential mortgages and commercial loans in Canada, offset by lower U.S. commercial balances, including the impact of optimization actions. Customer deposits were up 1% from last year with good growth in Canadian everyday banking and commercial operating balances, offset by lower term deposits in both countries. Turning to Slide 11. On an ex-trading basis, net interest income was up 10% from the prior year with good growth in all operating segments supported by continued margin expansion and balanced growth in Canadian P&C and Wealth as well as higher net interest income in Corporate Services. Net interest margin ex trading was 206 basis points, up 7 basis points sequentially, reflecting improved deposit margins and contribution from corporate services, including the benefit of higher reinvestment rates. In Canadian P&C, NIM was stable with higher deposit margins, offset by changes in product mix. U.S. banking NIM was up 5 basis points, with higher deposit margins, partially offset by the impact of lower deposit balances. Year-over-year all bank NIM widened by 15 basis points and we expect it to remain relatively stable through next year based on the current rate expectations and continued benefit from latter investments. Turning to Slide 12. Noninterest revenue was up 9% from the prior year and up 17% excluding trading, driven by strong wealth management fees and underwriting fees in capital markets, as well as continued growth in deposit fees reflecting strength in our TPS business. Moving to Slide 13. Underlying expense growth was up 5% driven by higher employee-related costs, including investments in talent as well as higher technology investments. For the full year, underlying expense growth of 4% was in line with our mid-single-digit growth guidance given at the beginning of the year and achieved positive operating leverage of 4.3%. We have a long track record of disciplined expense management through continuous assessment of our expense base, balanced against strategic investments for future growth. We believe that we still have room to improve our structural expense base and have identified further efficiencies, mainly in the form of workforce optimization that will require an upfront charge. We are in the process of finalizing the details and currently expect to record a charge of approximately $225 million in the first quarter, which we expect will deliver annualized savings of $250 million when fully executed. We expect to realize about half of the savings in 2026. We expect core expense growth to be in the mid-single-digit range in 2026, including the upfront charge and our growing investments in talent, technology and automation with a particular focus on our U.S. banking and wealth businesses. We expect to still achieve positive operating leverage for the year, including the impact of the first quarter charge. A reminder that similar to previous years, Q1 will include seasonally higher benefits and impact of stock-based compensation for employees eligible to retire, which we project to be in the range of $250 million to $270 million. Turning to Slide 14. Our CET1 ratio is strong at 13.3% and remains above management targets. The ratio declined 20 basis points from last quarter with continued good internal capital generation more than offset by share repurchases and moderate growth in source currency RWA. We completed 8 million share repurchases during the quarter and 22.2 million shares in total during fiscal 2025. In 2026, we expect to continue buying back our shares while supporting business growth opportunities and maintaining a strong capital position. Our CET1 management target remains 12.5%. Moving to the operating segments and starting on Slide 15. Canadian P&C net income was up 5% year-over-year as good PPPT growth of 7% was partly offset by an increase in impaired and performing PCLs. Revenue of $3.1 billion was up 7%, driven by higher net interest income, reflecting both balanced growth and higher margins. Higher noninterest revenue reflected good growth in mutual fund fees, deposit fees and net investment gains in our commercial business. Expense growth of 6% reflected higher technology and employee-related costs. Canadian P&C, again delivered positive operating leverage for the full year with the efficiency ratio improving to 43.1%. Moving to U.S. Banking on Slide 16. My comments here will speak to the U.S. dollar performance and reflect the change to our organizational structure, combining the U.S. wealth business with our U.S. personal and commercial businesses. Net income was $627 million, up from $262 million a year ago, reflecting good PPPT growth of 8%, positive operating leverage of 3.6% and lower PCLs. Revenue growth was driven by higher deposit margins more than offsetting lower deposit and loan balances and improving noninterest revenue driven by strong TPS fees and net asset growth in wealth. Expenses were flat compared with the prior year as lower technology and other operating expenses were offset by higher employee-related costs. Moving to Slide 17. Wealth Management net income was up 28% from last year, driven by strong revenue performance in Wealth and Asset Management, up 14%, reflecting higher markets and continued growth in net sales, strong balance sheet growth and higher brokerage transactions. Insurance revenue increased due to underlying business growth and favorable market movements. Expense growth of 11% was driven by employee-related expenses, including higher revenue-based costs. In Q1, our first quarter results will include a full quarter of results from Burgundy Asset Management. Moving to Slide 18. Capital Markets net income was $532 million compared with $270 million last year, reflecting strong PPPT performance of $712 million, up 32% and lower PCL. Revenue was up 14%, reflecting 10% growth in Global Markets driven by higher debt and equity insurances and higher equities trading revenue partially offset by lower interest rate trading. Investment and corporate banking revenue increased 18% driven by higher debt and equity underwriting fees as we saw strong client activity during the quarter. Expenses were up 4%, mainly driven by higher performance-based compensation. Turning now to Slide 19. Corporate Services net loss was $73 million, reflecting above trend revenue in the quarter. We expect Corporate Services net loss in 2026 to average a similar range as the current year with the first quarter net loss expected to be the high point, including seasonal items. In summary, in 2025, we delivered strong performance with record revenue, PPPT and net income and met our commitments on positive operating leverage while investing in the business. We've made strong progress in ROE improvements at both the total bank and U.S. banking levels with strategies in place to drive further improvement. As we look ahead towards 2026, in Canada, we expect low single-digit loan growth as challenges in the macroeconomic environment continues to impact personal and commercial demand. Despite the muted environment, we are well positioned to generate continued market share gains in our businesses and anticipate improving conditions during the year from fiscal initiatives in addition to further policy rate easing and lower borrowing costs. In the U.S., we expect to benefit from the improved economic backdrop and focus on allocating resources to areas of competitive strength and higher returns. We expect to largely complete our balance sheet optimization in the early part of the year and expect year-over-year loan growth to strengthen and reach mid-single digits by the end of the year. Assuming markets remain constructive, we expect Capital Markets and Wealth Management to maintain their strong performance in 2026. And lastly, we expect an effective tax rate in the range of 25% to 26%. Overall, we are focused on building on our current earnings momentum and deliver continued progress towards our medium-term ROE targets. Across all of our businesses, resource deployment decisions today are predominantly driven by this ambition, and we are confident that the strength of our franchise on both sides of the border will help accelerate our performance. I will now turn it over to Piyush. Piyush Agrawal: Thank you, Tayfun, and good morning, everyone. My remarks start on Slide 21. Our credit performance this year was in line with our expectations. Impaired provision for credit losses was 46 basis points for the fiscal year at the lower end of the guidance of high 40s. Through fiscal 2025, performance improved in U.S. banking. At the same time, softness in the Canadian economy, including rising unemployment and trade uncertainty, resulted in higher losses in our Canadian Personal and Commercial business. Now turning to the fourth quarter. Total provision for credit losses was $755 million or 44 basis points with impaired provision of $750 million, down $23 million or one basis point from prior quarter, primarily due to lower losses in U.S. banking with relatively stable losses in Canadian Personal and Commercial banking and capital markets, which increased $7 million and $4 million, respectively. Turning to Slide 22. The performing provision for the quarter was $5 million with a build in Canadian Personal and Commercial, largely offset by a release in U.S. banking, consistent with the risks in the economy and credit trends in our portfolios. Overall, the provision this quarter reflected an improvement in the macroeconomic scenarios and lower balances in certain portfolios, which were offset by the uncertainty in credit conditions. The performing allowance of $4.7 billion provides a robust coverage of 70 basis points over performing loans, and we remain well reserved. Turning to Slide 23. Impaired formations were stable at $1.8 billion this quarter. The increase in the consumer segment came largely from mortgages, which are well secured with low LTVs and we do not expect to see significant losses. Wholesale formations have come down since last year and have been relatively stable over the last 3 quarters. Gross impaired loans increased to $7.1 billion or 104 basis points, up 2 basis points from last quarter. While it takes time to work through impaired files, we have seen a steady decline in new watch list formations and expect that this will lead to lower impaired balances over time. This quarter, we included in the appendix additional details on the nonbank financial institutions, or NBFI portfolio. This portfolio is well diversified across products, clients and collateral pools. It is well structured, generally secured and managed through specialized teams and differentiated underwriting criteria. 50% of this portfolio relates to equity subscription loans which has a very strong risk profile with no losses over a 30-year history of this business. In closing, while downside risks remain the impaired PCL ratio has improved 22 basis points since the end of last year. As we look to 2026, we anticipate a softer economic environment in Canada during the first half with trade uncertainty and subdued consumer sentiment continuing to weigh on the economy. At the same time, expansionary fiscal policies and growth initiatives as well as support from monetary policy should lead to stronger growth as we go through the year. Assuming the consensus macroeconomic outlook plays out, we expect impaired provision to remain in the mid-40 basis points range with quarterly variability. In conclusion, our performance continues to be supported by the diversification of our portfolio and risk management capabilities underscored by a strong risk culture. The robust allowance coverage, strong capital and liquidity not only equip us to navigate any challenges in the environment, they position the bank to capture opportunities as market conditions evolve. I will now turn the call back to the operator for the Q&A portion of this call. Operator: [Operator Instructions] Our first question comes from Paul Holden from CIBC. Paul Holden: A question on ROE. Now given the 11.3% in '25, wouldn't expect you to increase the target at this point. That's for sure. But just wondering in terms of that 15% target, do you think it's realistic that you could achieve that in 2027 given the pace at which you're executing against your strategy? Is it a realistic objective? Or are we going to have to wait a little bit longer? Darryl White: Paul, it's Darryl. So the 15% is still absolutely the target. Thank you for the question. In terms of the timeline, we're pretty clear to say that, that's our medium-term target, which we sort of think about as 3 to 5 years. And we started to establish that language pretty clearly through the course of this year. So it's difficult for me to put a particular date on when we hit the 15% for you right now. But we also have said and I stand by it, that assuming constructive environments, we hope to get there by the early part of this range. Operator: Our next question comes from John Aiken from Jefferies. John Aiken: Tayfun, you reiterated your preference for a CET1 ratio, getting closer to 12.5%. You guys are actually a little bit more aggressive in that regard. I'll preface this question by saying that I do agree that 13% is still a little bit too high for you and the group. But how comfortable do you believe that you and BMO are in terms of breaking ranks with the peer group if you drop below 13% before anybody else does? Tayfun Tuzun: So John, good question. I will reiterate how we think about our approach to capital management. There are 3 factors that we've been very public about this. One is obviously the regulatory minimums. The second one is the economic -- macroeconomic backdrop and our own performance within that macroeconomic backdrop. And the third one is the peer group distribution. So when we arrived at 12.5% management target, we considered all these 3 points. And we're quite comfortable that at 12.5%. This is a very sound approach to managing our capital ratio. And thus, we've been very public about that for a while now. Operator: Our next question comes from Ebrahim Poonawala from Bank of America. Ebrahim Poonawala: I guess just 2 questions -- one or 2-part questions since we can only ask one. I guess when we think about the commercial loan growth outlook, ex your optimization actions. I understand that's going to mitigate growth in the near term. But when we look at the U.S., there are obviously mixed signals around what's happening with the economy. Are you actually seeing signs that the tax bill is having an impact on how businesses are behaving around investments and hiring? And when you look at the first half loan growth in the U.S. one, like do you see a pickup? Or do you see risks of downside given the tariff uncertainties? And similarly, in Canada, what needs to happen to really lift the macro overhang if we don't get some clarity on [ CUSMA ] maybe until the back half of '26? Aron Levine: Ebrahim, thanks for the question. It's Aron. So in terms of the U.S. we're hearing from clients, general optimism, obviously, that's cautious and there's always the questions as you're asking. But generally, we're seeing pickup in activity. We're seeing pipelines grow. We're having good conversations with clients that are feeling generally a level of optimism. For us, in particular, as we think about this inflection point that we're hitting with moving out of optimization towards growth, right, the strength of our commercial relationships that really came through with the fee growth that we showed. Second, as Darryl mentioned, hiring over 100 commercial bankers and private advisers over the last 12 months. They're just effectively getting going. So you're going to see that benefit us over the next 12 months. And then, of course, our continued investment in both client-facing and internal technology as we get more efficient, make it easier to do business. So for all of those reasons, I feel very confident that we'll start to see the loan growth, as Darryl mentioned, as we get into the second quarter, third quarter of 2026, again, assuming some of the optimism stays and the U.S. economy stays as we think it will. Ebrahim Poonawala: Got it. [indiscernible] on Canada. Aron Levine: Yes. Here it comes. Sharon Haward-Laird: Thank you. Here it comes. It's Sharon. Thanks for the question. I'd say similar to Aron, I've been out talking to clients, and we would describe the tone as cautiously optimistic. There's obviously a lot of pent-up demand and pipelines are very strong. We did see the end of the fourth quarter was stronger than the beginning of the fourth quarter. So we're seeing good momentum going into this coming year. But we're also really focused on deposit growth. And you see we've taken a lot of market share in operating deposits and our TPS business has had double-digit -- high double-digit growth this year as well. So we've had very strong commercial revenue growth, and we're ready for the CapEx. On your question of what has to happen. I think at some point, we are starting to see, especially in the middle market, more clients moving and starting to draw down. But utilization rates are still low. So there's room there as well. Obviously, any more certainty will be a positive contributor to things moving. But whenever things pick up, we think we'll be in a good position to take share. Operator: Our next question comes from Gabriel Dechaine from National Bank Financial. Gabriel Dechaine: I know the impaired PCL discussion over the past while it's focused on the U.S., but I want to ask about the Canadian credit card book. We're seeing the delinquency rates there rise above the peer average. We're seeing the balances shrink over the course of the year. And I'm wondering what I should take away from that data? Are you -- did you grow too fast at a certain point in time? Are we maybe going to see a blip in post-Christmas period credit metrics? And then I'll throw this one in there while I'm at it for Darryl, M&A, would you be willing to issue stock to do a deal? Or are you looking at more tuck-in type things? Mathew Mehrotra: Thanks for the question, Gabe. It's Matt speaking. I'll just go back to the comments at the beginning of the call on the macro economy. That -- the overall conditions are definitely affecting mass consumers and particularly the lower end of the credit spectrum, not surprisingly, unemployment and solvency is up. Those stresses are more visible for us given our portfolio composition. We tend to have a smaller premium book, think about sort of large airline co-brand hasn't been a big part of our business up until recently with Porter. We've made adjustments that manage our exposure to that segment and equally on the flip side are seeing good growth with Porter and sort of our premium segment overall, 16,000 accounts acquired since launch. They have a deep active collector base. So overall, we're looking ahead towards that top end of the market. But I mean, obviously, with the macro conditions as they are, the impact on that lower segment is visible for us, and we're waiting for that improvement. Operator: Our next question comes from Mario Mendonca from TD Securities. Mario Mendonca: Sort of similar question to what Gabe just asked on acquisitions. There's plenty of speculation that BMO is actively looking to make an acquisition in the U.S. banking. And I know it's difficult for you to comment on that speculation because that would be a speculation, but perhaps you could speak to this. If BMO were to do a deal in the U.S., would you sacrifice that ROE target of 12%, at least for a few years, for the benefit of that increased scale? Darryl White: Yes. Okay. So it's Darryl, Mario. Thanks, Gabe, for the question as well. We rolled into the next one pretty quickly. So it's fine. I'll pair them together. The short answer to Mario's question is no, and absolutely no. So let me step back and give you a little bit of color behind that. I think we've been pretty clear about how we think about capital deployment and achieving the ROE targets is the top imperative across the bank and in U.S. banking. So every decision that we make is evaluated through that lens. Will it support the ROE improvement and sustainable profitable growth or not? That applies to an organic growth decision and it applies to M&A decisions as well. I've also said before good management teams always have their M&A antenna up. But equally, you got to be really disciplined. And we would only take a hard look at anything that met both the strategic and the ROE objectives. We've discussed a lot about how we're optimizing the redeployment in the United States. You saw it in my comments. You saw it in our new slide. You heard from Aron just now. The reinvestment is targeted at densifying and building local scale in markets where we think we're positioned to compete and win. So that's a really important point when you think about your question. Is there a tuck-in opportunity in those markets that would enable us to continue our ROE journey and not slow it down. In fact, if it would accelerate it, might we look at it? Sure. But if it doesn't meet those criteria, both strategically and financially, we're not on. Our #1 priority is to grow organically, and we're confident we could do that and reach those objectives with or without M&A. Mario Mendonca: Okay. And I need one quick clarification on the restructuring. Is that a number you're leaving in the core number? Or are you going to take that out and adjust that for it? It sounds like you're leaving it in, but some clarification? Tayfun Tuzun: Yes. We are leaving it in. We've always -- yes, we -- our record is that we typically leave it in. Operator: Our last question comes from Darko Mihelic from RBC. Darko Mihelic: I have a 2-part question. Just the first part of this is just a clarification on the corporate segment. Can you just speak to what it was that you did in the quarter that had this segment do much better than the typical loss? And importantly for me is just whatever was done in there, it doesn't seem like it has any kind of impact on the tractoring or anything like that? That's just the most important part of the answer to that. And the second part of my question is completely unrelated to -- with the disclosure you provided, Piyush, one of the things that -- on NBFI, one of the things I just want to confirm with you is you mentioned in your remarks that the -- there's no losses, so to speak, in a significant part of this book. And I guess, where I am with that is, were there losses in the other parts of the book and specifically, Piyush, I'm very interested in understanding if any part of this NBFI lending contributed to the higher losses we saw in '24 and to some extent '25? Tayfun Tuzun: So I'll begin with the first question, Darko. We have not done anything unique this quarter. So if you're asking, like, have you triggered something on your latter investments, et cetera, that resulted in outperformance? No. I think sometimes, we will have quarters when we may have some gains and that go to corporate services. We are doing a very good job in managing the overall liquidity and the low-yielding asset balances, which typically contributes to revenues in corporate services. And it's reflected in our margin improvement as well. As you can see, I mean, we've done a very good job in managing the margin. But there is nothing unique to the quarter. In some quarters, it happens to be higher. Some quarters, it tends to be lower. But there's nothing that we triggered caused this outcome. Piyush Agrawal: Okay. Let me Darko -- it's Piyush, let me talk to the NBFI. So the NBFI sector, you've disclosed information as you saw in the appendix. It's a big part of our business. It's a very profitable part of our business, very high returns. The big piece, as you saw is our equity subscription lines, 50% of it. We've been in this for a long time. I think you understand this business well. Over 99% almost is investment grade, and it's at the epicenter of a one client business of how we take this exposure and have multiproduct relationships across TPS, across wealth, across capital markets. In the other pieces, again, it's an amalgamation of many forms of clients, but it's well secured, well structured. Over 10 years, I would tell you, the loss rate is one basis point, and some of that came from what we've disclosed 2 years ago in the insurance sector. It's not a typical NBFI segment, but depending on how the nomenclature is, we have included insurance as well. So it's a high-performing, high investment grade, very, very low gross impaired loans. So what I would leave you with is, well secured, well structured, managed by dedicated teams and specialized underwriting criteria. Operator: Our next question comes from Ebrahim Poonawala from Bank of America. Ebrahim Poonawala: So I guess, Tayfun for you, as we think about the regulatory changes in the U.S., the SLR change, et cetera, does that -- any of that actually impact how you think about the capital levels within BMO's U.S. bank or the holding company? Like could any of that change? And I'm just wondering, as we think about the path to the 12% ROE, is there an element of capital flex that we may be underappreciating, especially in light of what seems like we could have a pretty busy period of rule making in the U.S. around some of the capital requirements? Tayfun Tuzun: Yes. Good question. Our capital position in the U.S. today and in the coming quarters, we'll continue to be above our peers. So today, the FC has 13.75% CET1 capital. The bank has 14.73% capital. So those are very strong levels. And given our income accretion, they are expected to go up. There is nothing in our ROE outlook that would be achieved by a lower capital position in the U.S. We're currently continuing to keep that accretion. So any changes from a regulatory perspective potentially could give us more flexibility, but we're not baking that into our ROE outlook. Our desire is to continue to utilize that capital supporting our balance sheet growth. Ebrahim Poonawala: Got it. And if I could follow up, maybe, Darryl, for you, given just how frequently bank M&A comes up with any conversation on BMO. One, why would you not want to do a deal in a world with the regulatory backdrop and wide open, you have excess capital. I'm assuming you could deploy some of that U.S. capital in a deal, I get it needs to meet the financial hurdles, but we didn't scale and -- scale be the way to go when you think about density, regional scale a priority for you? Darryl White: Okay. Ebrahim, thanks for the question. Look, the first thing is we don't -- we don't think about M&A timing regulatory environment, timing windows. You've seen us do deals in different administrations, and you've seen us do it through different macro environments as well. It's all about whether we have something that fits both strategically and financially, and I've reemphasized on this call the discipline that we're applying to that. And so I'll just come back to my question -- my answer earlier when I say that the focus is on densification and regional scale in markets where we can win. We have a really good strategy that Aron is leading in terms of making sure we have the highest probability of climbing up that ROE curve as fast as possible in the U.S. organically. And right now, that's job one. If something comes along that fits in the tuck-in category where we can accelerate that and not slow it down, yes, we'll have a good look. Otherwise, we've got other things to do. Operator: We have no further questions. I would like to turn the call back over to Darryl White for closing remarks. Darryl White: Okay. Thanks, everyone, for your questions this morning. I'll just wrap up by saying we had a really strong 2025, and we're well positioned for the year ahead. As I think about today's call, I'm reminding all of us that we're laser-focused on achieving our ROE imperative as quickly as possible and delivering earnings growth at the same time. And we'll share more on those plans and our outcomes at our Investor Day in March. Before closing the call, I want to acknowledge the contributions of our CFO, Tayfun, on his last quarterly call before retiring at the end of the year. Over the course of the last 5 years, he has served as an exceptional CFO, executive committee member and trusted adviser, and he has had a tremendous impact on BMO's growth trajectory, strategy and ambition to win. He's taken significant personal initiative to develop the next generation of leaders and strengthen the future of the bank. Tayfun, thank you for your leadership. And with that, I wish everybody a happy holiday season and look forward to speaking to you again in the New Year. Operator: This concludes the BMO Financial Group's Q4 2025 Earnings Release and Conference Call. Thank you for your participation. You may now disconnect.
Operator: Good evening, ladies and gentlemen, and welcome to the Argan Inc. Earnings Release Conference Call for the Third Quarter of Fiscal 2026 ended October 31, 2025. This call is being recorded. All participants have been placed on a listen-only mode. [Operator Instructions] There is a slide presentation that accompanies today's remarks, which can be accessed via the webcast. At this time, it is my pleasure to turn the floor over to your host for today, Jennifer Belodeau of IMS Investor Relations. Please go ahead, ma'am. Jennifer Belodeau: Thank you. Good evening, and welcome to our conference call to discuss Argan's results for the third quarter ended October 31, 2025. On the call today, we have David Watson, Chief Executive Officer; and Josh Baugher, Chief Financial Officer. I will take a moment to read the safe harbor statement. Statements made during this conference call and presented in the presentation that are not based on historical facts are forward-looking statements. Such statements include, but are not limited to, projections or statements of future goals and targets regarding the company's revenues and profits. These statements are subject to known and unknown factors and risks. The company's actual results, performance or achievements may differ materially from those expressed or implied by these forward-looking statements and some of the factors and risks that could cause or contribute to such material differences have been described in this afternoon's press release and in Argan's filings with the U.S. Securities and Exchange Commission. These statements are based on information and understandings that are believed to be accurate as of today, and we do not undertake any duty to update such forward-looking statements. Earlier this afternoon, the company issued a press release announcing its third quarter fiscal 2026 financial results and filed its corresponding Form 10-Q report with the Securities and Exchange Commission. Okay. With that out of the way, I'll turn the call over to David Watson, CEO of Argan. Please go ahead, David. David Watson: Thanks, Jennifer, and thank you, everyone, for joining us today. I'll start by reviewing some highlights of our operations and activities and Josh Baugher, our CFO, will go over our financial results for the third quarter and 9 months ended October 31, 2025. Then we'll open up the call for a brief Q&A. We delivered a solid third quarter, highlighted by record backlog of approximately $3 billion. We added several new projects to our backlog during the third quarter, including the 1.4 gigawatt CPV Basin Ranch project and another 816-megawatt project also in Texas. Our current backlog represents over 6 gigawatts of new thermal and renewable power plants. Demand for our capabilities has been steadily growing as the industry addresses the urgent need for new power resources to support the grid as the electrification of everything, the growth in AI and data centers in the onshore manufacturing pressure the current capacity of existing facilities. As we've mentioned, the current urgency in the demand environment is amplified by the aging and retirement of many natural gas-fired and coal plants. The strength of the opportunity pipeline we're seeing for our expertise and capabilities is providing excellent visibility looking out for the next several years as we move through next year and into calendar 2027, we expect to continue to add a handful of projects. We are optimistic about our project cadence and expect to reach our capacity of approximately 10 to 12 jobs for the foreseeable future. That said, as you know, on a quarter-over-quarter basis, our revenue and backlog performance can at times very related to the timing of projects. While we do our best to sequence our projects, ultimately, the project start dates are determined by the developers and the timing of one project ending and another starting can sometimes be more staggered than we prefer. You'll see that dynamic illustrated in our third quarter revenue performance, which while strong at $251 million decreased slightly as compared to revenue of $257 million in the third quarter of fiscal 2025. The decrease is primarily related to our completion of the LNG project in Louisiana and the near completion of Trumbull Energy Center, both of which generated significant revenues in the prior year period, coupled with limited revenues on several of our recently awarded projects in the current quarter. As many of you know, the early days of any project typically generate limited revenue which begins to ramp as we have more activity and more people on site. Sequentially, we were pleased to see revenue growth of 6% from $238 million in the second quarter of fiscal 2026. Along with delivering a solid revenue number, we achieved enhanced gross margin and strong profitability. Josh will go into the details of the quarter and first 9 months in a moment. But in summary, we had improved gross margins of 18.7% compared to 17.2% in the third quarter of fiscal 2025, net income of $31 million or $2.17 per diluted share, EBITDA of $40 million or an EBITDA margin of 16%; record backlog of approximately $3 billion, which includes the 2 new projects I just mentioned, the approximately 1.4 gigawatt Basin Ranch project with CPV as well as the 816-megawatt facility. Our balance sheet remains strong as we continue to generate significant cash flow. We have $727 million of cash and investments, net liquidity of $377 million and no debt at October 31, 2025. Finally, we remain committed to returning capital to shareholders, and we're pleased to raise our quarterly dividend to $0.50 and or an annual run rate of $2, representing our third consecutive dividend increase in the past 3 years. Now on to the operational review. Slides 4 and 5 present our 3 reportable business segments. In our Power Industry Services segment, we have the capability to build multiple types of power facilities, including efficient gas-fired power plants, solar energy fields, biomass facilities and battery energy storage systems in the U.S., the U.K. and in Ireland. Power Industry Services revenues decreased 8% to $196 million in the third quarter as compared to $212 million for the third quarter of fiscal 2025. The revenue decline in the quarter was primarily related to timing as certain projects are nearing completion and other newer projects are in the early stages of on-site activity as discussed earlier. The segment represented 78% of third quarter revenues and reported pretax book income of approximately $37 million. Revenue increased to $49 million in our Industrial Construction Services segment, a 19% increase compared to revenue of $41 million in the third quarter of 2025. Industrial Construction Services contributed 20% consolidated revenues with pretax book income of approximately $5 million in the third quarter of 2026. This segment primarily provides solutions for industrial construction projects with a concentration in agriculture, petrochemical, pulp and paper, water, data centers and power and has seen solid demand for its capabilities closing the quarter with backlog of $159 million. Finally, revenue in our Telecommunications Infrastructure Services group grew 76% to $6.3 million in the third quarter of fiscal 2026 compared to $3.6 million in the third quarter of fiscal 2025. Telecommunications Infrastructure Services is our smallest segment and contributed 2% of third quarter revenues. The Telecommunications segment provides outside construction services for the utility and telecommunications sectors as well as inside the premises, wiring services, primarily for federal government locations and military installations requiring high-level security clearance as well as data centers. We're excited about the growth we're seeing in this segment and expect to drive continued year-over-year growth. There has been a great deal of industry and news coverage detailing the increase in energy demand across almost every sector of the economy as the electrification of everything continues to expand. We are in a unique and concerning environment where a substantial portion of the nation's natural gas infrastructure is reaching the end of its useful life at the same time, energy use is increasing for the first time in decades. The ability for AI data centers, complex manufacturing operations and EV charging to operate without interruption is contingent upon the 24/7 supply of reliable, high-quality energy that primarily comes from a combination of traditional gas-fired and renewable infrastructure. Argan, along with just a few others in our industry, has the capabilities to build the large complex combined cycle facilities necessary to power the electric economy. We are energized by the current demand environment and believe that our energy agnostic capabilities, long-standing customer and vendor relationships, proven track record of success and disciplined approach in the market opportunities in front of us positions us well for continued long-term growth and profitability. Slide 7 illustrates the strength of our project backlog which is comprised of approximately 79% natural gas projects and 16% renewable. As I just mentioned, we believe grid reliability going forward will benefit from a combination of natural gas and renewable energy resources. And as you can see from this portion of our backlog that the demand for new natural gas facilities is significant and growing. We will continue to maintain our presence in the renewable space, but we expect gas-fired and other thermal power facilities to represent the substantial portion of our backlog in the near and midterm. As I mentioned a moment ago, Argan is one of only a few companies who have the capability to successfully execute the complex combined cycle projects and make up a significant portion of the projects currently coming to market. We have established a reputation for operational excellence and a proven track record of success for our customers by employing a disciplined approach to pursuing and winning the right projects with the right partners in the right geographies. We're excited about the market landscape and the demand we're seeing for our expertise and services. Turning to Slide 8. Our consolidated project backlog at October 31, 2025 was a record at approximately $3 billion, reflecting the strength of our offerings at all 3 operating segments. Our current backlog includes fully committed projects in both the power industry services, in Industrial Construction Services segments as well as in our Telecom segment. We're pleased with the demand we're seeing across all segments. Slide 9 highlights select major projects currently underway or recently awarded. Our Trumbull project, a 950-megawatt natural gas-fired plant in Ohio is nearing completion with first fire achieved at both units of the facility in late summer. The project is currently in the later stages of commissioning activity. Construction began on our 1.2-gigawatt ultra efficient combined cycle natural gas-fired plant for SLEC in Texas. And during the quarter, we added 2 additional gas-fired projects in Texas, CPV Basin Ranch an approximately 1.4 gigawatt project as well as an 860-megawatt project. During the third quarter, we continue to make progress on an approximately 700-megawatt combined cycle natural gas-fired power plant located in the U.S. as well as meaningfully advancing several renewable projects as we took advantage of cooperative summer and fall weather. Additionally, we are progressing on the Tarbert next-generation power station, a 300-megawatt biofuel plant for SSE Thermal and the 170-megawatt thermal facility, both located in Ireland. I'd like to take a minute to point out that both the Ireland projects are categorized as renewal because they are biofuel, but the construction cadence and profile is more consistent than gas build than a renewable build. Finally, you'll see 2 separate water treatment plant projects being performed by our Industrial Construction Services segment as well as a new recycling and water treatment plant that we are building in Alabama. As we move through the final quarter of fiscal 2026, we remain focused on executing the important and diverse projects in our project backlog. With that, I'll turn the call over to Josh Baugher to take us through the third quarter financials. Go ahead, Josh. Joshua Baugher: Thanks, David, and good evening, everyone. On Slide 10, we present our consolidated statement of earnings for the third quarter and 9 months ended October 31, 2025. Third quarter revenues decreased 2% to $251.2 million, primarily due to the timing of certain projects in our Power Industry Services segment. The revenue decline compared to last year's third quarter was related to decreased activity at Trumbull Energy Center which is near completion, the Louisiana LNG facility, which was completed earlier this year and the Midwest solar and battery projects. Additionally, certain recently awarded projects are progressing through early construction stages, while last year's third quarter included peak execution activity at several large projects. Sequentially, consolidated revenue increased 6% as compared to the second quarter of fiscal 2026. For our recently ended third quarter, Argan reported consolidated gross profit of approximately $46.9 million or a gross margin of 18.7%. Consolidated gross profit for the comparative quarter last fiscal year was $44.3 million, representing a gross margin of 17.2%. The increased gross profit and improved gross margin for the recently ended quarter was primarily due to the improved gross profit margins for the Power Industry Services segment and the Industrial Construction Services segment. Gross margins for Power Industry Services, our Industrial Construction Services and our Telecommunications Infrastructure Services segments were 19.8%, 13.9% and 21.2%, respectively, for the third quarter of fiscal 2026 as compared to 18.3%, 11.1% and 26.1%, respectively, for the third quarter of fiscal 2025. Selling, general and administrative expenses of $14.3 million for the third quarter of fiscal 2026 increased slightly as compared to SG&A of $14 million for the comparable prior year period. Other income net for the 3 months ended October 31, 2025, was $7.1 million, which primarily reflected investment income earned during the period. During the quarter ended October 31, 2025, the company recorded a provision for income taxes of $9 million on pretax book income of $39.7 million, reflecting an effective tax rate of 22.6%. For the comparable period last year, Argan recorded a provision of income taxes of $9 million on pretax book income of $37 million, which represented an effective tax rate of 24.3%. Net income for the third quarter of fiscal 2026 was $30.7 million or $2.17 per diluted share compared to $28 million or $2.17 per diluted share for last year's comparable quarter. EBITDA, earnings before interest, taxes, depreciation and amortization for the quarter ended October 31, 2025, increased to $40.3 million, compared to $37.5 million for the same period of last year. EBITDA as a percent of revenue increased to 16% for the third quarter of this fiscal year compared to 14.6% for the third quarter of last fiscal year. Looking at our year-to-date performance, revenues for the first 9 months of fiscal 2026 increased by 6% to $682.6 million as compared to revenues of $641.7 million for the prior year period. Our consolidated gross margin of 18.8% for the first 9 months of fiscal 2026 increased as compared to gross margin of 14.6% for the first 9 months of fiscal 2025, primarily due to the same reasons described for the quarter. SG&A expenses increased to $41 million for the first 9 months of fiscal 2026 as compared to $37.8 million for the first 9 months of fiscal 2025, but remain consistent as a percentage of revenues. Net income for the first 9 months of the fiscal year was $88.6 million or $6.27 per diluted share compared to $54.1 million or $3.91 per diluted share for the first 9 months of last fiscal year. EBITDA was $106.8 million for the first 9 months of fiscal 2026 compared with EBITDA of $74.2 million for the first 9 months of fiscal 2025. With that, I'll turn the call back to David. David Watson: Thanks, Josh. With strong cash flow, we further strengthened our balance sheet during the third quarter. At October 31, 2025, we had approximately $727 million in cash, cash equivalents and investments, generating meaningful investment yields. Our net liquidity was $377 million, and we had no debt. The strength of our balance sheet is a competitive advantage as it supports our increasing operations, expands buying capacity and provides customers a reliable and bankable EPC partner. Stockholders' equity was $420 million at October 31, 2025. The liquidity bridge demonstrates that our business model ordinarily requires a low level of capital expenditures. Our net liquidity of $377 million at October 31, 2025, has increased $76 million compared with net liquidity of $301 million at January 31, 2025. During the first 9 months of fiscal 2026, we have returned $32 million of capital to our shareholders. We have a disciplined capital allocation strategy, which focuses on our core commitments. First, we invest in our people to ensure we are appropriately prepared to staff and execute our projects. Second, the company pays a quarterly dividend which we increased 33% to $0.50 per common share in September 2025, creating an annual dividend run rate of $2 per share. Of note, that increase came just a year after we raised our dividend to $0.375 per share in September 2024 and represents our third consecutive year of raising our quarterly dividend, reflecting the strength of our business and our commitment to returning shareholder value. Since November 2021, when we began our share buyback program, we have returned a total of approximately $109.6 million to shareholders. Additionally, in April 2025, our Board increased the authorization of the share repurchase program to $150 million. And finally, we will continue to evaluate and consider M&A opportunities that could be additive or complementary to our current capabilities or enhance our geographic footprint. Our company is dedicated to driving long-term value creation for shareholders. Our backlog and pipeline are stronger than they have ever been. And since 2008, we have increased our tangible book value and cumulative dividends per share to record levels. As I mentioned at the start of the call, the unprecedented growth in power consumption, coupled with the replacement cycle for natural gas facilities that have reached or are near the end of their useful life are driving significant demand for Argan's construction capabilities and expertise. We are one of only a few companies who have a proven success rate building both complex combined cycle natural gas facilities and renewable energy resources and our track record of on-time, on-budget completion is unmatched among our competitors. The build-out of large gas-fired plants is necessary for the continuation of the 24/7 reliability of the power grid and Argan is uniquely positioned to expand our role as a market leader in the construction of energy infrastructure. To close, we remain focused on our long-term growth strategy, leverage our core competencies to capitalize on existing and emerging market opportunities, maintain disciplined risk management with the goal of improving our project management effectiveness and minimizing costly project overruns, strengthen our position as a partner of choice in the construction of power generation facilities that power the electric economy and maintain grid reliability. And last but not least, drive organic growth while also being alert for acquisition opportunities that make sense for our business through thoughtful capital allocation. We are energized by the strong opportunity pipeline and the demand for our expertise and capabilities. The power industry has a significant need for large combined cycle natural gas plants to support an already strained grid as the demand for energy increases and Argan is one of only a few providers with the ability to build these facilities. As we move through the close of fiscal 2026 and into fiscal 2027, we remain committed to our disciplined approach to capitalizing on the strong demand we are seeing for our services with a focus on pursuing the right projects with the right partners in the right geographies. We remain optimistic about our growth opportunities and our prospects for adding projects to our backlog in this high demand environment over the coming years. I'd like to thank our entire team for their hard work and dedication to operational excellence. They are the engine behind our company's growth and success. Likewise, I thank our shareholders for their continued support. With that, operator, let's open it up for questions. Operator: [Operator Instructions] The first question today is coming from Chris Moore from CJS Securities. Christopher Moore: Congrats on a solid quarter. It looks like you're set up exceptionally well for next year and fiscal '28. Maybe just trying to get a better sense in terms of margins moving forward. Obviously, another good quarter for gross margins move around a little bit depending on mix and where you are with certain projects. I guess maybe just we'll start on large natural gas projects, pricing on those, is it much different today than it was, say, 2 to 3 years ago? David Watson: Chris, yes, we haven't disclosed our pricing on our gas projects, but our pricing model remains the same as it always has taking into account today's market, inflation, labor and other various risks into consideration. As you know, there's really no one size fits all on pricing approach here at scope, complexity, whether it's a combined cycle or simple risks that are taken and other factors can be very different from contract to contract. So we're thrilled with our $3 billion in backlog, and we're also really pleased with what we've been able to do with our gas business. And obviously, our margin profile over the past 3 quarters has been good, and we're looking to continue that run. Christopher Moore: Got it. I appreciate that. Maybe I'll ask it a little differently. Just in terms of a sustainable gross margin moving forward. Is that 18% range? Is that a reasonable target for fiscal '27 and '28. Or just any thoughts around that? David Watson: Yes. You know that we remain intentionally conservative with our directional guidance on margins and we gave, I think, earlier this year, kind of that 16-plus percent benchmark. And clearly, over the year-to-date, we're at 18.8%. So we've exceeded that, and we're proud that we've been able to execute to do that. And so given all these recent awards and the changing overall mix of projects, contract types, frankly, the relative percentage of each of our business segments, I think, it's a little too early to tell where fiscal year '27 gross margins will go. But I mean, we really remain excited about the opportunities in front of us and look to continue to impress. Christopher Moore: Fair enough. Maybe just 1 last one. Just obviously, you can have multiple significant natural gas projects running at the same time in calendar '26 and beyond. I'm just -- can you talk a little bit about the required manpower challenges there? Are there specific skill sets that are exceptionally limited, which need to be shared across the different projects? David Watson: There are. I mean, procurement, engineering, there's a number commissioning. There's a number of skill sets that you allocate to multiple jobs at any given time. Labor is always a challenge. It's been so for years, and there's no change there as in the past. And we're always keeping a close eye on that. But I think you're kind of driving that what's our project capacity, Chris, in last quarter, I kind of given that range of $10 million to $12 million -- and we're going to remain consistent with that guidance. As our teams employees grow with training and experience, we'll strive to grow that capacity in the future. And as you know, we've intentionally been adding headcount. We're at our largest head count in the history to be able to take on this bulge of work and a lot of this work for the foreseeable future. Operator: The next question will be from Rob Brown from Lake Street Capital Markets. Robert Brown: Congratulations on all the progress. Just in terms of the pipeline and maybe the cadence of the pipeline after having a couple of large projects kind of kind of awarded here. Do you expect kind of a similar rate in '26? Or is there a bit of a pause? Or do you sort of -- what's the cadence of activity you expect here in the next 6 to 12 months? David Watson: Well, we're catching our breath Rob. As you know, we've historically been pretty conservative about predicting where our backlog can go, and we're going to stick to that approach. But we've successfully added 4.6 gigawatts or 6 major power jobs to our backlog over the past 12 months. And so we've got a lot of work to do in front of us. And so as we balance that capacity, our capacity in the new work, we ultimately do expect to add a handful of jobs over the next 12 to 24 months, but it's difficult to predict when we will be able to add those jobs, especially since, as you know, we don't control when the new jobs start. We're constantly evaluating projects that meet the right time, conditions and best fit for our organization. And we frankly have a significant number of inbound requests for our service at any given time. So I can't really give you a precise guidance as to the time of new jobs. The reality is, our next job could be next quarter or a year from now. And as you know, backlog performance can vary quarter-to-quarter. But at the end of the day, we're excited with our $3 billion in backlog, and we're excited about adding future jobs over the next couple of years. Robert Brown: Okay. Okay. Great. And then -- have you seen sort of changes in the competitive environment? I know on your script, you talked about one of the few that can kind of do these large jobs. But what's sort of the competitive environment changes here with all the demand? David Watson: Yes. As you know, after the dash of gas in that 2015, 2018 time period, just a little bit going back in history here, we had a lot of competition that left the field strategically. And today, for the larger complex combined cycle projects, there's really only a handful of us that are able to compete to do those. And there are more folks competing for simple cycle also known as peakers, and we expect to see more folks enter the market over time. But the reality is there is enough work right now for everybody and we focus on getting the right jobs with the right contract and customer as we build out our portfolio of projects. Operator: The next question will be from Michael Fairbanks from JPMorgan. Michael Fairbanks: I got another question on labor. So David, you talked about 10 to 12 teams. I guess I'm curious to hear if you expect to be at that level in fiscal '27? And then also, just like within that, how many teams could you potentially have working on CCGT project at one time? And then also just curious to hear, like how hard is it to expand that team count further? David Watson: All good questions. And as you know, this is not an easy business that we're in. I mean, you can do the math, we're currently working on around 7 gas/biofuel projects and a couple of renewable projects. So simply looking at that, there's a little capacity with -- little additional capacity to add another gas or renewable. And also the Trumbull job is kind of getting close to the end of its completion stage, which could free up some more opportunity for us. So again, that 10 to 12 capacity, we do have capacity to add to that, and that is our intent over the next 12-plus months. So I guess that answers part of your question. There's also a number of ways for us to deploy our talent, where we're able to potentially optimize certain leaders over multiple jobs versus just one. And so we're being very creative in being able to stretch our capabilities to take on the right projects and be able to meet our customers' needs. So there's a lot of -- there's a lot of thought and strategic decisions that are made around that. And again, always focused on growing our teams, growing assistant project managers, assistant engineers, et cetera, so that we can seed -- put the seeds in place for future expansion of capacity. Michael Fairbanks: Great. And then just as a follow-up, you talked about being selective on new projects. I guess I'm curious, like what kinds of projects and customers are you looking for -- and has there been any notable shift in your conversations around contract structure or terms or the risks that you're taking? David Watson: Sure. We have always remained a flexible partner with current customers and future customers at the end of the day. When it comes to contract terms, you just got to ensure that you're getting paid for the risk that you take on, and if you're able to enter into a an agreement that meets both your needs as the EPC as well as the customers' needs and for that customer to be able to get financing or whatever else they have to do to be able to get that project to go. So as it relates to terms, they're all negotiable. And there's really no standard set of terms that exist. No one size fits all. As it relates to our type of customers, obviously, we're looking to build out our portfolio of projects. We do find that with repeat customers, they know how we work and we know how they work. And so there is a natural cadence, which, in my mind, does reduce the risk on that type of project, but we're also very excited about the new customers or potential customers that we're talking to. And we work both with IPPs and utilities. And so I would say we're not closed for business with any type of customer. Operator: And the next question will be from Ati Modak from Goldman Sachs. Ati Modak: David, I think on the handful of opportunities that you mentioned into calendar '27, I'm curious what the size ranges are? Are the projects getting larger on average? Is it going to be similar? Any color you can provide there would be helpful. David Watson: Sure. I mean it's interesting if you kind of do the math, there are 5 U.S. jobs right now, they average over 1 gigawatt each. So that is very sizable. And as you know, in the past, we've worked on the job that was almost 1.9 gigawatts, the Guernsey job in Ohio. So we don't have any size limitations as to what we're looking to consider. We will -- I think there's opportunities that are even greater than that size. And then there's opportunities that are on the lower end. Again, it's about meeting the right place in our cadence of jobs that works for us and fits in our schedule. And so I think there is a tendency for us to do larger jobs, and we continue to -- and I think that's a bit of a sweet spot for us, but that doesn't mean any other job is off the table for us. Ati Modak: That's helpful, David. And then on the opportunities from private players or hyperscalers for dedicated CCGT plants, are you seeing anything? What's your outlook there? And what's your competitive position for something like that where it's a nontraditional customer, but we're starting to hear conversations around that. Any thoughts you can provide? David Watson: Well, we're always being asked to participate in behind-the-meter type projects. And we -- again, we're always evaluating each opportunity to see what works best for us and what can potentially work with that potential customer. Again, it comes down to the right job, the right contract, the right price, et cetera. And I think if you look at our history, we've worked with all different types of project owners and developers. And so having that flexibility and we are a lean team that has shown an ability to be flexible, that bodes well for those types of opportunities as well. Operator: The next question will be from [ Austin Lang ] from JLG Research. Unknown Analyst: Maybe if we could just kind of break apart the quarter's bookings qualitatively. I know you can't disclose too much here, but maybe it would be great to kind of understand some of the puts and takes that kind of define this tranche of bookings? And then I have one more question before I'm happy to turn it back. David Watson: [ Austin ], great to hear from you. And I assume you're specifically asking about the CPV Basin Ranch opportunity as well as the 860-mega watt Texas project. Again, 2 projects that we're excited about when it comes to puts and takes. It just depends. We are always -- as I've stated before, you look at the risk that you take on, are you wrapping the job? Are you not wrapping the job? Are you -- how much of the equipment are you buying versus the customer? So it's really difficult to, again, have that one-size-fits-all pricing per KW basis for any particular type of job, not knowing the details of the contract and what's in there. So we're really excited about how we have historically performed and how we have historically priced our projects, and we're looking forward to generating 2 additional successful projects here. Unknown Analyst: No, that's great. Maybe if we could just get your thoughts on the opportunity set broader broadly for gas gen like geographically, where are you seeing the most smoke here? Because obviously, this slate of Texas projects has been really exciting. But maybe anything more West Virginia or Eastern Seaboard? David Watson: Sure. I mean clearly, we've added a number of jobs in Texas, and we're very excited about working in that state. But historically, we've worked everywhere. And as you know, [ Austin ], we spent a fair amount of time in the PJM, finishing up on the job in Ohio. We've built several jobs in Ohio, several jobs in Pennsylvania. Yes, there are opportunities in West Virginia and throughout the PJM. And I think PJM is in the middle of an auction right now. So they are demonstrating in the last couple anyways, some improved pricing and thus potentially encouraging further development of gas plants, and that's a region we're very familiar with and would be very, very pleased to continue working in. Operator: And that does conclude our Q&A session for today. I would now like to hand the call back to David Watson for closing remarks. David Watson: Thank you all for participating in today's call. We look forward to speaking with you again when we report fourth quarter and year-end fiscal 2026 results. Have a great evening, everyone. Operator: Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.
Rob Quast: Good morning, and welcome to The Kroger Co. Third Quarter 2025 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Rob Quast, Vice President, Investor Relations. Please go ahead. Good morning. Rob Quast: Thank you for joining us for The Kroger Co.'s third quarter 2025 earnings call. I am joined today by The Kroger Co.'s Chairman and Chief Executive Officer, Ronald Sargent, and Chief Financial Officer, David John Kennerley. Before we begin, I want to remind you that today's discussions will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. The Kroger Co. assumes no obligation to update that information. After our prepared remarks, we look forward to taking your questions. In order to cover a broad range of topics from as many of you as we can, we ask that you please limit yourself to one question and one follow-up question if necessary. I will now turn the call over to Ron. Thank you, Rob, and good morning, everybody. Ronald Sargent: Thank you for joining our call today. We are happy to deliver another quarter of strong results, reflecting meaningful progress on our strategic priorities. This quarter, we continued to focus on what matters most, serving our customers, running great stores, and strengthening our core business. These efforts are improving the customer experience and creating a strong foundation for long-term growth. Today, we are going to talk about the things we got done this quarter, the proof points of our progress, and the ways we are positioning The Kroger Co. for continued success. I would like to start by sharing the results of our e-commerce strategic review. It marks an important step in how we are evolving our business to meet customer needs and also to improve profitability. In today's world, having a strong e-commerce offering is key to delivering a differentiated customer experience and also represents an important growth driver for our business. We have made good progress, building a more than $14 billion business achieving six consecutive quarters of double-digit sales growth. Earlier this year, we formed our new e-commerce team headed by Yale Kassett, designed to align all of the teams who contribute to the online customer experience. By bringing these teams together, we created a more integrated structure to support our strategy. Building on that foundation, we conducted a comprehensive review of our entire e-commerce model. This review helped us to identify where we can be more efficient and better meet customer demand. Customers increasingly value speed, flexibility, and convenience, and better leveraging store-based fulfillment helps us meet those expectations. As a result, we are evolving our hybrid fulfillment model by using automated fulfillment in geographies where customer demand supports it and also leveraging store-based fulfillment through our pickup business and relationships with well-established third-party delivery partners. These changes are fully consistent with our broader organizational goals to improve operational efficiency, drive profitability, and more effectively utilize our stores. We will make these changes to our network through a phased approach, ensuring we maintain flexibility to adjust our plans while minimizing operational and customer disruption. In recognition of this shift, we announced the closure of three automated fulfillment centers that have not met operational and financial expectations. We expect these fulfillment centers to close by January 2026. Based on our customer and store-level analysis, in those geographies where we will close sites but continue to operate stores, we expect to retain most of our customers and their e-commerce spend through store-based fulfillment and in-store shopping. We expect these closures to have a neutral impact on identical sales without fuel. With more fulfillment occurring in stores, we recently expanded our relationships with third-party delivery providers Instacart, DoorDash, and Uber Eats. By using our store network, we are improving both geographic coverage and speed with delivery in as little as thirty minutes. Each of our delivery partners brings unique strengths and specific benefits to our customers. They will also create new opportunities for our media business both on our platform and on theirs, something David will cover later. So in summary, this refreshed hybrid model helps us attract new customers, improve delivery speeds, and leverages our growing store network. We expect these decisions to contribute approximately $400 million in e-commerce profitability improvements in 2026, making our e-commerce business profitable in 2026. Turning now to store operations. Running great stores and delivering an exceptional customer experience are central to our strategy. Our internal composite scores, which measure key metrics such as in-stocks, fresh quality, and customer service, continue to show steady improvement. We are also investing in experiences that matter most to our customers, including adding store hours to improve checkout speed, increase service, and improve in-stocks. These investments are delivering tangible results including significant year-over-year reductions in wait times for our customers. To support these changes, we are utilizing an AI-powered workforce management platform which enables better coverage during peak periods and gives associates greater flexibility. This tool combines real-time labor insights with intelligent scheduling, allowing store leaders to proactively fill open shifts and ensure the right staffing at the right time especially during high-demand periods like weekends and holidays. Finally, as part of our commitment to simplifying our business, we are making good progress in reviewing all non-core assets to determine their ongoing contribution and role within the company. All of these actions strengthen our business and position The Kroger Co. for long-term growth. Before I talk about the results, I want to take a moment to just share what we are seeing from customers and how that is shaping our approach going forward. Macroeconomic uncertainty continues to influence customer behavior. And we are seeing a split across income groups. Spending from higher-income households continues strong, while middle-income customers are feeling increased pressure. Similar to what we have seen from lower-income households over the past several quarters. They are making smaller, more frequent trips to manage budgets, and they are cutting back on discretionary purchases. Food spend has been more resilient than non-food spend. Categories like natural and organics continue to perform well, reflecting continued interest in healthy and premium options. At the same time, customers are turning to promotions in our brands as smart ways to save without sacrificing quality. Ready-to-eat and other meal solutions are providing another way for households to get quality and convenience at a great value. Inflation and uncertainty around government funding combined with the pause in SNAP benefits during the final weeks of the quarter added incremental pressure to our third-quarter identical sales without fuel. These trends reinforce the importance of delivering value through lower prices, affordable quality in our brands' products, and more promotions for customers to save. Turning to our third-quarter results, identical sales without fuel grew 2.6% year-over-year and accelerated on a two-year stack basis up 4.9%. Sales growth was led by pharmacy and e-commerce. Gaining market share continues to be a top priority. In a challenging macroeconomic environment, we delivered share trend improvement again this quarter, after adjusting for closed stores, reflecting the progress we are making in strengthening our competitive position. We also increased our price investments this quarter. Toward the end of the quarter, when SNAP benefits were held up, we increased promotions to help customers save. We are disciplined in those investments, balancing our gross margin rate to ensure we deliver value in a sustainable way. Our brands had another strong quarter with sales outpacing national brands. Customers continue to choose these products because they deliver high quality at a great value. Our premium lines, Simple Truth and Private Selection, were the strongest performers again this quarter. Our brands' products carry a more favorable margin profile and also improve profitability during the quarter. These results highlight the strategic importance of our brands. Driving sales, building loyalty, and improving profitability. E-commerce sales were strong again this quarter, growing 17% led by delivery. We also improved e-commerce profitability with both pickup and delivery showing strong quarter-over-quarter improvement. We are encouraged by the early results from our DoorDash relationship. In its first month alone, we fulfilled 1 million orders bringing new customers and incremental meal occasions to The Kroger Co. As we evolve our hybrid model, we expect to continue to ramp up both sales and profitability. This quarter's results show the progress we are making. We also know we have more to do. Looking toward the future, we have shared previously, we are accelerating the expansion of our store footprint. We expect to break ground on 14 new stores in the fourth quarter, marking a meaningful acceleration in activity. Earlier this quarter, we announced expansion plans for Harris Teeter, one of our strongest and most successful banners. These plans include opening additional new stores in the Southeast and entering Jacksonville, Florida which is an important adjacent geography that positions us to grow households and gain share. Looking ahead, we plan to accelerate capital investment in new stores beyond 2025 to strengthen our competitive position, expand into high-potential geographies, and support long-term growth. As we expand our footprint, our approach to site selection and format starts with the customer. Then prioritizes improving ROIC with a focus on delivering greater shareholder value. We also see significant opportunity to continue taking costs out of our business. Starting with procurement. Both cost of goods sold and goods not for resale are areas with significant potential for savings and we are acting to capture those benefits. At the same time, we are rethinking how we work. This includes leveraging technology and artificial intelligence to simplify tasks and operate more efficiently, putting talent closer to the customer and building a more streamlined organization. As part of this effort, we are returning to in-office work five days a week to strengthen collaboration, accelerate decision-making, and better support our stores. Working together also creates a better environment for our associates to learn and develop. These changes will allow us to move faster and lead to a more efficient organization. We are also looking to emerging technologies such as AgenTeq AI to enhance the customer experience. We plan to introduce new AgenTeq shopping capabilities starting with Instacart's AI-powered card assistant on The Kroger Co. website and mobile app in 2026. The card assistant will help customers shop more effortlessly by making it easier to build personalized baskets, find meal ideas, and save time. We will embrace this technology while making sure it complements what differentiates The Kroger Co. today. Fresh products, unique Our Brands products, and an industry-leading loyalty program. While the landscape continues to evolve, we are confident we will be able to use technology to improve the customer experience. Finally, we are continuing the foundational work toward refreshing our go-to-market strategy with the customer of the future in mind. This includes a deep dive into customer data and a rigorous assessment of our competitive positioning. This work is shaping the foundation for our next phase of growth. Now I will turn it over to David who will review our financial results in more detail. David? Thank you, Ron, and good morning, everyone. David John Kennerley: The Kroger Co. delivered another strong set of results this quarter, driven by solid execution in our core grocery business and continued growth in e-commerce and pharmacy. In a challenging environment marked with cautious consumer spending, the government shutdown, and a pause in SNAP distributions, we improved market share trends excluding the impact of store closures by delivering meaningful value for customers. We delivered these results while continuing to balance the right investments for the customer with disciplined margin management. I will now walk through our financial results for the third quarter. We achieved identical sales without fuel growth of 2.6%, moderating slightly from last quarter as we cycle the impact of last year's Hurricane Helane and Port Strike as well as the pause in SNAP distributions during our final week of the quarter. On a two-year stack basis, identical sales without fuel accelerated by 20 basis points to 4.9% reflecting continued strength in our business. Our identical sales without fuel growth was again led by strong pharmacy and e-commerce results. Food inflation increased moderately compared to the prior quarter with notable inflation in certain commodities, particularly beef. Our Pharmacy business delivered another strong quarter fueled by growth in both core Pharmacy Scripts and GLP-1s. While the strong growth in pharmacy sales impacts our margin rate, it contributes positive gross profit dollar growth and supports our overall operating profit. Our FIFO gross margin rate excluding rent, depreciation, and amortization and fuel, increased 49 basis points in the third quarter compared to the same period last year. The improvement in rate was primarily attributable to the sale of Kroger Specialty Pharmacy, our brands' performance, lower supply chain costs, and lower shrink, partially offset by the mix effect from growth in pharmacy sales which has lower margins and price investments. After excluding the effect from the sale of Kroger Specialty Pharmacy, our FIFO gross margin rate increased 24 basis points. As we communicated last quarter, we expect our gross margin rate for the full year on an underlying basis to be relatively flat. As we balance the impact of pharmacy mix, margin enhancement initiatives, and price investments. The operating, general, and administrative rate, excluding fuel and adjustment items, increased 27 basis points in the third quarter compared to the same period last year. The increase in rate was primarily attributable to the sale of Kroger Specialty Pharmacy and investments in associate wages and benefits. Partially offset by lower incentive plan costs and improved productivity. After adjusting for the sale of Kroger Specialty Pharmacy, our adjusted O G and A rate increased nine basis points on an underlying basis. As we did in the first quarter this year, we took the opportunity to make an accelerated pension contribution in Q3, which was worth eight basis points on our O G and A rate. This reflects a proactive approach to reducing future liabilities and, most importantly, helps secure long-term benefits for our associates. Our LIFO charge for the quarter was $44 million compared to a LIFO charge of $4 million last year resulting in a $0.04 headwind to EPS this quarter. Our adjusted FIFO operating profit in the quarter was $1.1 billion and adjusted EPS was $1.05 both reflecting 7% growth compared to last year. Fuel is an important part of The Kroger Co.'s strategy and builds loyalty with customers through our Kroger Plus fuel rewards program. Fuel sales were lower this quarter compared to last year, attributable to fewer gallons sold. Fuel profitability was in line with expectations just slightly ahead of the same period last year. We expect gallons sold to remain lower on a year-over-year basis for the fourth quarter. Turning now to e-commerce. Our e-commerce business delivered 17% growth this quarter, driven by an increase in both households and order frequency. Orders delivered within two hours or less grew by more than 30%, reflecting the growing immediacy demand. Building on what Ron shared earlier, the recent update to our e-commerce strategy reflects a thoughtful evolution of how we serve our customers and drive sustainable growth. Our refreshed hybrid fulfillment model allows us to leverage the strength of both automation and store-based fulfillment to meet evolving customer expectations. This also allows us to optimize the performance and use of automated fulfillment centers when the right conditions exist. And utilize third-party partners for faster delivery while reaching new customers and incremental trips. Our new model positions us for both strong sustainable growth and improved flexibility. From a financial perspective, we are significantly accelerating the profitability of our e-commerce business. Closing three fulfillment centers and increasing store-based delivery will deliver approximately $400 million in incremental e-commerce operating profit in 2026. As a result, we now expect our e-commerce business to be profitable in 2026. The benefits from these decisions will be primarily used to reinvest in our business to increase value for customers and improve the shopping experience as we look to accelerate sales. We also remain focused on expanding operating margins and a portion of these benefits will be used to increase shareholder value. Given the financial performance of our automated fulfillment network, and the closure of specific sites, and as previously announced, we recorded an impairment and related charges of $2.6 billion in the third quarter. We will continue to monitor our retained sites with a focus on improving operating efficiency and strengthening financial performance. Our updated hybrid model also creates new opportunities for our media business. Our broad reach and unmatched food retail capabilities are attractive to delivery partners and we structured these relationships to benefit our media business. For example, our unique approach to collaboration with Instacart, DoorDash, and Uber unlocks new media opportunities across both platforms and we are already seeing strong interest from several large CPG brands. By integrating our customer data and loyalty insights with third-party platforms, we can bring more targeted and innovative media campaigns to reach new customer segments and create additional monetization opportunities. Our media business had a strong quarter with double-digit growth and continues to be a meaningful contributor to profitability. We are encouraged by the momentum and believe we have an opportunity to accelerate growth even further as we leverage new capabilities and improve coordination between our media and merchandising teams. I would now like to turn to capital allocation and financial strategy. The Kroger Co. delivered strong adjusted free cash flow this quarter, which reflects the strength of our operating performance. Free cash flow is important to our model, providing liquidity for our operations and strengthening our balance sheet. At quarter-end, our net total debt to adjusted EBITDA ratio was 1.73, which is below our target ratio range of 2.3 to 2.5. This provides us with financial flexibility to pursue growth investments and other opportunities to enhance shareholder value. We expect to return to our target leverage ratio over time and we will share more details about our plans for 2026 next quarter. Our capital allocation priorities remain consistent and are designed to deliver total shareholder return of 8% to 11% over time. We are focused on investing in projects that will maximize return on invested capital over time, while remaining committed to maintaining our current investment-grade rating, growing our dividend subject to Board approval, and returning excess capital to shareholders. During the third quarter, we completed our $5 billion ASR program under The Kroger Co.'s $7.5 billion share repurchase authorization. We are currently executing open market repurchases and expect to complete the remaining $2.5 billion under the authorization by the end of the fiscal year which is contemplated in full-year guidance. Improving ROIC is a key priority. As we shared earlier, we expect our updated hybrid e-commerce model and investments in new stores to drive stronger returns going forward. Building on that, we continue to sharpen our focus on cost structure. We have made meaningful progress so far, but we see greater opportunities ahead by modernizing operations and ways of working across our organization from stores to support centers. We also see opportunities to improve procurement, to unlock additional cost savings. The combination of disciplined cost management and capital deployment positions The Kroger Co. to deliver stronger returns and create more shareholder value. I would now like to provide some additional detail on our outlook for the rest of the year. We are pleased with the continued momentum in our business, supported by strong performances in pharmacy and e-commerce. Given our year-to-date results and outlook for the remainder of the year, we are narrowing our range for identical sales without fuel growth to a new range of 2.8% to 3% and raising the lower end of our adjusted earnings per share guidance to a new range of $4.75 to $4.80. This includes the impact of LIFO which is now expected to be a $0.07 headwind compared to what we expected at the start of the year. As we move into Q4, we expect a slight improvement in our OG and A rate to help mitigate the impact of a slight decline in FIFO gross margin rate. One additional factor to note is the impact of the Inflation Reduction Act on our pharmacy business. Beginning on January 1, this legislation is expected to reduce Medicare drug prices on 10 highly utilized medications. Sales on these medications will be recorded at the new reduced prices. The Kroger Co. will continue purchasing these drugs at current acquisition costs and manufacturers will fully reimburse The Kroger Co. for the difference through rebates, which will then be recorded as an offset to cost of goods sold. As a result, we expect that this will lower Q4 identical sales without fuel by approximately 30 to 40 basis points but will have no impact on our earnings. This is reflected in our updated guidance. I will now turn the call back to Ron. Ronald Sargent: Thank you, David. In closing, we are encouraged by the progress we are making. Our priorities are clear, we are executing with greater speed and discipline. We are strengthening our core business, investing in areas that will contribute to long-term growth. We are taking decisive actions today that will make The Kroger Co. stronger now and in the future, delivering greater value for our shareholders over time. Before we move into Q&A, I want to provide a brief update on the CEO search. Our board remains actively engaged and is making good progress. While we do not have a specific timeline to announce today, we are engaged in a thorough process and expect to appoint a new CEO during 2026. We will now open it up for questions. Operator: The first question goes to John Heinbockel of Guggenheim. John, please go ahead. John Heinbockel: Hey. Good morning, Ron. Can you talk to the accelerated storing program right, maybe talk about that cadence and then when you think about, you have got obviously a fairly far-flung network. How do you think about concentrating that and as part of this, I know the digital review is different. Do you think about the portfolio that you currently have, you know, are there opportunities? Are you looking to, you know, do you exit some places? Do you double down in others? As part of the storing effort? Ronald Sargent: Sure. Let me try to answer several of those questions. First of all, we are pretty excited about the new investments in storing because that drives a lot of goodness from the top line and the same-store sales line. And we think we have got a great long runway to grow stores. I think, you know, when you think about the things that go into making, you know, stores obviously, the right location, the right market, you have got to have, you know, great operational infrastructure as well as talent. And, obviously, you are not going to open a store unless you think it is going to deliver a terrific return. In the fourth quarter, we are going to complete about or in the fourth quarter, we plan to complete about four major store projects. We are going to break ground on another 14 stores. When you look at 2026, we expect to increase new store builds by 30%. In terms of and I guess the other thing I should just mention is how excited we are about our entry into Jacksonville with Harris Teeter. You know, Harris Teeter runs a great business. They already operate in Florida in Amelia Island, which is about 40 miles from Jacksonville. Florida itself is a large state. It is a growing state. We expect to do very well there. I think Jacksonville is the tenth largest city in the United States, and I think it is the largest city in Florida. And I think, you know, that is kind of an indication of we are going to continue to expand in adjacent markets. I think we also have opportunities to grow, you know, through acquisition, and we have not ruled that out despite our last few years with Albertsons. And, I think you look at, you know, our long-term aspiration, we expect and plan to be a national retailer. So I am not sure that answers all your questions. Concentration is important. You know, we will certainly fill up Jacksonville before we move to adjacent markets. But we think we have got great opportunities to grow stores, and I think, frankly, that has been one of our biggest challenges over the last few years is we have not allocated enough capital to growing stores because we have, you know, allocated a lot of capital in other areas like fulfillment centers. John Heinbockel: Great. And maybe just a follow-up, totally unrelated. The CEO search has been, you know, one of the longest, right? I think we have seen in a while. I am curious, you and the board, what are you looking for? You may be, you know, characteristic-wise, capability-wise, and what does the business need from that person? Ronald Sargent: Sure. You know, I think as you know, we have been pretty deliberate in the process. We have also been very thorough in the process. You know, we are working with an executive search firm and we have identified and engaged with really several very highly qualified candidates. I think we have announced publicly that our next CEO will be external. And I think we expect them to bring in fresh perspectives to the organization, and also to complement the culture that we have today, which is pretty strong at The Kroger Co. as well. In terms of, you know, what we are looking for, we want a deep understanding of retail transformation. We want somebody who is very close to the customer. We want somebody who has demonstrated success operating at scale. Who knows how to operate and frankly, cultural fit and alignment with The Kroger Co. values is critical as well. And like I said, we are getting closer. We are making good progress. And we expect that decision will be announced in the first quarter. John Heinbockel: Thank you. Ronald Sargent: Thanks, John. Operator: The next question goes to Ed Kelly of Wells Fargo. Ed, please go ahead. Your line is open. Ed Kelly: Good morning, Ed. Ed Kelly: Yes. Hi. Good morning, everyone. I wanted to, you know, maybe first Ron, could you just kind of step back and, you know, maybe talk about how you are feeling about the current grocery ID trend. It seems like you want that to be better. The competitive environment seems like, you know, it may be ticking up a bit, and you did mention, you know, some investment in price towards the end of the quarter. How should we think about all of that in the context of maintaining underlying gross margins stability going forward? And I think what you are implying for next year based upon the way you are talking about e-commerce is EBIT, you know, at least maybe some EBIT margin expansion. Ronald Sargent: Sure. Yeah. Let me just talk a little bit about sales. Yeah. I think this morning, we announced that sales came in a little lighter than we expected, and that was primarily later in the quarter. And that is due to a combination of factors. We saw increased caution and uncertainty among consumers, particularly in October and November due to the concerns about the government shutdown. Also, the pause in SNAP benefit distributions created some headwinds at the end of the quarter. I think consumers are becoming more selective. They are buying more on promotion. They are reducing discretionary purchases, things like general merchandise. General merchandise comped negative during the quarter. And, also, we had a tougher ID comparison in Q3 from the prior year. Despite all that, you know, our two-year stacked identical sales were up 20 basis points, and I think that might have been one of the higher orders of the year. But I think, you know, what we are doing going forward is, you know, our focus remains on value and serving customers during a pretty uncertain time. If you look at Q4, Q4 to date, we are feeling pretty good about our quarter-to-date sales. We are slightly ahead of our guidance that we provided this morning. But we do not anticipate any, you know, meaningful improvement in the consumer environment in Q4. Also, when you, you know, do the math, looking at the top line, we are also going to lap harder comparisons in Q4. Last year, we benefited from some weather, and maybe we will have weather again this year. Also, we benefited from egg inflation last year that we will not see this year. And then finally, and I think David mentioned this one, is we will see some headwinds relating to the Inflation Reduction Act in pharmacy. That will hit us in January to the tune of about 30 basis points in overall ID sales. You asked about the competition. I think the environment remains very competitive as it always is in the retail world. I think it is especially true today when consumers are looking for great value. Frankly, our focus is just running The Kroger Co. playbook. We want to run great stores. We want to drive e-commerce business. We want to grow alternative profits. We continue to lower prices. We took down another thousand items in Q3. And I think we will continue to ramp up promotions during the holidays to drive traffic as well as basket sizes. The good news is that vendor funding continues to be strong to support our initiatives. Maybe I will give you one example of that. Thanksgiving meal bundle that we announced a few weeks ago. We lowered the price this year over last year. And, we did not cut the menu to do so. I think the bundle fed 10 people for less than $5 per person. So in answer to your question, yeah, the environment remains competitive and we expect that to continue. David John Kennerley: Hey. Just a couple of things to build on Ron's comments. I think it is also important to note in the quarter, you know, our share trends improved. So, despite the impact on sales from the things that Ron talked about, we saw sequential improvement in our share trends, which was good. And then in terms of gross margin, I think, you know, Q3 shows that, you know, we manage gross margin in a very, very responsible way. And I think, you know, despite what we have guided to for Q4, you guys should think about us continuing to do that in a responsible way. You know, if you look at actually the breakdown of gross margin, selling gross itself actually declined as we invested in pricing. But we were able to offset that with, you know, mix on our brands, good sourcing improvements, shrink, and other supply chain costs. And I think I would expect a similar dynamic to what we saw in Q3 going forward. Operator: The next question goes to Michael Montani of Evercore ISI. Please go ahead. Michael Montani: Good morning, Michael. Yes. Hi. Morning. Thanks for taking the question. I guess one thing that I was going to ask about was when you look at the pharmacy drug pricing headwind, should we anticipate that that annualizes closer to 100 bps for next year? That was part one. And then part two is just can you parse out some of the tailwinds you might have to offset when you think about Express Scripts' impact? Where is that now? How does that mature? You know, DoorDash and Uber Eats, just trying to see what there might be there as offsets. David John Kennerley: Hey. Thanks for the questions. David here. So, obviously, we are not, you know, getting into 2026 guidance today. We will obviously get into more details on that in our next quarterly earnings. But let me just add a little bit more color on the Inflation Reduction Act impacts that we will see this quarter. And then how you might think about some of the tailwinds that we have got. So I think, to provide a little bit more detail, so starting January 1, Medicare will pay, you know, 60 to 70% less for the first 10 negotiated drugs. And I think it is important to stress that this is really only Medicare. Those lower reimbursements will translate into lower sales, i.e., the price at which we sell, and that creates the headwind that we have talked about. I think it is also important to know that manufacturers will offer rebates to us to offset that. So this will have no margin impact in the quarter. And no earnings impact, and we expect that dynamic to continue on an ongoing basis. As we think about the tailwinds that we have, you know, to maintain really good performance in our ID sales, you know, our long-term trends are, you know, we are seeing units improve in our core business. You know, we have got, you know, expecting to continue to invest in making sure our price gaps. We have got headroom on our brands. We have got a, I think, a whole range of different initiatives to keep core momentum in our business moving along strongly to offset some of the impacts from what we are going to see going forward on our pharmacy business. Operator: The next question goes to Kelly Bania of BMO. Ronald Sargent: Good morning, Kelly. Operator: Kelly, your line is open. Kelly Bania: There we go. Thanks for taking our question. Can you just maybe help parse out more specifically the impact of pharmacy on the quarter? It sounds like you are estimating some slight market share improvements, but I think a lot of investors are really just trying to understand what is happening with the core grocery business, with inflation and units and market share? Any color you can give there? And then also, just going back to the reinvestment of the e-commerce losses, maybe can you talk about how much you are planning there? How much is planning to go towards price versus store standards? Maybe just your assessment of those two key factors on where your price positioning is and your store standards? Is this going to be a broad-based investment across many stores, more targeted in certain areas? Any color on how we should think about that and what that might do for next year? David John Kennerley: Kelly, let me take that initially, and then I will turn it over to Ron. So I think pharmacy in the quarter, you know, I would think of the impact of pharmacy, you know, business, you know, similar to what we have been seeing over recent quarters. So I do not think there is a material change, you know, in what we are seeing from a pharmacy performance this quarter. I think your second question was around units and what we are seeing on the core business. We did see a slight deceleration in our unit trends in Q3. If you sort of dissect where that is coming from, actually, discretionary categories were probably the most impacted. We also saw some impacts in our meat business due to the higher inflation that we have been seeing. But I think it is also important to say that, actually, unit trends improved or held up in a number of areas. We saw good improvement in the deli. And, actually, natural and organic foods held up really, really well. You know? And I think these trends changed given some of the broader dynamics that Ron talked about at the beginning. You know, SNAP, and the sort of broader macro consumer environment. In terms of the tailwind that we have next year from our e-commerce business, we have not yet declared how we are going to, you know, split that money up. Obviously, we will provide more details when we get into 2026 guidance. But as we said, we expect to use some of the money to reinvest back into pricing, to make ourselves even more competitive. We have got a whole range of different opportunities to invest to improve the customer and in-store experience, which we believe will also help improve composite scores. But we are also committed on an ongoing basis, as we have said, to improve the operating margins of the business. And we expect to do that next year as well. Ronald Sargent: And, David, the only area I would add would be kind of technology. I think we have got some technology spend that is in the pipeline that we want to make sure that we, you know, can continue to grow not only our retail business but also our e-commerce business, which is rapidly evolving. Operator: The next question goes to Michael Lasser of UBS. Michael, please go ahead. Michael Lasser: Good morning, Michael. Good morning. Thank you so much for taking my question. Good morning, Ron. My two-part unrelated question. The first is as you went through your e-commerce review, how did you think about the risk of leaning so heavily on third-party providers to fulfill a core competency, which is to interact with the customer at the point of delivery versus having that key function more in-house? And, also, as part of the e-commerce review, you mentioned that it is going to be profitable next year. Is that simply a function of the $400 million of losses going away, or are there other factors that we should consider to drive that profitability? And just one last unrelated point. As you think about 2026, do you expect the rate of growth for the grocery industry just to be more sluggish overall given this 100 basis point headwind from the pharmacy change along with what could be a headwind term snacks next year? Thank you very much. Ronald Sargent: Sure. I will start, and then I will turn it over to David. In terms of you asked the question about the providers that, you know, are going to be doing some more of our delivery. One, we are really excited about the connection. I think each of those partners really brings distinct customer, you know, serves distinct customer needs as well as occasions. You know, some are full basket stock up, delivery companies and some are really more about immediate, convenience. I think we are looking at these partners as incremental sales opportunities and customer opportunities. The vast majority of our e-commerce sales come from The Kroger Co. website. And, we feel like, they give us operational flexibility as well as strategic flexibility. You think about Instacart, which is our largest partner, you know, they deliver broad geographic reach. They have got great scale. They can handle very large basket sizes. They also we also can offer agentic shopping capability on The Kroger Co.'s iOS. Uber Eats, you know, that leverages Uber's existing customer base and the Uber app. And I think the benefits here are add-on economics. You know, customers can order grocery items and do with the restaurant orders. That certainly appeals to younger customers who want more speed, more convenience, and I think those represent the new and younger customers for the company. And then DoorDash, David talked about how successful that launch has been. And there again, we are focusing on speed. We are focusing on convenience. It is, you know, ideal for, you know, quick small basket needs. And, it appeals to younger customers. In terms of the $400 million, I will ask David to weigh in on that one. David John Kennerley: Yeah. So Michael, the way I think about e-commerce profitability is, I mean, as we have been saying, we are already making good improvements in on the business as it exists today. In fact, in quarter three, we actually cut the losses that we have been making in half. So we are making really, really good quarter-over-quarter improvements in profitability. And I expect that to continue into next year. You then take the $400 million that we have talked about, you know, which is from, you know, from closing the automated fulfillment centers. You then add in the business that we believe is highly incremental from the new third parties that we are working with so DoorDash and Uber Eats. As well as continued growth from our Instacart business. You have got the media business that we expect to continue to grow. And importantly, the media sharing opportunities that we have with our new partners. And when you put all that together, that allows us to expect that we will make money in e-commerce next year. Ronald Sargent: And, Michael, your third question, you know, I am not qualified to speak for the rate of the grocery industry growth rate for 2026, and I certainly do not want to get into any, you know, guidance at this point. We will do that next quarter. But I do not know that there is any reason why there should be this dramatic slowdown in the grocery industry. And, certainly, you know, not for us. We have got new store growth coming. We are closing, you know, kind of unproductive and low-performing stores. E-commerce has been, you know, has had a great year and continues to accelerate seems like every month more and more. So the mix might change a bit there because e-commerce will grow faster than physical stores. But, you know, we have got a lot going on in fresh categories. Our brands continue to grow faster than the house. And then, you know, finally, you know, we want to continue to execute very well in our stores, and customer service matters. And, I am not sure that I see a slowdown for 2026. Operator: The next question goes to Jacob Aiken-Phillips of Melius Research. Jacob, please go ahead. Jacob Aiken-Phillips: Good morning, Jacob. Hey. Good morning. So on the last call, you talked about how you are kind of working on how you discuss the retail media business with vendors or across the organization. And today, you highlighted some new opportunities within the three partnerships. I am just curious. Like, as more missions originate on the partner platforms, how are you structuring the relationships so that you have the right level of first-party data and we think of the economics as comparable first-party versus third-party for retail media? David John Kennerley: Jacob, let me take that one. It was a little hard to hear your question. Your line is breaking up. But, I got the gist of it. So we are seeing good performance from our retail media business today. So in Q3, we saw another quarter of double-digit growth. And we think we have got good plans for Q4. And obviously, we will share more specific guidance as we get into next year. And our plans lead us to believe actually that that business will accelerate into Q4. I think the foundation of this is, you know, great tools with best-in-class capabilities for the brands that choose to operate on the platforms. Now as we think about the new partnerships that we have got going forward, the really important thing that was important for us when we structured those relationships is to make sure that, you know, we got to participate in the media opportunities that exist and that may originate on their platform rather than our platform. Obviously, I do not want to get into the details of the specifics of how we have structured those agreements, but we have structured them in a way that we benefit what I would call appropriately from that. In a way that is very favorable to our economics. Operator: The next question goes to Seth Sigman of Barclays. Please go ahead. Your line is open. Seth Sigman: Good morning, I think there was a comment that you feel good about quarter-to-date. I am not sure if that implies there is anything more you can share about that and what may be driving that if it is improving? And you mentioned price investments. I am just curious, is that playing a role? And then a bigger picture question on price investments. You know, you were doing a lot of testing this year. Is there anything else you can share about what is working versus what is not working? Thank you. Ronald Sargent: I think it is a little early to opine about the fourth quarter. We are just three or four weeks into the quarter. Just to be clear, I said that, you know, quarter-to-date, we are trending ahead of our guidance that we shared with you this morning. In terms of price investments, it is a little hard to know those in real-time. We continue to make price investments. We will continue to do that throughout the quarter. I think what we are seeing with our promotional environment out there is that customers are responding to promotion. And we will continue to do that. I do not know what David Yeah. Just sorry. One slight clarification just to make sure the point on Q4 is crystal clear. We are trending quarter-to-date slightly above the midpoint of our Q4 guidance. David John Kennerley: Yeah. And Ron, do you want color price message? Sorry. Let me take that one. I think there was a second question on there, Seth, about price investments. Listen. We continue to make sure that we provide great value for the consumer. You know, as Ron talked about, a great example was towards the end of the quarter when we knew consumers were struggling. Given, you know, SNAP benefits being withheld. You know, we invested in what we believe was an appropriate way and also a very responsible way with our margins. To bring the cost of a Thanksgiving dinner down, as well as lower prices through promotions on a number of critical items for households. And I think we will continue to do that. Value is at the foundation of what we do. And we will continue to do that in a responsible way. Operator: The next question goes to Simeon Gutman of Morgan Stanley. Please go ahead. Ronald Sargent: Good morning, Simeon. Simeon Gutman: Hey, Ron. Hi, David. Morning. Two questions. The first e-commerce. Now that you will be in the green next year, you talk about the scalability or maybe incremental margins. Does it move quicker or is it still a long evolution? And part two, since you have been in your role, Ron, there has been some significant change, strategic change, tactical change. Today's call sounded a little more urgent with some pricing, folks coming back to work, etcetera. I do not know if that is a fair read or not, can you say if it is? And then I guess new CEO should be very little interruption as far as execution goes. Because it sounds like the plans are all being built today. Thanks. Ronald Sargent: Let me ask David to cover the first, and I will cover the second. Yeah. Let me take the first one. So, obviously, the economics are very almost business with the outcome of the strategic review, have changed. So we now move from a business that was in the red to a business that is now in the green. We have had a really good growing business now for many quarters. And I think, you know, with the new partnerships that we have signed, with the stores that we are building, with the strong growth that we are really seeing across all elements of our e-commerce business, I think what that allows us to do is continue to scale the business in a way that we now make money. You know? So I think as you think about that going forward, I am not sure we see a dramatic change in the growth rate. But I would expect us to see continued strong double-digit growth from the e-commerce business going forward. With the change being that that business is now profitable. Ronald Sargent: And, Simeon, just to get into the second point, you know, I have been here. I think this is my tenth month, and my only objective is to set up a company for future success. We have got to do the right things, and we are going to do the right things even if some of the decisions are hard and you ask about urgency, I am not sure there is any more urgency. I am always urgent about everything. And I think going fast needs to be a key element of our culture. I think, you know, being willing to make the tough decisions needs to be a key part of our culture. You know, and to the support, you know, I have gotten great support. You know, the board has been very supportive of those things that we need to do to set the company up for future success. And, frankly, you know, our management team has really embraced, you know, the speed, the decisions, the focus on the customer, the focus on, you know, kind of moving some of the influence from our corporate office to our divisions where customers are. And then five days a week, it is frankly just a function of the fact that that is just retail. I mean, we need to be here. We need to collaborate. We need to be able to respond quickly. And we need to be able to support our stores that operate seven days a week as long as our as well as our manufacturing facilities and our distribution facilities. So I would not say there is more urgency, but I would say that there is plenty of urgency. Operator: Thank you. The next question goes to Thomas Palmer of JPMorgan. Please go ahead. Thomas Palmer: Morning, Good morning. Thanks for the question. In the release discussing the fulfillment center closures, there was the mention, right, of the $400 million in savings. Could you maybe get a little bit of a breakdown of where these savings will be seen? I think some of it might be depreciation, some of it other operating costs. And then when we are thinking about the reinvestment, how much of this is investment that you probably would have undertaken anyway, and this just gives you kind of better ammo to fund it? Versus things that might not have occurred if the closures had not occurred. David John Kennerley: Yeah. Let me take that one. So as you think about the $400 million, you are right. That splits across what I would call kind of operating profit, kind of EBITDA, kind of more cash-related items. And then, of course, there is a component of it that relates to depreciation. So it is split across both. In terms of investments, the way I would think about that, obviously, and we will get more into that in terms of, you know, when we get into guidance for next year. It is a combination. Clearly, it gives us fuel to be able to make investments that we were likely already going to make. But it also gives us incremental flexibility to invest in things that perhaps we were not going to be able to make. So we will get into more details on that as we get into 2026 guidance. But hopefully, that gives you sufficient color. And just to add, I mean, you know, the key of e-commerce, it is our, you know, one of our fastest-growing businesses, and that will continue. In fact, you know, it continues to accelerate. It is 11% of our sales. The focus is we have got to make money on a business that is growing that fast. And it was all about we have got to get profitable. We have got to get profitable fast because e-commerce is a key part of our future here. Operator: Thank you. The next question goes to Rupesh Parikh of Oppenheimer. Good morning, Rupesh. Rupesh Parikh: Good morning, and thanks for taking my question. So just going back, I guess, just to CapEx. So going forward, more aggressive store openings, obviously, a change in your e-commerce strategy. Does anything change in terms of how to think about the baseline CapEx spending for the business? Ronald Sargent: CapEx? I do not think anything changes in the immediate term about the CapEx. I think what we are doing is prioritizing the mix differently. So we are reallocating more into our storing program. And less into other areas of the business. We think this is good for the ROIC of the company and the returns on our capital. As we get good returns from major storing programs. Think of it more as a mixed shift. Operator: The final question goes to Chuck Cerankosky of Northcoast Research. Please go ahead. Ronald Sargent: Hey. Good morning, Chuck. Chuck Cerankosky: Good morning, Chuck. Good morning, everyone. In looking at your store development well, let me back up a bit. It sounds like you talked about the mid-tier customer pulling back some more in line with the lower-income customers. Is that a change that you saw during the quarter? And looking at store development, anything going on at Fred Meyer that you might want to talk about? And could you perhaps talk about how it is a larger exposure to general merchandise as you are thinking about that banner? Thank you. Ronald Sargent: Sure. Yeah. I can give you some big-picture comments about what we are seeing on the consumer side. You know, as you have been reading, consumer sentiment has declined a lot over the last four months. And, you know, there are a lot of reasons behind that, whether it is a slowing job market or the government shutdown, the SNAP benefits, concern about inflation, categories like beef and coffee and chocolate. I just think customers are managing their budgets carefully. And they are making more trips. They are making smaller trips. You know, the idea of stocking up is declining a bit. And, you know, we are seeing this economy where, you know, high-income premium shoppers, they continue to spend. While lower-income customers are pulling back more aggressively. In terms of that middle bucket, I would guess, again, they are also looking for value. And, you know, the best indicator of that is, you know, our Q3 was softer in the later parts of the quarter because of the pause in SNAP benefits. So that would be kind of, you know, I think, you know, going forward, you know, I think the consumer is going to remain cautious. I think there is going to be more focus on food items and less on discretionary categories. Does that impact Fred Meyer? I think it probably does from their mix of, you know, higher mix of discretionary and GM merchandise. But it is also, we are seeing it in adult beverages, snacks, I think the good news is that, we are seeing this continued shift from restaurant purchases to food at home purchases, which should be good for our business. And then I think the other big trend we are seeing is e-commerce continues to grow a lot faster than physical stores. You know, Fred Meyer, I do not want to point out a specific division, but Fred Meyer continues to perform well. We got Todd out there, our president, Todd Kanmai. Running it and was out there a few months ago, and feeling pretty good about Fred Meyer. David John Kennerley: I think maybe just one thing just to add on stores and store formats. As to how we think about that. You know, we will continue to build, you know, kind of large stores around the 123,000 square foot. We have also got a 99,000 square foot format that we are going to continue to build. I think as we think about the future, we are going to continue to experiment to make sure that we have the right array of store formats to cater to consumers wherever they may be located. Operator: Thank you. That concludes today's question and answer. I will now hand back to Ronald Sargent, Chairman and Chief Executive Officer for any closing comments. Ronald Sargent: Okay. Well, thanks, everybody. Thanks. We had a lot of great questions today. Before we conclude our earnings call, we would like to share a few comments with our associates who are listening in. The progress we have made and the strong results we shared today reflect your hard work and your commitment. This year, we focused on running great stores, delivering a strong customer experience, and strengthening our core business, really priorities that are essential to our success going forward. Your efforts are creating a strong foundation for The Kroger Co.'s long-term growth. We are very proud of what we have accomplished so far, and we are excited for the work ahead. So thanks for everything you do and for your hard work during a really busy holiday season. Thanks, everybody, for joining us on the call this morning. We look forward to speaking with all of you again soon. I hope to see you in our stores. And happy holidays, everybody. Operator: Thank you. This now concludes today's call. Thank you all for joining and you may now disconnect your lines.
Operator: Good day, and welcome to the Methode Electronics Second Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions] I will now turn the call over to your host, Mr. Randy Wilson, Vice President of Investor Relations and Treasury. Randy, the floor is yours. Randy Wilson: Thank you. Good morning, and welcome to Methode Electronics Fiscal 2026 Second Quarter Earnings Conference Call. Our fiscal 2026 second quarter financial results, including a press release and presentation can be found on the Methode Investor Relations website. I'm joined today by Jon DeGaynor, President and Chief Executive Officer; and Laura Kowalchik, Chief Financial Officer. Please turn to Slide 2 for our safe harbor statements. This conference call contains certain forward-looking statements, which reflect management's expectations regarding future events and operating performance and speak only as of the date hereof. These forward-looking statements are subject to the safe harbor protection provided under the securities laws. Methode undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in Methode's expectations on a quarterly basis or otherwise. The forward-looking statements in this conference call involve a number of risks and uncertainties. We will be discussing non-GAAP information and performance measures, which we believe are useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures can be found in the conference call materials. The factors that cause actual results to differ materially from our expectations are detailed in Methode's filings with the Securities and Exchange Commission, such as our 10-K and 10-Q. Please turn to Slide 3, and I'll turn the call over to Jon DeGaynor. Jonathan DeGaynor: Thanks, Randy, and good morning. I'd like to welcome everyone to our earnings call, and I appreciate your interest in Methode. I want to start by thanking our global team for their continued focus on our customers and on our operational performance while navigating through a very difficult and dynamic operating environment. Your efforts are paying dividends. The Methode transformation is firmly on track with much more work to do, but the trajectory is positive and is progressing largely according to plan. We are pleased to report that our improvement efforts and disciplined execution against those initiatives have delivered sequential improvement in our financial results. Our net sales for the quarter were $247 million, up 3% sequentially, with adjusted EBITDA rising 12% sequentially to $18 million. There was a usage of cash in the quarter, driven by a onetime customer initiative. We were able to improve quarterly free cash flow by $47 million year-over-year, and our first half cash flow results were in line with management estimates. Finally, we expect the second half of fiscal 2026 to be stronger, so we are reaffirming our full year sales guidance of $900 million to $1 billion and our adjusted EBITDA of $70 million to $80 million. Please turn to Slide 4, and I will discuss our operational and strategic accomplishments for the quarter as we have significantly increased the intensity of our improvement actions to drive financial performance. I've said previously, our Egypt and Mexico facilities needed significant management attention and leadership upgrades. We've had members of my staff dedicating a large portion of their time on the ground in both of these facilities to drive improvement. I'm pleased to say that our actions have resulted in quality, delivery and cost improvements in both sites. The Egypt facility is ahead of Mexico on its transformation journey, but both facilities are making significant progress. We continue to refine our organization and align our portfolio and business structure working as One Methode by strengthening leadership and the company culture. Very simply, we are moving from a regional siloed organization to one where teams are global and teams work cross-functionally to rapidly drive improvement. The top grading of leadership is now substantially completed across the organization, ensuring that we have the right people in place to execute our strategy. Our product portfolio is well aligned with key megatrends, including data centers and vehicle electrification, and we are driving a disciplined approach to long-term growth investments. A major strategic footprint action is also underway with the relocation of our corporate headquarters to Southfield, Michigan, which positions us for future growth and operational efficiency. We look forward to being closer to our automotive customers and to having almost all of our functions under one roof. Please turn to Slide 5. Methode's Power Solutions offerings actually go back more than 60 years, and we are using this history and our expertise to bring solutions to our customers. Our data center activity was just over $40 million in fiscal 2024 and last year generated over $80 million in annual sales. We continue to expect to see long-term growth in this area. One of the most exciting aspects for me in this business is the ability to apply core competencies that have been built over decades to current and future products in different end markets. These capabilities can be brought to bear to better address the megatrend fueled opportunities in the EV and data center spaces. Looking ahead, as we implement more customer-focused solutions like vendor-managed inventory, utilize our global footprint more aggressively and develop solutions for problems like high-voltage in data centers, it provides us with opportunities to differentiate Methode in ways that we have not in the past. We continue to expect our fiscal 2026 Power sales to be in line with fiscal 2025. we also expect a sales acceleration in the future as our data center growth strategy positions us to take a larger share of customer demand. Our Power solution offerings are clearly a long-term growth engine for Methode. Please turn to Slide 6. As you think about the transformation of Methode, it has been a journey and the starting point for that 18-month journey was to stabilize the base. It started by fixing launch execution, and we had 50-plus launches between fiscal 2025 and fiscal 2026 to deliver while improving customer satisfaction and product quality in multiple regions, so we needed to address these fundamental challenges first. A revamp of our most important plants in Mexico and Egypt, both from a leadership and from an execution standpoint was next. We have changed all but 2 of the senior leaders and many of the team members below those leaders in the company. Standing up a new team who are driving a more global approach, diagnosing situations and pinpointing weaknesses has dramatically helped move things forward. We are nearing the end of this foundation building phase of our transformation journey. And now starting to discuss what the next chapter is as the foundation is corrected. In this next phase, we can start talking about leveraging synergies with credibility. Because without execution as a foundation, we would not have the credibility with customers and shareholders to talk about what's next. Overall, we've been laser-focused on improving execution and making Methode a more reliable and resilient company and is showing up in our results. I'll now turn it over to Laura for a discussion of our financial results. Laura Kowalchik: Thanks, Jon. And turning to Slide 7. First, let me note that fiscal 2026 is a 52-week year and fiscal 2025 was a 53-week fiscal year. The 3 months ended November 1, 2025, and November 2, 2024, were 13- and 14-week periods, respectively. Second quarter net sales were $246.9 million compared to $292.6 million in fiscal 2025 as a decrease of 16%, while on a sequential basis, sales increased 3%. The year-over-year decrease in sales reflected lower volume across all segments. Second quarter adjusted net loss was $6.7 million, an $11.9 million change from fiscal 2025 and on a sequential quarter basis, a reduction of adjusted net loss by $1.1 million. Second quarter adjusted EBITDA was $17.6 million, down $9.1 million from the same period last year. And on a sequential quarter basis, adjusted EBITDA increased $1.9 million. Second quarter adjusted diluted loss per share was $0.19, a $0.33 decrease from the prior year second quarter and a $0.03 improvement from Q1 fiscal 2026. Overall, our improvement efforts to drive expanded margins when we return to sales growth are still underway. Please turn to Slide 8, where I will discuss the progress made with our disciplined capital allocation strategy. Net debt was down $29.6 million compared to the same period last year as we continue to drive cash flow and debt reduction. We ended the quarter with $118.5 million in cash, which was up $21.5 million year-over-year. Operating cash usage in the second quarter was $7.4 million, but we generated $17.7 million in the first half of fiscal 2026. An item to note in the quarter was a $10 million inventory build to support the transition to vendor managed inventory for our data center customers. With that said, our operating cash flow performance in the quarter would have been positive without the vendor managed inventory impact. Second quarter free cash flow was a usage of $11.6 million compared to a usage of $58.4 million in the fiscal second quarter 2025, reflecting a $46.8 million improvement on a year-over-year basis. Turning to Slide 9. Again, please note that fiscal 2025 was a 53-week fiscal year and fiscal 2026 is a 52-week fiscal year. For fiscal 2026, we are reaffirming our expectation for sales to be in a range of $900 million to $1 billion and for adjusted EBITDA to be in a range of $70 million to $80 million. We expect our second half results to be higher than the first half as we have previously communicated. Q3 results will reflect traditional seasonality with improvement expected in Q4. For fiscal year 2026, we expect free cash flow to be positive compared to an outflow of $15 million in the previous fiscal year. Our fiscal 2026 guidance represents a solid foundation for the Methode team to further build on. We are pleased with the results year-to-date, and our team is focused on finishing the second half of fiscal 2026 strongly. With that, I will hand it back to Jon for closing remarks. Jonathan DeGaynor: Thanks, Laura. And please turn to Slide 10. The Methode team is not standing still and is working with a high sense of urgency and purpose to drive improved execution. This quarter's results demonstrate that our business is moving decisively in the right direction, yet there is still important work ahead as we rebuild the future of Methode. We are aggressively driving financial improvement to strengthen our balance sheet and deliver our fiscal 2026 guidance. At the same time, we are selectively investing in initiatives such as data centers that will position Methode for long-term growth. We are transforming Methode into a more reliable and resilient company, one that is poised to generate long-term value for our shareholders. And with that, operator, please open the line for questions. Operator: [Operator Instructions] Our first question is coming from Luke Junk with Baird. Luke Junk: Jon, maybe if we could start with the Power business this quarter. Just hoping to square kind of current trends that you're seeing right now between the big drivers there in terms of EV and data center. And then in terms of that full year expectation, maybe if you could break that out similarly, are you expecting some growth in data center to be offset by EV? Or are those trending more similarly, would you say? Jonathan DeGaynor: Thanks, Luke. I think it's important to note, as we've talked before, the year-over-year headwind from an EV standpoint, we've already really taken that hit with some of the launches and the things that we've talked about, whether it's delays in certain Stellantis programs or other programs. When you understand overall EV volumes or when you understand our volumes, automotive is on a year-to-date basis, automotive within Methode is 44% of total sales. EVs represent 41% of that and North American EVs is 12% of that. So total revenue year-to-date in North America for EVs is less than $12 million. So when we talk about EVs and we talk about the headwinds of EVs, I think it's important for everybody to understand, as we've said multiple times that our EV exposure is not just in North America, it's in Europe and it's in Asia, and it's a much greater percentage of our total than in North America. We expected it to be much higher as we've talked about in previous quarters, but those launches did not come to fruition. So we've already taken that hit. With regard to data centers, as we mentioned to you on the last call and as we talked about at the Baird conference a few weeks ago, we're very optimistic about the opportunity to grow and the move to vendor managed inventory gives us a position -- gives us an opportunity to take share and to get a lot more clarity with regard to the sales forecast. But as we have said, we will not adjust our guidance from a data center standpoint until that EDI is locked in. So I believe there is tailwind to come in that. It is not something that we can talk about here in Q2, but I'm very confident in the team that Brad Perotti is leading and the work that we're doing to deepen our relationships with the customers. We would not have made this investment in the $10 million of vendor managed inventory were we to not feel confident that this is a source of growth for us. Luke Junk: Yes. I mean I appreciate the investment, Jon. I was just wondering if we could put a finer point on the 2Q trends. Just was the Power business similar to what you're expecting for the full year in terms of just being relatively flat? And within that, did data center show any growth overall in the second quarter versus 2Q last year? Jonathan DeGaynor: Yes, data centers are exactly on the guidance that we expected and actually maybe a little bit ahead. But when we talked about -- when we've said what we expected for the full year, the data center revenue for Q2 is exactly in line with that. And the EV business as I said to you, EV headwinds are primarily in North America, and they're primarily due to delayed or canceled launches, which we've already taken the hit for that. That's why we had $100 million less in revenue guidance in the first place. So the -- we're only 44% exposed to automotive. We're only 36% of that 44% in North America. So SAR-based revenue headwinds for us are relatively limited from an automotive standpoint and EV-based headwinds in North America are relatively limited as well. So we're on track with what we expected. We're not getting tailwinds from CVs. We're not getting yet tailwinds from ag and industrial. The data center stuff continues to move forward. We continue to be optimistic about where that will go, but not to the point where I can increase the guidance on that number. Luke Junk: Got it. Just in terms of the guidance, reiterating overall sales and EBITDA and the comment that the second half should be stronger. I mean, certainly appreciate the seasonality in the third quarter from a top line standpoint. Should we think that second half versus first half strength primarily through the lens of EBITDA? Just want to clarify that. Jonathan DeGaynor: Well, I think what you should think about, and Laura can give you a little more detail on sort of the year-over-year improvements. I think what you should think about is the sequential improvements in our 2 biggest facilities and the progress that we've made in both Egypt and Mexico. And as I said in my prepared remarks, Mexico is behind Egypt with regard to that performance. But Laura will talk a little bit on just where we are today. Laura Kowalchik: Yes. For Egypt, when looking at Egypt, our gross margins have nearly doubled. So we've made reductions in scrap, freight costs. We have upgraded talent there, too, both at a leadership team meeting -- our leadership team level and a level below. In Mexico, obviously, with the reduction in volume, margins are down. However, we focus on the cost side there in Mexico with reductions in direct labor, indirect labor and salary. Material and freight and scrap are also down in Mexico. Jonathan DeGaynor: So to answer -- to put a fine point on it, Luke, yes, we -- you should expect to see it as a conversion on sales will be a lot higher because some of the cost of poor quality, the premium freight, some of the other things as we make improvements in the plants, and we get through these launches. So you start seeing run rate impact of launches and you see the improvements that we're making in the plants. That's why we feel very confident about the second half of the year. Operator: Our next question is coming from John Franzreb with Sidoti & Company. John Franzreb: I guess I'm just curious about the guidance. We're more than halfway through with the year. We have a seasonally weak third period coming up. Are you comfortable at the lower end of the guidance or at the upper end based on your current visibility today? Jonathan DeGaynor: John, we -- because there's so much exogenous volatility, Nexperia is not behind us. We still have -- we still have commercial vehicle sales that are turbulent. We still have a whole series of ranges of economic turbulence. It's why we haven't narrowed either the top or the bottom half of our guidance and why we continue to bracket both the revenue guidance and the EBITDA -- the adjusted EBITDA guidance the way we do. The performance of the -- the predictability and the performance of the business is much better than where it was 12, 18 months ago. But we spend every day still talking about tariffs and every day still talking about the impact of the next period and what it can mean from a revenue perspective. And it would be, we believe, a disservice to our shareholders to narrow down those numbers right now until we have a little more clarity on just what's happening from the turbulence in the external market. John Franzreb: Okay. Fair enough, Jon. In the quarter, I noticed there was a nice improvement in the industrial operating profit on a sequential basis and a nominal increase in revenue. Is that totally due to data centers? Or can you provide some color what drove that sequentially? Jonathan DeGaynor: No. It's -- basically, it goes back to our plants are getting better. And the -- we've said before that these plants aren't other than in a very specific situation, and they are shared between our industrial activities and our automotive activities. So the plants getting better flows through the P&Ls of the different segments. Our plants are getting better. And that's why we can feel confident about our guidance without it having to be revenue tailwind that drives it is Mexico, Egypt first, but Mexico as well. Both of them are getting better. Our plant in Malta is much, much better. The plants in China continue to perform. I want to thank that team. But the 2 places that we're most on fire 18 months ago when I walked in the door are much, much better, and that gives us the predictability when we talk about earning the right with shareholders and the predictability that goes along with it, it starts with our plants are much, much better. John Franzreb: Jon, there's a point where you voiced concerns about new program rollouts and you want to get beyond that. And you just mentioned 50 so far in '25 versus '26. Are we beyond the point given the new personnel that you've hired in multiple levels, where that's no longer a significant worry for you at this point? Jonathan DeGaynor: The -- what I can say is the trend lines from our launches are also going in the right direction. In many situations, those launches both were happening in Egypt and in Mexico. So where the plant is getting better, some of it was premium freight and other issues with regard to program launches. The ones that were most problematic where we had customers in the building have largely gotten behind us. It doesn't mean that they're all behind us. We still have a couple of challenged launches, a little bit of it, the difference between where I said in Mexico and it's phasing versus Egypt. But we've -- we've got new people plus some outside help that are working with us to continue to stabilize and drive those launches. And so the answer is largely the launch challenges are behind us, but not completely. John Franzreb: Okay. Fair assessment. I guess one more question. It appears that your past the part of stabilizing the business and moving on to the part in the transition process of addressing revenue and cost-cutting drivers. Can you kind of like walk us through the road map to returning to profitability? What's going to be the biggest drivers here? Is it going to be on the cost cutting, be it part rationalization? Or is it going to be really a top line-driven story here to get you back in [ block ]? Jonathan DeGaynor: Well, so if you think about our year-over-year improvement from an EBITDA perspective, you just took midpoint of our current EBITDA guidance versus last year, and what that means basically adding from $43 million to midpoint at $75 million, adding $32 million worth of EBITDA on $100 million less in sales. That is getting cost for quality and waste out of the plants. We have taken more than 1,000 people out of our -- out of those 2 big facilities between Mexico and Egypt. The -- we will continue to refine those, but it's -- and the headquarter move is a cost refinement plus a capability increase. We will continue to make cost adjustment activities. But now it's really okay, let's ramp up these new programs, let's ramp up the data center activity. Now let's really start to drive revenue. Let's get ourselves positioned as we see commercial vehicle volumes come back in calendar 2027, what would be our fiscal -- the latter part of our fiscal 2026 and into our fiscal 2027 as we start seeing some revenue tailwinds just with stuff that we have because there's headwinds in each of our end markets. We believe that the business is very well positioned for profitability at all levels down the income statement. Operator: Our next question is coming from Gary Prestopino with Barrington Research. Gary Prestopino: A couple of housekeeping questions here. Laura, this was the quarter where it was 12 versus 13 weeks last year. Is that correct? Laura Kowalchik: That's correct. Gary Prestopino: Okay. So on a like-for-like basis, can you give us some idea of what the sales were down? Laura Kowalchik: Yes. The sales were about roughly $20 million for one week? Gary Prestopino: $20 million that was incrementally added by that one week? Laura Kowalchik: For last year, yes. Gary Prestopino: Okay. And then I noticed you didn't report the percentage of your sales to EV and hybrid applications, which you had done in the past. Are you not reporting that anymore? Or can you share that with us? Jonathan DeGaynor: Well, I don't know that we gave that specific detail, but let me give it to you. So in the first half, so I don't have it by the quarter, but I have it by the half, EV is 41 -- so automotive is 44% of our total sales or $217 million in the first half. EVs are -- EVs are 41% of that. Now for full transparency, that's just not buzz, that's not just Power, that's anything that goes into an EV. Then you take that 41% of the 44% and split it, 71% of that 41% is in Europe, 18% of the 41% is in Asia and 12% of the 41% is in North America. So in the first half of fiscal 2026 for Methode, our sales on the EV side in North America were $11.5 million. So when we talk about EV penetration in North America and what it means for a headwind, it's not -- it's already been baked into our guidance that the stack charts that we talk about with regard to Stellantis and some of the other programs that we already took to hit. Gary Prestopino: Right. I understand that. I'm just trying to square with what you guys had reported in the past. And I'll work through that. That includes EV and hybrid, right? Jonathan DeGaynor: No. This is just based on platform specific, it's EV stuff. As we talk about business wins and where there are opportunities for Power going forward, those would be both in EVs and hybrid vehicles, and we talk about that separately. But these are for EV-based platforms. Gary Prestopino: Okay. And then in your guidance, the tax expense of $17 million to $21 million, is that all cash taxes, Laura? Could you give us some idea of what the cash taxes will be? Laura Kowalchik: No. Some of that, as is noted on the slide, it does include a $10 million to $15 million valuation allowance on deferred tax assets. So that's... Gary Prestopino: So if I back that out of your range then to get an idea of what cash taxes could be? Laura Kowalchik: Yes, yes. Gary Prestopino: Okay. All right. And then, Jon, I wanted to talk about your program launches. Like I went through my reports over the last quarter, 30 program launches you're anticipating this year. You say you've taken all the hits from the reduction in the EV programs. So in the back half of the year, number one is, how many programs are expected to be launched? And are these programs all dealing with ICE applications? Or the -- give us some idea of where those programs are? Is it all auto? Is it across all of the different segments like industrial or whatever? Jonathan DeGaynor: So I don't have the split by region, but the majority of the programs that are launching are power based. And so there, Gary, it would be either EV or hybrid. And we have a couple of examples where it's both. The ramp -- the new launches are primarily in Mexico right now versus in EMEA, those launches, we went through some of that pain earlier. It's part of the reason why Egypt is ahead of -- Egypt is ahead of Mexico on the transformation. . And the big hit that we took with regard to programs that were delayed or canceled was primarily in North America. That's part of the reason why North American auto was so challenged because we had particularly Stellantis programs that we expected $100-plus million in annualized revenue that were canceled. So as we have discussed previously, we're in negotiations with Stellantis on this topic, but we are launching multiple programs in Mexico and ramping up programs in Egypt and Malta right now, plus programs in Asia Pacific. Operator: We have another question from John Franzreb with Sidoti & Company. John Franzreb: Yes. Just regarding the cash outflow in the quarter, click back of the envelope suggests that there was a cash outflow in the receivables in the quarter. Is that like seasonal timing? If I did the numbers right, it seems like it was $12 million in the quarter. Or is there something else to that? I'm sorry, $14 million in the quarter. Laura Kowalchik: Yes, that's correct. There was $14 million. It was up from last year and that's due in last quarter due to the sales increase in the quarter compared to last quarter. John Franzreb: Okay. Okay. So there's nothing else unusual about that? Laura Kowalchik: No, there are some receivables that were collected in November after the end of our quarter. So it came down in November. John Franzreb: Excellent, Laura. And I guess in regards to -- since Jon, you brought this up about tariffs, you talk about it every day. But you don't have a new change in the slide presentation from the fourth quarter. So is it fair to assume that the -- not only the bridge that we talked about last quarter, but the tariff slides, everything is status quo since the last presentation we had included? Or is there anything we should be aware of? Jonathan DeGaynor: There's no new news with -- from an investor standpoint with regard to tariffs. As we've said, we are working with our customers closely to first try to alleviate any tariffs where possible. And our USMCA facility helps us do that. We're moving -- we're rebalancing manufacturing to try to help that. But where there is a tariff that we can't avoid, we are passing that on to customers and are working with customers that way. So there's nothing different, John, with regard to the financial impact for us. What more was I was saying is the tariff regime and particularly, most recently, the next period chip issue still creates turbulence. And it still creates challenges with regard to our customer plans, stuff that's in many ways outside of our control, and that's why the revenue range for our guidance is difficult to narrow down at this point, yes. John Franzreb: Okay. That's fair. And I guess one last question as we close out the calendar 2025 calendar. I'm kind of curious about how you envision calendar 2026 in some of the, let's call it, problematic end markets. Do you view the overall automotive sector as up or down, same with the ag and the Class 8 truck market. What are your thoughts in aggregate about how calendar 2026 plays out? Jonathan DeGaynor: So from current, we try to use third-party forecasters to help us with this because I'd love it if we had a great economic staff that was better than S&P, but we don't. And I don't think it's the best place to use our smart people. IHS is saying that fiscal -- or this fiscal year, not calendar year, right? IHS is saying that calendar year would be just a little bit better from an overall volume perspective. That -- also that IHS is talking about 2027 or 2026 being better from a CV standpoint, particularly in the second half of the year, which would be our first part of our fiscal 2027. So we see -- in the industrial market, as we talk to customers and we see where things are going for our electronics business, our Nordic Lights business as well as some of the activities from Grakon, we see some future tailwinds as opposed to headwinds. So the thing that gives me the most -- one of the things that gives me the most confidence here is this has been performance improvement in the face of very little good end market news. Our performance improvement is -- yes, we talked about data centers being a tailwind and good end market news. But the rest of our end markets have all been headwinds for us. And commercial vehicle, as those who know that space is a highly cyclical, more cyclical than [ PassCAR ] and we still move freight and there will be trucks that will be sold. And so what we're seeing for calendar year '26 is an improvement, particularly in North America and a small improvement in Europe that will hit us the latter half of our fiscal year and early into fiscal 2027. Operator: Thank you. And that concludes our Q&A session. I will now hand the conference back over to Mr. Randy Wilson for closing remarks. Please go ahead. Randy Wilson: Thank you for joining us today and your interest in Methode. Take care, everyone, and have a great rest of the day. And with that, operator, please disconnect the call. Operator: Thank you. Ladies and gentlemen, this concludes today's call. You may disconnect your lines at this time, and have a wonderful day, and we thank you for your participation.
Operator: Good morning, everyone. Welcome to Tecsys Fiscal Year 2026 Second Quarter Results Conference Call. Please note that the complete second quarter report, including MD&A and financial statements were filed on SEDAR+ after market closed yesterday. All dollar amounts are expressed in Canadian currency and are prepared in accordance with International Financial Reporting Standards. Some of the statements in this conference call, including the question-and-answer period, may include forward-looking statements that are based on management's beliefs and assumptions. Actual results may differ materially from such statements. I would like to remind everyone that this call is being recorded on Thursday, December 4, 2025 at 8:30 a.m. Eastern Time. I would now like to turn the conference over to Mr. Peter Brereton, Chief Executive Officer at Tecsys. Please go ahead, sir. Peter Brereton: Thank you. Good morning, everyone. I'm joined today by Mark Bentler, our Chief Financial Officer. We appreciate you joining us for today's call. I'm pleased to report second quarter fiscal '26 results with SaaS revenue up 22% and total revenue up 15% from the same quarter last year. We also had record adjusted EBITDA in the quarter, which was up 71% compared to the same quarter last year. These results highlight the strength of our Elite Healthcare Solutions, which represents the core of our business and a primary driver of SaaS ARR. As indicated in our earnings press release, while facing headwinds from the U.S. healthcare policy environment and government shutdown as well as uncertainty created by shifting tariffs, we believe these results demonstrate our disciplined execution and the scalability of our business. During Q2, we saw these headwinds manifest and extended decision cycles and elongated procurement processes. Against this backdrop of near-term headwind, our SaaS pipeline continues to grow and has never been stronger, with our health care pipeline up about 60% compared to the same time last year and with accelerating traction in pharmacy and key markets within general distribution. This quarter, bookings were led by expansions in our health care and life sciences business, including hospital networks. We also had an exciting new logo win with a marquee health care and life sciences brand and a migration in our general distribution business in Europe. As we have discussed in prior calls, our migration bookings will continue to become a smaller component of our SaaS ARR growth. Growth will be driven by new logos and expansion of existing customers. This quarter marked an important milestone. Our Elite platform is now available on the AWS marketplace. This is an important step in our cloud strategy because it helps shorten the path from interest to implementation. It reduces friction in the buying process and makes it easier for customers to realize value from Tecsys Elite platform more quickly. It also broadens our reach and strengthens our relationship with AWS, a key partner as we help organizations modernize their supply chain operations in the cloud. During the quarter, we published a case study that illustrates the impact of our solutions. Texas Children's Hospital partnered with Tecsys to deploy an RFID-enabled, fully automated pharmacy inventory system, integrated with Epic Willow. The results have been remarkable with the hospital network achieving approximately $14 million in annual savings, and there is more potential ahead. This demonstrates how we continue to focus our product development and go-to-market efforts on strengthening our competitive advantage as a true end-to-end health care supply chain management platform. We're aided in these efforts by a growing portfolio of referenceable health care customers whose results continue to validate our approach. Mark will now provide further details on our Q2 results as well as financial guidance on several key metrics. Mark Bentler: Thank you, Peter. As a reminder to everyone, our second quarter ended October 31, 2025. I'll start with SaaS. As Peter mentioned, SaaS revenue growth was 22%, reaching $19.7 million in the quarter. SaaS ARR was $81.1 million at the end of Q2 fiscal '26, which was up 16% from the same quarter last year. Our Elite SaaS ARR, which is our core product and the predominant contributor to total SaaS ARR grew by 21% over the same period. Sequentially, SaaS ARR increased by $1.8 million in Q2 fiscal 2026 compared to prior quarter as new bookings and the favorable impact from foreign exchange, were partially offset by attrition in a small group of noncore customers. In our core Elite customer base, we're quite pleased that attrition over the last 12 months was less than 2%. SaaS RPO was $240.4 million at the end of Q2 fiscal '26. That was up 18% from the same time last year. Foreign exchange did not have a material impact on that reported growth number. Professional services revenue for the second quarter was up 20% from the same quarter last fiscal year to a record $17 million. Professional services backlog remained robust at the end of Q2 fiscal 2026. It was up 14% compared to Q2 last year but down 10% sequentially from the prior quarter after record level professional services revenue in Q2 fiscal '26. Based on our PS backlog heading into Q3 and general seasonality, we expect Q3 PS revenue to look more like Q3 last year. That was around $14 million versus Q2 of this year. For the second quarter of fiscal '26, gross margin was 52%, up 400 basis points compared to 48% in the same period last year. The key drivers here are increasing SaaS margins as well as strength in professional services margins in the current quarter. Net profit in the quarter was $1.8 million compared to $758,000 in the same quarter last year. Basic and fully diluted earnings per share were $0.12 in Q2 this year compared to $0.05 in Q2 of last year. Adjusted EBITDA was $5.0 million in Q2 fiscal '26 that compares to $2.9 million same quarter last year. On the last 12-month basis through Q2 of fiscal 2026, adjusted EBITDA is up 47%. Turning briefly to our year-to-date highlights. SaaS revenue for the first half of fiscal '26 was $38.8 million. That's up 23% from the same period last year or 22% growth on a constant currency basis. Our total revenue reached $94.6 million, a 12% increase from last year. That was up 10% on a constant currency basis. And if you exclude hardware, overall revenue grew by 14% or 13% on a constant currency basis. For the first half of fiscal '26, our adjusted EBITDA increased to $8.3 million, that was up from $5.5 million in the same period last year and fully diluted earnings per share for the first half were $0.17 compared to $0.10 first half last year. We ended Q2 with a solid balance sheet. We had cash and short-term investments of $30.5 million and no debt. We used about $2.8 million of cash in the quarter to buy back shares under our NCIB and also paid out about $2.5 million in dividends during the quarter. Additionally, the Board yesterday approved a quarterly dividend of $0.09 a share. Turning to financial guidance. We are maintaining full year fiscal '26 guidance for SaaS revenue growth of 20% to 22%. Total revenue growth of 8% to 10% and adjusted EBITDA margin between 8% and 9%. I'll now turn the call back to Peter to provide some outlook comments. Peter Brereton: Thank you, Mark. A recurring theme this quarter was industry validation. In November, Gartner published its Healthcare Supply Chain Top 25. Tecsys customers accounted for 10 providers on the list with 2 more recognized in the Masters category. We congratulate AdventHealth, Corewell Health, St. Luke's, Intermountain Health, Vanderbilt Health and all of our customers recognized in the report and we are honored by their continued trust and partnership as they set the benchmark for supply chain excellence. Also this quarter, for the second year in a row, Tecsys was recognized as a leader in the 2025 WMS Technology Value Matrix published by Nucleus Research, a global technology research and advisory firm. The Nucleus report highlighted our expanding influence in health care, noting that our solution provides end-to-end visibility and control over hospital and clinical supply chains, supporting centralized inventory management, surgical kit preparation and automated replenishment. Nucleus specifically praised our commitment to innovation, which remains core to our business model. It's that spirit of innovation that we're continuing to invest in AI and in particular, Agentic AI. Agentic AI has the potential to drive efficiency and business value by enabling greater flexibility, adaptability and automation, closing the gap between human decision-making and machine execution. This summer at our User Conference, we introduced TecsysIQ, a unified data layer built on the Databricks Data Intelligence Platform that integrates directly with the Tecsys ecosystem. Interest was immediate and several customers have since joined our new product introduction program as early adopters. Our development team is now focused on expanding TecsysIQ with new capabilities as we continue to identify priority use cases. We have also advanced AI-driven innovations across our portfolio, including a content pack for point-of-use inventory optimization and enhancements to our mainline platform such as the warehouse AI assistance for Elite WMS. This commitment to innovation and continuous improvement sets Tecsys apart from the narrower solutions on the market. Between continued future innovation in our Elite Solution and the initial availability of TecsysIQ, we have a solid foundation for a reliable long-term value creation. And so in summary, I want to remind you of our key themes this quarter. Long decision cycles slowed our bookings this quarter, but our pipeline remains stronger than ever, and we're confident in both our fiscal '26 and our long-term outlook. New features and innovation, our availability on the AWS marketplace, and our demonstrable customer success will help us to increase deal velocity. We've continued to invest in our leadership position across the end-to-end health care supply chain. And the industry is increasingly acknowledging Tecsys as a trusted partner. This growing recognition and rising brand visibility position us well to win new business. We're responding to market demand for solutions to connect people, data and decisions and our AI-driven TecsysIQ unified data platform is set to be a key driver of value and innovation. We believe these pillars will enable us to continue delivering consistent, profitable growth and shareholder value. With that, we'll open up the call for questions. Operator: [Operator Instructions] Your question comes from Amr Ezzat from Ventum. Amr Ezzat: Congrats on the strong quarter. Peter Brereton: Thanks, Amr. Amr Ezzat: First one is on -- I mean, I look at your ARR, it's up 16%, SaaS, 22% RPO, a nice 18%. It all paints a consistent picture, but I wanted to unpack the ARR adds for the quarter, and I do appreciate that it can move around a lot quarter-to-quarter. But on the pacing of ARR adds, like is there anything structural that we should be mindful of on the macro side. And maybe you can give us a bit more color or maybe quantify the noncore attrition you spoke to? Peter Brereton: Do you want to take that, Mark? Mark Bentler: Yes, sure. I mean I would sort of paint the triangulation on that SaaS ARR movement as follows. I mean, there wasn't a meaningful impact from FX during the quarter and the way that you should think about that is we mark that SaaS ARR number at the spot rate at the end of the quarter. So a lot of our ARR is in U.S. dollars, about 80%, 80% roughly. And that spot rate moved between 1.5% and 2%. From the end of Q1 to the end of Q2. So that had a pretty large impact, and that was a bit of tailwind there. From the churn side, kind of going in the other direction, it's going to help you triangulate there. Like that churn impact was bigger than the FX impact. And I can appreciate you might need to kind of go do some math a little bit to help you triangulate on those numbers. But the point being that the churn number is bigger, more material than the FX impact. And then in terms of that churn being driven by noncore product, that was very significant. That was like 96% of the churn in that quarter was from noncore product, which is why I mentioned, particularly in my prepared remarks that our core platform has really, really low churn, less than 2% over the last 12 months. So that's -- I think that's kind of the -- that's how I would -- that's the information I think I would provide here to help you triangulate on bookings. And I don't know, Peter, if you want to talk a little bit about just the more macroeconomic picture then. Amr Ezzat: Maybe before we go to Peter, just when you say like it's larger than the FX, are we talking like magnitude larger? Like you're seeing the FX impact 1.5% to 2%, are we talking like 3%, 4%? Mark Bentler: Well, we're just -- I'm just saying it's materially larger than the FX impact. Amr Ezzat: Then maybe like on the macro, but like can you also give us more detail when you guys say noncore, like are we talking about customers that just don't fit your sort of ICP that you guys wanted to get rid of? Or was it driven by the customers themselves? Mark Bentler: That's not Elite. First of all... Peter Brereton: Yes. Mark Bentler: First of all, it's non-Elite customers, right? It's non-Elite. So that's the first point. And the other point is that sort of what we're considering that noncore group is less than 10% of our ARR. Amr Ezzat: Okay. I'll let Peter speak to the macro. Peter Brereton: Yes. On the macro side, I mean, we kind of commented in our prepared remarks. But I mean, in the U.S. right now, you've got a combination of factors. You've got, of course, tariffs that are generally distracting people in the broader supply chain market, it's the unpredictability of them, that's the issue. In a certain sense of the tariffs would become predictable. I think they could plan their businesses around it. But as it is, it's kind of hard to plan. So that continues to be just a distraction for the general supply chain market and then more specifically in the hospital space, there -- at this point, the plan calls for cuts to Medicaid as well as a pretty dramatic reduction in subsidies to the Affordable Care Act. So people are looking at their health care insurance costs rising by, in some cases, for a lower income family, $600 or $700 a month come January. Or higher income family, that can be a couple of thousand dollars per month in rising health care insurance premium. So it's very significant. So the hospitals are looking ahead and knowing that if these people are uninsured, it's not that the hospitals stop caring for them. They'll continue to care for them. They just won't be able to collect for services rendered. So it's a challenge for the industry. We saw this happen. This kind of thing happened back in 2016 when there was a threat to tariff, the Affordable Care Act and sort of hospital deals kind of went on hold. In this case, they have really gone on hold, but they definitely, hospitals are being more careful. They're reanalyzing their plans for next year, deciding what to prioritize and so on. So we're in this interesting position. And believe me, we've been here before, where you have a health care pipeline that's rising nicely. I mean, our pharmacy pipeline is up literally 3x over this time last year. We've got a number of situations where we've been notified that we're a vendor of choice and they're moving into contract. But the contracting and approval process is more cautious right now. So we're -- this will catch up. I mean we can see the pent-up demand building up in the pipeline. And we can also see, to some extent, some of the political wins starting to shift in the U.S. towards finding a solution to the funding, the health care funding from government. So we'll see how that plays out. We're watching how it plays out. In the meantime, we continue to grow our SaaS revenue in spite of it. So we're still looking for a pretty exciting year as we enter calendar '26. Amr Ezzat: Fantastic. And as you're speaking to the pharma solution in the pipeline there and I want to just revisit a question that I asked you 3 or 4 quarters ago, and I'm not sure you'll have an answer for me, but among the IDNs that initially came to you for pharma, have any expanded or are in discussions to expand into your broader solutions? I'm just trying to understand the expansion road map, if you will, for pharma life customers? Peter Brereton: Yes. Interesting question, I mean there's 2 of them that are in those discussions right now. Nobody has actually signed up to expand right now, but we've got 2 potential deals in the pipeline where they started with pharmacy and now they're looking to expand and add other capabilities. We probably have more though going the other way, which are accounts that started -- have been with us in the past for general supplies or OR, cath lab, et cetera that are now in active discussions to add pharmacy. So that's probably the more significant trend. Amr Ezzat: Fantastic. Then maybe one last one on the PS side. I mean you guys like have talked in the past about capacity topping out at around $60 million, yet now we're at $17 million. I do appreciate that Q3 is seasonally weaker, and I appreciate the color that you guys gave. But how should we think about Q4, which is typically a strong sort of PS quarter from a run rate perspective. Maybe you could update us on the headcounts or any sort of planned additions there? Or are you guys like just driving utilization at pretty unsustainable levels this quarter? It pretty well sums it up. Mark Bentler: Yes. At $17 million, it's kind of toppy. That's kind of what our full out team can do. We previously said we could kind of sustain it $15 million to $16 million. You can always run a little bit hot, but you can't run hot forever. We're trying to be very, very practical and careful on hiring because when you grow that team, it's pretty inelastic. So we're pretty careful about that. And our expectation is to maintain the current team. We expect utilization rates will dip down in Q3 on seasonality and backlog. But we also expect that Q4, our expectation right now is that utilization is going to increase, I think typically does in our Q4. And if you just look at our pipeline and general activity, that's our expectation. We don't expect to be hiring -- we don't expect to be adding to that headcount anytime in the near future. Operator: And your next question comes from Suthan Sukumar with Stifel. Essey Tesfay: This is Essey, speaking on behalf of Suthan. First question for me, just on -- maybe to double click on pipeline growth, looked like it was strong. I was curious to know how things are going with respect to sales cycles and deal sizes? And what changes are you seeing quarter-over-quarter and over last year? And how that might translate to further pipeline growth -- pipeline to bookings translation over the second half and beyond? Peter Brereton: I mean the deal cycle, I would say, is on the pharmacy side, it has been shorter over the last year or so. Part of it is just the payback in pharmacy is more significant. And the -- in some ways, the upset to existing business model is less. Most of them are already largely running their own pharmacy supply chain. We're just giving them better tools to do it. Whereas often on the general supply side, they really weren't running their own supply chain before we come in with a platform. So there's a lot more change management to handle. Right now, the combination of some of these macro issues that I discussed with the U.S. health care environment and add in -- adds in AI is another challenge. You've got most organizations are now introducing an AI governance committee, which also has to approve any new software platforms and approaches to data management and so on. So we are seeing elongated deal cycles right now. And hence, the sort of very large pipeline that on the one hand, it's fun to have a very large pipeline, part of our job is to try to get rid of that pipeline and turn it into book revenue. So -- and those deal cycles are definitely elongated with a combination of distraction in the market and concern about funding next year and some of these other distractions we discussed. Essey Tesfay: Yes, that's helpful. I guess second question, maybe on Pro Services and partners in that dynamic, is there any notable difference between your internal Pro Services capabilities versus deals that are may be partner-led? Peter Brereton: I would say not really at this point. I mean we always see that where one of our partners is involved in a project. The certainty of the win rises and the certainty of timing also rises. I mean, partly just because, of course, what that typically means is that they're, in effect, already spending money on the initiative. I mean, they're already working with the consultants. They've already got things rolling. They've already got some budget to get going. They really already committed to do something. So we often see -- if we look at our pipeline and we see 25% of the pipeline is partner-influenced, and then we look back and we realize that 35% or 38% of the deals we closed were partner influenced. So you see the impact on -- of partners on these -- on the whole deal cycle. But in terms of -- are they sort of moving ahead -- are they unaffected by the macro environment? No, they're also affected. These are pretty significant projects, right? So they tend to need approval all the way up to the C-suite. So there is just -- continues to be some caution around that. Essey Tesfay: Got it. Got it. And just I guess to quickly follow-up on that, on partners and partner engagement. Was that right in hearing that it was 35% to 38% deals partner influence or something along those lines? Peter Brereton: Yes. I mean we -- I mean, that number moves around for a bit, right, because we just don't do that many deals. I mean, when you're looking at total SaaS revenue in the range that we're in and total SaaS bookings in the range that we tend to be in. And yet a deal can be anywhere from $400,000 a year of SaaS up to $2.5 million of SaaS, and we've seen initial deals that size. So one deal because we measure on dollars, not on quantities of deals, not on numbers of deals, but on the dollar side. So one deal can swing that number pretty widely. So we look at it quarter-over-quarter, but we also look at it on a trailing 12 basis to try to get a larger sample set to see what's happening. Essey Tesfay: Got it. That's... Mark Bentler: It is right around 30% influence right now. Operator: [Operator Instructions] And I'm showing no further questions at this time. I would like to turn it back to Mr. Peter Brereton for closing remarks. Peter Brereton: Great. Thank you. Thank you for joining us today. And as always, if you have additional questions, please don't hesitate to reach out to Mark or myself, and we will look forward to talking to you after Q3 towards the end of February or early March. Thanks. Have a great day. Bye for now. Operator: And this now concludes today's conference call. Thank you all for joining. You may now disconnect.
Operator: Good afternoon. And thank you for standing by. And welcome to ChargePoint Holdings, Inc. Third Quarter Fiscal Year 2026 Financial Results Conference Call. Please be advised today's call is being recorded. A replay will be available on ChargePoint Holdings, Inc.'s Investor Relations website. I would now like to hand the conference over to John Paolo Canton, Vice President, Communications. Please go ahead. John Paolo Canton: Good afternoon. And thank you for joining us on today's conference call to discuss ChargePoint Holdings, Inc.'s third quarter fiscal 2026 earnings results. This call is being webcast and can be accessed on the Investors section of our website at investors.chargepoint.com. With me on today's call are Rick Wilmer, our Chief Executive Officer, and Mansi Katani, our Chief Financial Officer. This afternoon, we issued our press release announcing results for the quarter ended October 31, 2025, which can be found on our website. We'd like to remind you that during the conference call, management will be making forward-looking statements, including our outlook for 2026. These forward-looking statements involve risks and uncertainties, many of which are beyond our control, and could cause actual results to differ materially from our expectations. These forward-looking statements apply as of today, and we undertake no obligation to update these statements after the call. For a more detailed description of certain factors that could cause actual results to differ, please refer to our Form 10-Q filed with the SEC on September 8, 2025, and our earnings release posted today on our website and filed with the SEC on Form 8-K. Also, please note that we use certain non-GAAP financial measures on this call, which we reconcile to GAAP in our earnings release and for certain historical periods in the investor presentation posted on the Investors section of our website. And finally, we'll be posting a transcript of this call to our investor relations website under the Quarterly Results section. Thank you. I will now turn the call over to our CEO, Rick Wilmer. Rick Wilmer: Good afternoon, and thank you for joining us. Today, we will provide a comprehensive review of our quarterly performance, share our perspective on current market conditions, discuss the progress we have made towards our three-year strategic plan, and highlight how our ongoing innovation is shaping the future of e-mobility. Financial performance this quarter exceeded expectations. Revenue surpassed the top end of our guidance, reaching $106 million, which marks a return to growth. This is a trend we anticipate to continue, especially as we move into 2026 with many of our new products ramping, our Eaton partnership accelerating, and numerous opportunities in Europe that we can now access with our new products. Our non-GAAP gross margin remained at a record high of 33%. We maintained strict cash discipline with cash utilization better than planned at $14 million. As growth returns, we continue on our path towards positive adjusted EBITDA. Additionally, we successfully completed a debt exchange securing nearly $110 million of deal discounts that benefit shareholders, reducing outstanding debt by $172 million and extending maturity to 2030. This transaction is a pivotal step in strengthening our financial foundation. By deleveraging at a significant discount, we are shifting enterprise value to shareholders and reinforcing our balance sheet. These strong results confirm the effectiveness of our strategy and the rigor of our operating model. Our CFO, Mansi Katani, will provide further details on this transaction later in the call. North America continues to see steady sales demand despite headlines to the contrary, as evidenced by key customer wins we will discuss shortly. In Europe, demand is not only robust but accelerating, with significant opportunities emerging across key markets. As we move into calendar year 2026, especially the second half, Europe stands out as a potential growth engine, fueled by favorable regulatory support, rapid EV adoption, and substantial infrastructure investments. This creates an ideal environment for ChargePoint Holdings, Inc. to lead with our innovative new offerings. At the same time, the competitive landscape in both regions is consolidating, creating opportunities for ChargePoint Holdings, Inc. to expand our market presence and reinforce our role as a reliable partner in EV charging. Supported by these favorable conditions, we are well-positioned to pursue steady growth, provide strong value to customers, and continue advancing the industry. In terms of customer highlights from the third quarter, we strengthened our partnership with the city of New York by extending our agreement to support its expanding EV infrastructure needs. This ongoing collaboration reinforces our shared commitment to sustainability and positions ChargePoint Holdings, Inc. as a trusted partner in advancing clean transportation. We also launched an exciting program with BMW North America to transform select premium locations into destination charging stations for EV drivers nationwide. Improvement of site hosts is now underway. And finally, NEVI momentum is building again with more than 40 states announcing new plans. We continue to deliver NEVI-funded projects, including a recent installation in Land Hope, Pennsylvania, where ChargePoint Holdings, Inc. supplied all charging hardware during Q3. ChargePoint Holdings, Inc. now manages approximately 375,000 ports, including more than 39,000 DC fast chargers and more than 127,000 ports located in Europe. Globally, ChargePoint Holdings, Inc. drivers have access to 1,350,000 public and private charging ports. We launched our three-year strategic plan nearly two years ago, built on four key pillars: efficient and capital-light hardware innovation, software innovation, world-class driver experiences, and operational excellence. We are delivering on these promises. Our operational excellence is evident throughout the company, with continuous improvement in our gross margins, network reliability, and customer satisfaction. We have made significant strides in utilizing AI for internal processes, which we expect to further accelerate improvements in operational execution. AI is a featured piece of our new software offerings, which we believe will provide tangible benefits to our customers. The second year of our three-year plan focused on delivering innovation and driving growth. Our financial results demonstrate that growth has returned, which we expect to accelerate because of new products and services contrived in the first year of our plan that are now beginning to enter the market. We believe our new offerings will drive market share gains and margin improvements. Our innovation engine is performing strongly, further expanded and accelerated by our partnership with Eaton and close collaboration with vehicle OEMs. Our approach to innovation is anchored by our belief that electric vehicles, EV charging infrastructure, and the power grid should not operate as independent silos or industry standards dictate the sole means of interoperability. Our new DC product line, ChargePoint Express powered by Eaton, is a bidirectional capable solution that we believe can be deployed with up to 30% lower capital expenditure, occupies a 30% smaller footprint, and reduces ongoing operational costs by up to 30% compared to other solutions. Our new AC product line, integrated with Eaton's Able Edge smart breaker and smart panel technology, is the most cost-effective offering for enabling vehicle-to-home and vehicle-to-grid, eliminating expensive panel upgrades, and accelerating deployment. Our hardware innovation is complemented by significant software advancements. We have released a new generation of the ChargePoint platform, a flexible software solution that redefines EV charging management. Completely reengineered and optimized by AI, the platform empowers operators to optimize charging infrastructure on any scale. Soon, we will release a major upgrade to our mobile app, also powered by AI, designed to deliver smarter, more personalized charging experiences. Customer reactions to these innovations have been overwhelmingly positive. Our solutions do more than meet expectations; they are redefining them. We believe the transition to EVs is inevitable, and ChargePoint Holdings, Inc. is uniquely positioned to lead. Our roadmap is clear: deliver innovation, drive growth, capture market share, and improve margins. We are building a business driven by innovation, operational efficiency, and a relentless focus on customer needs. Thank you to our employees, partners, and shareholders for your continued support. We are excited about the journey ahead and look forward to sharing more milestones in the next quarter. I will now turn the call over to our Chief Financial Officer, Mansi Katani. Mansi Katani: Thank you, Rick. As a reminder, please see our earnings press release where we reconcile our non-GAAP results to GAAP. Our principal exclusions are stock-based compensation, amortization of intangible assets, and certain costs related to restructuring, settlements, and nonrecurring legal expenses. I will first go through the results of the quarter and then talk a bit about our recently announced debt reduction. I'm happy to announce that revenue for the third quarter exceeded our expectations, coming in at $106 million, significantly above the high end of our guidance range of $90 million to $100 million, up 7% sequentially and up 6% year on year. Network charging systems at $56 million accounted for 53% of third-quarter revenue, up 12% sequentially and up 7% year on year, marking a return to growth. Subscription revenue at $42 million was 40% of total revenue, up 5% sequentially and up 15% year on year as our total installed base continues to grow. Other revenue at $7 million was 7% of total revenue. In terms of geography, North America made up 85% of revenue, and Europe was 15%, consistent with recent quarters. Non-GAAP gross margin remains at a record high of 33%, flat sequentially and up seven percentage points year on year. Hardware gross margin was flat sequentially. Subscription margin continued its upward trajectory, achieving a new record of 63% on a GAAP basis and was even higher on a non-GAAP basis, driven by economies of scale and ongoing efficiencies in support costs. Non-GAAP operating expenses were $57 million, representing a 2% reduction both sequentially and year on year. We remain committed to prudent expense management, maintaining a disciplined approach that balances current constraints with selective investments intended to support long-term growth and margin expansion. Non-GAAP adjusted EBITDA loss was $19 million. This compares with a loss of $22 million in the prior quarter and a loss of $29 million in the third quarter of last year. Stock-based compensation was $15 million, down from $18 million last quarter and $21 million in the third quarter of last year. Our inventory balance was stable relative to the prior quarter at $212 million. We continue to manage existing commitments with our contract partners and anticipate a gradual reduction in this balance over the coming period. We ended the quarter with $181 million in cash compared to $195 million in the prior quarter, reflecting cash usage of $14 million. This compares to $24 million of net cash usage in Q3 of last year. While quarterly cash usage may vary, we have made meaningful progress in reducing cash burn, and we expect the continued sell-through of existing inventory will further support cash generation going forward. Next, I would like to address our recently announced debt exchange transaction, which closed following the end of Q3. We believe this transaction strengthens ChargePoint Holdings, Inc.'s financial position and represents a meaningful step forward in delivering significant shareholder value. Last month, we completed a privately negotiated debt exchange with existing holders that will ultimately reduce our total debt by $172 million, more than half of the previous balance. The consideration paid included a combination of new senior debt, cash, and warrants, and reflected a discount of 33%. We believe this deleveraging action captured at a significant discount shifts enterprise value to shareholders and strengthens our balance sheet. Key benefits of the exchange include, number one, reduction of total debt by $172 million, more than 50%, number two, elimination of the 125% change of control premium on the prior notes of approximately $82 million, number three, reduction in annual interest expense by approximately $10 million, and number four, extension of debt maturity from 2028 to 2030. The exchange utilized a portion of our existing cash made possible by the significant improvement in cash usage over the past year. Over the last four quarters, our net cash usage was less than $39 million. This compares to a net cash usage of $178 million over the four quarters prior to that. The progress we have achieved in managing cash usage provided the confidence to pursue this transaction, which meaningfully reduced our debt burden at a substantial discount. We believe this represents a prudent decision for the company and our shareholders. We view this transaction as a transformative step forward for ChargePoint Holdings, Inc., one that strengthens our financial position and reflects our continued focus on disciplined capital management and commitment to creating long-term value for our shareholders. Finally, moving on to guidance, for 2026, we expect revenue to be $100 million to $110 million, representing a 3% year-on-year growth at the midpoint. While we remain cautious in light of the broader macroeconomic environment, we are confident that revenue growth will continue as we execute on our strategic priorities. In summary, this quarter, we delivered sequential and year-over-year revenue growth, achieved another record quarter for subscription gross margin, and continued to make progress towards profitability. The operational improvements we have implemented over recent quarters position us well to capture future growth opportunities. In addition, the significant debt reduction announced strengthens our financial foundation and enhances our ability to execute on our long-term strategy. We will now open the call for questions. Operator: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star then the number one on your keypad to raise your hand and enter the queue. If you would like to withdraw your question at any time, simply press star 1 again. Please note that ChargePoint Holdings, Inc. prefers that we ask each analyst to limit yourself to one question. You can return to the queue for a follow-up question. Thank you. Your first question comes from the line of Colin Rusch with Oppenheimer. Your line is open. Colin Rusch: Thanks so much, guys, and congrats on the capital optimization here. I'm curious about the product evolution and the confidence that you're projecting around calendar year next year. Can you talk a little bit about any demand that you're seeing for virtual power plants, some of the geographies that are potentially in kind of tight supply situations from an electricity standpoint, and products that you're seeing that are starting to emerge outside of NEVI that could actually help inflect demand in a meaningful way as you go through the calendar year next year? Rick Wilmer: Yeah. Thanks, Colin. I think on two fronts, two things we've announced that both tie into the VPP play are, one, the new flex product line that we announced that's fully V2G and V2H enabled. That is particularly cost-effective and powerful when paired with the Eaton smart breaker and smart panel technology. This is something we showed at the RE plus show earlier this year, and that'll start rolling out in 2026. And then on the other end of the spectrum, the DC fast charging product that we've announced, our new Express line, there is a configuration of that product that can integrate directly with the DC grid. And the amount of capital savings that is enjoyed by doing so due to the elimination of a lot of power conversion and being able to integrate directly with solar and battery, for example, along with improved electrical efficiency provides not only fully bidirectional charging but very significant economic benefits in terms of CapEx and OpEx. Colin Rusch: Thanks so much. If I can have a follow-up, I'm just curious about the potential for inventory throughout the course of this year as you work through some of the remaining items that you have on the balance sheet and go through some of this product transition. Mansi Katani: Yeah. Hi, Colin. So we've made some strategic decisions to wind down certain commitments with some of our full-time manufacturers. And a part of that wind-down process sometimes involves having to take remaining components, which add to inventory. But I think we will see a small decline in Q4 most likely in the inventory balance, but we expect a more material decrease throughout next fiscal year as we sell through the existing inventory and manage our supply. Colin Rusch: Thanks so much, guys. Your next question comes from the line of Mark Delaney with Goldman Sachs. Your line is open. Mark Delaney: Yes. Good afternoon. Thanks very much for taking the question. I also had one on inventory, but more with respect to the gross margin. And I think in the past, the company had thought that as it works through some of the older inventory and shifts to these new products, there was an opportunity for that to expand margins. With what you're seeing in the business today and some momentum you've spoken about with these newer products, can you talk a bit more around whether or not you're still set for those new products to drive gross margins to the upside as they become a bigger contribution to the mix? And just anything you can share in terms of the timing as to when you may start seeing a bigger mix of those as you think about the inventory dynamic? Thanks. Mansi Katani: Yeah. Hi, Mark. So I think improvements in hardware margin in the near term will be by product mix due to the fact that we've got inventory already produced and ready to ship. We anticipate hardware margins to remain around the current levels until we start selling through that existing inventory. Now in the current hardware margin that you see today, we are seeing some benefit of Asia manufacturing. But we expect to see larger improvements from Asia manufacturing as we sell through our existing inventory and as we start releasing new products, we'll expect margin improvement. But that should come in towards the latter half of next year. But overall, hardware margin always depends on the final mix. Mark Delaney: Understood. I'll pass it on. Thank you. Your next question comes from the line of Chris Pierce with Needham. Your line is open. Chris Pierce: Hey. Good afternoon. Can you hear me? Rick Wilmer: Yeah, Chris. Go ahead. Chris Pierce: Okay. Perfect. Sorry. I was in the car. You've spoken kinda confidently to the second half of the calendar next year and projects in Europe. Can you just remind us, like, lead times? Are these projects that you've sort of already negotiated and still confident that you've won, or is this just confidence in the new product suite that you're rolling out? Rick Wilmer: It's probably more the former. I was in Europe recently personally meeting with many customers, talking about these new products. And as I mentioned in the prepared remarks, the response was overwhelmingly positive. There's a lot of people excited about our new DC architecture that I referenced a moment ago in the questions. And I'm quite confident that we'll win a number of fairly significant deals in Europe as we bring that product to market in the second half of next year. Chris Pierce: Okay. And then just lastly, are these consumer, like, passenger car products? Are these, are you starting to see fleet wins, or are there not enough fleet vehicles out there? I'd kinda wanna get a sense of where you're seeing the momentum. Rick Wilmer: The combination of both. The new DC architecture is really well-suited for passenger vehicle DC fast charge. It also is really an ideal architecture for megawatt charging for large trucks. And we've talked to customers in both of those areas, specifically in Europe. Chris Pierce: Okay. Thank you. I'll pass it on. Your next question comes from the line of Bill Peterson with JPMorgan. Line is open. Bill Peterson: Yes. Hi. Thanks for taking my questions. I guess sort of housekeeping. Relative to your expectations on the last quarter call, you came in nicely ahead of expectations. Can you provide some color on what came in better than expected? And then anything notable within the network hardware in terms of mix, and then just adding the second question on here to get back in the queue. Within your expectations for the second half in next year, your growth expectations, would this, in your view, be enough to push you to profitability? Mansi Katani: Yes. So in terms of the first part of the question, Bill, the significant beat was mostly due to a boost in residential billings due to the expiration of the federal EV credits that we saw. We saw a huge boost in sales of our home products. The commercial did well also compared to the prior quarter, but the significant beat was mostly due to this boost in the residential billings. In terms of growth in the second half in EBITDA, we're not guiding to a timeframe, but EBITDA, as we've mentioned before, will come with growth in revenue, which we are significantly focused on. And as we've mentioned before, with the new products and the increased demand in Europe and the Eaton partnership, we think the second half should be pretty strong. Bill Peterson: Thank you. Your next question comes from the line of Chris Dandrinos with RBC Capital Markets. Line is open. Chris Dandrinos: Yeah. Thank you. I wanted to follow-up a bit more on the Eaton partnership and hopefully just asking you to provide a bit more information about where you're at with that relationship, how that partnership's going, and I guess just any broadly, any extra information you can provide? Thanks. Rick Wilmer: Yeah. I would characterize that as exceeding expectations. The amount of innovation we've been able to unlock compared to what I expected when we began the relationship has increased again, to exceed expectations. I gave a couple of examples earlier. On our home via home solution that is really differentiated from the market as a result of our partnership and innovation in collaboration with Eaton and likewise on the DC fast charge, the DC-only version of that on a DC grid built by is a very differentiated product. So expectations exceeded operationally. We're working very well with Eaton. Shipping a lot of cobranded products this past quarter that we just closed and expect that to continue to grow. Chris Dandrinos: Thank you. That's it for me. Operator: Again, if you would like to ask a question, please press star then the number one on your telephone keypad. Your next question comes from the line of Craig Irwin with ROTH Capital Partners. Your line is open. Craig Irwin: Good evening and thanks for taking my questions. So Rick, the part of your prepared comments that was a big surprise is the funding. The fact that this is driving installations today. Can you maybe talk about the runway here as far as the financing and whether you're seeing some of the financing from the states come through in a more material way now that some of the uncertainty out of DC is behind us? Rick Wilmer: Yeah. With respect to NEVI, we are seeing projects move forward. As we mentioned in the prepared remarks, 40 states now are active in NEVI and awarding contracts, and we're active in many of those. Craig Irwin: And are you seeing similar levels of support, similar levels of financial support and sort of subsidy for new stations? Or are these basically flat, improving? How would you characterize any change there? Rick Wilmer: You kind of return to where it was before it was paused. I think it's a good way to characterize it. Craig Irwin: Excellent. That's good news. Well, thanks for taking my question. Operator: And with no further questions in queue, that will conclude today's conference call. You may now disconnect.
Operator: Good morning, everyone, and welcome to today's PVH Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. Please note this call may be recorded. [Operator Instructions]. It is now my pleasure to turn today's program over to Sheryl Freeman, Senior Vice President of Investor Relations. Sheryl Freeman: Thank you, operator. Good morning, everyone, and welcome to the PVH Corp. Third Quarter 2025 Earnings Conference Call. Leading the call today will be Stefan Larsson, Chief Executive Officer; and Zac Coughlin, Chief Financial Officer. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material. It may not be recorded, rebroadcast or otherwise transmitted without PVH's written permission. Your participation constitutes your consent to having anything you say appear on any transcript or replay of this call. The information to be discussed includes forward-looking statements that reflect PVH's view as of December 3, 2025, of future events and financial performance. These statements are subject to risks and uncertainties indicated in the company's SEC filings and the safe harbor statement included in the press release that is the subject of this call. These include PVH's right to change its strategies, objectives, expectations and intentions, and the company's ability to realize anticipated benefits and savings from divestitures, restructurings and similar plans such as the actions undertaken to focus principally on its Calvin Klein and Tommy Hilfiger businesses and its current multiyear initiative to simplify its operating model and achieve cost savings. PVH does not undertake any obligation to update publicly any forward-looking statement, including, without limitation, any estimates regarding revenue or earnings. Generally, the financial information and projections to be discussed will be on a non-GAAP basis as defined under SEC rules. Reconciliations to GAAP amounts are included in PVH's third quarter 2025 earnings release, which can be found on www.pvh.com, and in the company's current report on Form 8-K furnished to the SEC in connection with the release. At this time, I'm pleased to turn the conference over to Stefan Larsson. Stefan Larsson: Thank you, Sheryl, and good morning, everyone, and thank you for joining us today. I want to start by thanking our Calvin Klein, Tommy Hilfiger and PVH teams around the world for your hard work this quarter as we continue to make important progress on our multiyear journey to build Calvin and Tommy into 2 of the most desirable lifestyle brands in the world. For the third quarter, we exceeded our guidance across reported revenue, operating profit and EPS, and we delivered constant currency revenues in line with our guidance. Total revenue for the company was $2.3 billion, down less than 1% in constant currency and in line with our expectations. Third quarter direct-to-consumer revenue was also down 1% in constant currency, partially offset by 1% growth in our wholesale revenue. For the full year, we are reaffirming our constant currency revenue and operating margin outlook and narrowing our reported revenue and non-GAAP EPS outlook to the high end of our previous ranges, reflecting our confidence in our brands and execution despite the continued uneven global consumer backdrop and the impact of tariffs in North America, which Zac will share more details about. We remain disciplined in our execution of the PVH+ Plan, where we lean into the iconic global power of Calvin and Tommy, and focus on the key growth categories where each brand has the right to play to win with the consumer. We continue to expand innovation and newness across our core product franchises and amplify that in both brands with cut-through full funnel marketing that connects with culture and our target consumer. In Europe, revenues declined low single digits in constant currency. And coming into the fourth quarter in Europe, we had an unplanned start to Black Friday and the important holiday period. In the Americas in Q3, our digital channels continued to outperform, driven by strong customer engagement. And also here, the Black Friday and holiday start was on plan. And in APAC, we exceeded expectations again this quarter with strong D2C performance and a notable improvement in China. We continue to build our data and demand-driven supply chain, reflected in healthy inventory levels, which are up 3% versus last year, including the impact of tariffs. We are also investing in key growth initiatives, especially in marketing, and we have freed up over 200 basis points in SG&A efficiencies over the past 18 months. As we lean into the holiday season, I just came back from visiting 7 of our biggest markets across Europe, U.S. and Mexico. I visited over 100 Calvin and Tommy shop-in-shops, met with key partners and walked our owned and operated stores. What's clear from these visits are the underlying strength of the consumer love for our brands and the power and potential of our teams and partners. A common thread you will hear me talking a lot about today is that when we lean into the iconic strength of our brands and combine that with innovation and newness in product, marketing and the shopping experience, we win. I look forward to sharing how we did this in Q3 and how we will expand our impact quarter-by-quarter. Let me start with Calvin Klein, where we continue to build relevance and desirability by connecting Calvin's core DNA to the consumer and cultural conversation. This quarter, we again drove momentum with high-impact full funnel execution in underwear and denim, 2 of Calvin's biggest categories. Building on the strong launch of our new men's Icon Cotton Stretch product franchise, which we amplified through global mega talent, Bad Bunny. This quarter, we brought the same level of product innovation and newness to our largest and most successful women's underwear program. Together with global music superstar, Rosalia, we introduced our new Icon Cotton Modal franchise, driving double-digit growth in these styles globally. Repeating this model, we launched new campaigns with NBA star, Jalen Green, and Real Madrid footballer Trent Alexander-Arnold, driving 20% growth in Icon Cotton Stretch underwear, making our third consecutive quarter of strong growth, and growing total men's underwear mid-single digits. In denim, we continue to infuse innovation in fashion denim and make it easier for consumers to shop their favorite looks, and we delivered strong growth this quarter, continuing the momentum from Q2. Last month, global brand ambassador and K-pop mega talent, Jung Kook, launched our newest campaign featuring Calvin's iconic denim lifestyle. The campaign went viral globally, driving deeper consumer engagement in one of our most important pillars of the brand. In September, we continued to build the brand's aspirational halo through Calvin Klein runway with our Spring 2026 fashion show in Calvin's hometown of New York City. The show drove record social media engagement, earning the #1 spot among all participating brands, and Calvin alone had a 75% share of voice for the entire New York Fashion Week. As we look ahead to holiday, we're engaging the consumer with seasonal Calvin fashion essentials from social and e-commerce to our stores. In the marketplace, when we last spoke, we were just opening our Tokyo flagship in Harajuku, representing the ultimate Calvin brand expression and further strengthening our premium positioning. The opening went very well, and we have seen high-quality traffic and conversion. Next week, we'll further advance Calvin's global retail expansion with the opening of the Calvin Klein flagship store here in SoHo, New York, another iconic brand-building location and a true homecoming for the brand. We also continue to make progress as planned on the transitory operational challenges we previously discussed as we stood up the Calvin Klein global product capability in New York. The challenges created an expected headwind this quarter, but we continue to see the planned improvements in delivery timing and go-in margin we set out for spring 2026. Turning to Tommy. We continue to take Tommy's iconic DNA of classic American cool and connect it to today's consumer and culture. Every season, through our brand campaign, we invite the consumer into Tommy's aspirational world. We then lean into key growth categories and hero our best product franchises, which are both iconic and infused with newness. In the third quarter, we launched our Hilfiger Racing Club fall brand campaign with talent like Claudia Schiffer and Nicholas Hoult, which followed the success of Tommy's partnership with the global blockbuster film, F1 the Movie. Connected to the campaign, we executed high-impact full funnel activations, including global events across key cities. For the campaign, global brand ambassador, Jisoo, from Blackpink was featured by Vogue, igniting broad organic reach and engagement. This is a great example of how we convert influence into brand relevance and consumer excitement, both globally and regionally. This fall, Tommy opened its newest shop-in-shop concept at Galeries Lafayette in Paris, reflecting our multiyear elevation plan to evolve and invest in our shop-in-shops and stores. These investments bring a step change improvement in the consumer experience. And in our test store, we already see the positive impact of the elevated experience with a higher AUR sell-through. Tommy will close the year with this Hilfiger holiday campaign, reimagining iconic Tommy style for the holidays, and we are excited for Jisoo to lead the campaign. Lastly, I'm excited for the next step in our marketing execution. For spring 2026, we are taking Tommy's aspirational world to the next level, with Tommy himself inviting a strong group of global talent into his world, all wearing Tommy's powerful style icons in seasonally relevant growth categories across both men's and women's. I can't wait for you all to see it. Now let me turn to our regional performance, starting with Europe. Reported revenue increased 4%, but was down low single digits in constant currency. Wholesale was down less than 1% as positive fall order book growth was offset by lower in-season replenishment and D2C was down mid-single digits. A few factors drove this. First, after an unplanned start to the quarter and 2 consecutive quarters of D2C growth in Europe, in September, we observed a tougher backdrop with more muted activity from our European consumers. Secondly, the expected delays from the transitory Calvin global product challenges put extra strain on our European distribution center, impacting shipments for both Calvin and Tommy, which made us lose a few critical weeks of full price selling. Thirdly, we had an especially tough season for cold weather outerwear, a big fall category for both Tommy and Calvin. Importantly, we are directly addressing these factors with what's within our control. Independent of the consumer backdrop, where we have driven the most product innovation and newness for this fall in categories such as sweaters and pants for Tommy or underwear and fashion denim for Calvin, we drive positive growth. And season by season, you will see us expand iconic innovation and newness across bigger and bigger parts of the assortment. As I shared previously, we remain on plan to resolve the transitory challenges from the setup of the Calvin Klein global product capability. And for spring, we are on time from our suppliers, and we have captured the go-in margin improvements we targeted. And in cold weather outerwear, even without the delays, the full price selling window is becoming shorter as consumers every season lean more into lighter transitional outerwear that can be worn for a longer period of time. And even though our transitional outerwear across both brands performed well, and we have increased its share of total outerwear, going forward, we need to accelerate this shift even further. In regions where we have already done that, like in APAC this season, it has performed very well. As I mentioned earlier, in Europe, the holiday season and important Black Friday week is on plan. And in parallel to keeping this momentum up, we are preparing for our biggest Partner Day yet in January, where we will bring over 500 of our global partners to Amsterdam to show how we, for spring and fall 2026, are amplifying the increased innovation in product with marketing to cut through even more with the consumer. This includes the next level Tommy Lifestyle campaign, further strengthening of Europe-focused talent and increased shop-in-shop rebuilds. Next, turning to the Americas. We grew overall revenue by 2%, in line with our plan of low single-digit growth, driven by wholesale growth. In a continued choppy macro backdrop, D2C declined low single digits. Within D2C, we drove higher AURs and digital continued to outperform, delivering double-digit growth. This was supported by another quarter of double-digit traffic growth and driven by product strength and elevated mid-funnel marketing. Our team continued to lean into the next level execution of the PVH+ Plan as we work to unlock the full growth potential of both brands in the region. A great example is the denim category, where we grew across both brands and included newness in product, stronger presentation, improved fit guide and enhanced associate training. Looking ahead, we continue to build brand desirability in the region through increasing our refits of our North America retail fleet. Moving to Asia Pacific. For the second consecutive quarter, we delivered better-than-expected performance. Revenue was flat in constant currency, a sequential improvement from Q2, driven by an improvement in both D2C and wholesale with gross margin up versus last year. Importantly, D2C turned to positive growth with notable improvements in China, Japan and Australia. Highly relevant global activations across both brands, amplified by regional talent, drove continued e-commerce growth up high single digits. Driven by our hero products, Tommy delivered double-digit growth in key categories with transitional outerwear and sweaters both up approximately 20% across men's and women's. Calvin saw sequentially stronger growth in fall product, driven by the newly launched underwear programs in both men's and women's. We generated strong results during key consumer moments such as Golden Week and Chinese Valentine's Day, and we just finished Double-11, the largest consumer moment of fiscal 2025, where we drove gross merchandise revenue 15% higher than last year, and Calvin and Tommy again ranked among the top international brands on Tmall. Through strong execution, we continue to deliver sequential improvements in performance. We have increased investments in marketing to activate the full funnel and continue to expand new stores across APAC, all reflecting the importance of the region as one of our key growth drivers. In addition, both Calvin and Tommy were proud to participate as first-time exhibitors at the China International Import Expo, building on our long-standing presence and commitment to the market. Turning to our licensing business. Revenues in licensing were lower versus last year, reflecting the transition of previously announced women's North America wholesale categories. As we have shared before, our large and diversified global licensing business is a key competitive advantage. When we ourselves lean into our core categories to turn the brand-building consumer flywheel, our long-term partners bring their expertise across multiple complementary categories. Consistent with the outerwear category classification business for the U.S. wholesale channel, we recently entered into a new licensing agreement for the women's dress classification with an expected launch in spring 2027. Both categories live outside of our brand-specific lifestyle pads. Additionally, in Q3, we held a Global Licensing Summit here in New York with all our partners, where each of our brands shared their key growth strategies and where our key partners showcased how they, from those brand strategies, drive consumer engagement and growth in the categories they are the experts in. Next, a quick moment on leadership. We are excited to welcome Patricia Gabriel, who joined us last month as Chief Supply Chain Officer and Global Head of Operations. She is succeeding David Savman, who earlier this year took over the Global Brand President role for Calvin Klein. Patricia is a consumer-centric leader with a strong proven track record, and she will help further accelerate our PVH+ Plan progress. And a few weeks ago, we announced that Zac Coughlin, our Chief Financial Officer, will be departing for a new opportunity outside of our industry. I want to thank Zac for his partnership and contributions to the business and to me personally. Over the past several years, Zac has played an integral role in advancing our PVH+ Plan progress and driving important efficiencies across the company. Thank you, Zac, and we wish you all the best in your next chapter. Zac will stay with us through the end of December, and we have already begun a global search for our next CFO. In the interim, Melissa Stone will serve as our CFO. Melissa has over 2 decades of PVH financial leadership experience across accounting, controlling and FP&A, giving her a deep understanding of our global business. And I would like to thank her and our full finance leadership team for stepping up during this time. In closing, we are fully geared up to deliver the rest of the holiday season and the full year as we continue to step-by-step and season-by-season build Calvin Klein and Tommy Hilfiger into their full potential. There are only a small handful of globally iconic brands like Tommy Hilfiger and Calvin Klein, and we have 2 of them. In any consumer backdrop, we remain relentlessly focused on the levers within our control to keep leaning into our iconic brands, and through our PVH+ Plan, continue to strengthen our product, marketing and marketplace experience in a systematic and repeatable way. Everywhere we do this, combining our iconic brand strength with innovation and newness, we're already driving increasingly profitable growth with the consumer today. And with that, I'll turn the call over to Zac. Zachary Coughlin: Thanks, Stefan, and good morning. First, on a personal note, as this marks my last earnings call at PVH, I want to thank the PVH team as well as our customers and shareholders. I am truly grateful for the time that I have spent at PVH, working closely with Stefan and all our colleagues around the globe to help drive our two iconic brands forward through the execution of the PVH+ Plan. My comments are based on non-GAAP results and are reconciled in our press release. As Stefan discussed, this quarter, we continue to make progress on our multiyear journey to build Calvin Klein and Tommy Hilfiger into the most desirable lifestyle brands in the world, delivering or exceeding expectations across nearly all key financial metrics for third quarter, maintaining our strong cost discipline to offset a slightly higher-than-anticipated tariff headwind in the quarter. We delivered our overall revenue plan and a sequential improvement in operating margin despite some choppiness in the quarter and an uneven global consumer backdrop. As a result, our EPS was better than expected. Looking forward, following our third quarter results and on-plan start to holiday, we are reaffirming our full year constant currency revenue and operating margin guidance and narrowing our reported revenue and EPS guidance to the high end of the previous ranges. Importantly, we also ended the quarter with inventory up 3% compared to third quarter last year, including a 2% increase due to tariffs. This reflects a significant improvement as compared to the increase in the second quarter of 2025, as we continue to tightly manage inventories. Our inventory is fresh and current and well positioned headed into holiday, and we remain on track to land the year with inventory aligned to our sales plan, excluding tariffs. I will now discuss our third quarter results in more detail and then move on to our outlook. Revenue for the third quarter was up 2% on a reported basis and down less than 1% on a constant currency basis, in line with our guidance. Starting from a regional perspective, our EMEA business was up 4% on a reported basis and down 2% in constant currency for the quarter. As Stefan discussed, sales were on track through August, but coming into September, we saw a tougher start to the fall season. The lower trend continued through the balance of the quarter with the overall result for the quarter being sales in the direct-to-consumer business down mid-single digits in constant currency. Our wholesale business was down less than 1% in constant currency as positive fall order book growth was offset by lower-than-planned in-season replenishment. As Stefan discussed, EMEA results reflected a combination of factors, including muted consumer activity driven by a tougher backdrop in Europe, lower cold weather outerwear performance, and delays related to the transitory Calvin global product challenges. In our Americas business, revenue was up 2%, driven by mid-single-digit growth in wholesale due to the impact of Calvin Klein women's sportswear and jeans wholesale transition in-house. Excluding this impact, wholesale shipments were lower than last year as expected due to a more balanced timing of first half, second half shipments versus last year when shipments were more heavily weighted to the back half. On a normalized basis, wholesale sales, excluding the impact of licensing transitions, are planned up low single digits for the second half. Direct-to-consumer revenue in the Americas business was down low single digits. While we exited Q2 with modest sales growth in stores, the consumer backdrop in the third quarter remained choppy with store revenue down low single digits for the quarter. This was partially offset by robust performance in both our Tommy Hilfiger and Calvin Klein digital commerce businesses, which in total delivered another quarter of double-digit growth. This marked our fifth consecutive quarter of year-over-year growth, fueled by the investments we've made to elevate the online consumer experience. In our Asia Pacific business, we delivered revenue better than planned and flat on a constant currency basis, showing the strength of our Asia Pacific business and marking another quarter of sequential improvement in the region. Notably, direct-to-consumer revenue grew low single digits in constant currency in both brands with a return to growth in our retail store business and continued growth in our digital commerce business. Direct to consumer revenue also grew mid-single digits in China, driven by strength in digital commerce. Higher DTC revenue for the region was offset by lower wholesale revenue. Revenue for our Asia Pacific business was down 1% on a reported basis. In our licensing business, revenue was down 11% versus last year, primarily due to the previously mentioned transition of Calvin Klein women's sportswear and jeans in-house. Turning to our global brands. Tommy Hilfiger revenues were up 1% as reported and down 2% in constant currency. Calvin Klein revenues were up 2% as reported and flat in constant currency. The decrease in revenue on a constant currency basis in EMEA weighed more heavily on our Tommy Hilfiger business, as Stefan discussed. From an overall PVH channel perspective, our direct-to-consumer revenue was flat as reported and down 1% in constant currency. Sales in our retail stores were flat as reported and down 2% in constant currency, as modest growth in APAC was more than offset by low single-digit declines in Americas and EMEA. Sales in our owned and operated e-commerce business were up 1% as reported and flat in constant currency as strong growth in APAC and Americas was offset by a decline in EMEA. Total wholesale revenue was up 4% as reported and up 1% in constant currency, which reflects the previously mentioned transition of Calvin Klein women's sportswear and jeans in-house, partially offset by the decreases in EMEA and APAC. In the third quarter, our gross margin was 56.3%, a decrease of 210 basis points compared to last year. Progress on working through the Calvin Klein operational challenges continued, but our third quarter gross margin was lower than planned due to the unfavorable impact of timing and mix of the new higher tariffs. In third quarter, gross margin reflected approximately 110 basis points due to the unmitigated impact of tariffs. And as we have previously discussed, approximately 50 basis points of the decrease in gross margin was the impact of our North American license transitions. The remaining 50 basis point decrease was primarily due to higher promotions and the impact of Calvin Klein product shipment delays, which included a shorter full price fall selling season in Europe, as Stefan discussed. SG&A spending was down in constant currency and SG&A as a percent of revenue was lower than planned, improving 40 basis points versus last year to 47.5%, reflecting both our Growth Driver 5 Actions and a favorable impact from the timing of expenses. As we discussed last quarter, we will invest more into marketing in the second half of this year to capitalize on key consumer moments and to support our brand building cut-through campaigns amplified by mega talent. Marketing was up in third quarter versus last year, but lower than we initially planned as we decided to shift some of the spending into fourth quarter to maximize our holiday impact and build positive momentum into 2026. EBIT for the quarter was $202 million and operating margin was 8.8%. Earnings per share was $2.83, reflecting a negative impact of $0.37 related to tariffs and a positive impact of $0.14 related to exchange. Interest expense was $21 million, and our tax rate for the quarter was 25.5%. Additionally, during the quarter, we were pleased to complete our previously announced accelerated share repurchase program, reducing our share count by 2.3 million additional shares and bringing the total amount of shares purchased under the agreement to 6.9 million and bringing our year-to-date total, including open market purchases, to 7.7 million shares. And now moving on to our outlook. Starting with the fourth quarter, we are projecting revenue to be up slightly to up low single digits on a reported basis and down slightly on a constant currency basis compared to the prior year, in line with Q3 trends. Overall, for the Americas, we are planning fourth quarter revenue up mid-single digits with growth in wholesale, partially offset by low single-digit decline in DTC sales. In EMEA, we expect third quarter trends in constant currency to continue into fourth quarter. And in Asia Pacific, we expect revenue to be down slightly in constant currency. While underlying DTC trends are expected to remain positive, growth is muted by an unfavorable impact due to the timing of Lunar New Year compared to last year. We are expecting fourth quarter gross margin to decline approximately 200 basis points versus the prior year, including an unmitigated tariff impact of approximately 150 basis points, partially offset by the impact of planned mitigation actions. As we discussed last quarter, the impact of tariffs will be felt much more heavily in the fourth quarter than the third quarter as more inventory sells through at the new higher rate. We expect SG&A as a percentage of revenue to be down 50 basis points compared to last year, reflecting the increased marketing investments I spoke of earlier more than offset by our Growth Driver 5 Actions, which will continue to deliver efficiencies. Overall, we are projecting our fourth quarter operating margin to be approximately 9%, down approximately 100 basis points compared to last year. Earnings per share is expected to be in the range of $3.20 to $3.35. Our tax rate for the third quarter is estimated at approximately 22%, in line with our tax projection for the full year, and interest expense is projected to be approximately $20 million. And now moving on to the full year. We continue to operate in an uneven global consumer backdrop. As such, we are reaffirming our constant currency revenue and operating margin guidance and narrowing the range of our reported revenue and EPS guidance to the high end of the previous ranges. On the top line, we are narrowing our reported revenue outlook to up low single digits compared to increase slightly to low single digits previously. We continue to project revenue to be flat to increased slightly in constant currency. We are reaffirming our operating margin outlook of approximately 8.5% and narrowing our EPS outlook to a range of $10.85 to $11 compared to $10.75 to $11 previously. We continue to expect the tariffs currently in place to have an overall net negative impact on our earnings in 2025, including an approximately $65 million unmitigated impact to EBIT or approximately $1.05 per share compared to previous guidance of $70 million and $1.15 per share. We have begun to mitigate some of these costs through strategic actions this year and expect to fully mitigate the impact over time. But for this year, some we will need to absorb. The net impact of the tariffs and these mitigation actions are embedded within our guidance. Regionally, our revenue outlook remains unchanged for Americas and APAC. In the Americas, we are planning revenue up mid-single digits, including the positive impact of the Calvin Klein women's sportswear and jeans wholesale transition in-house. And in Asia Pacific, revenue is planned down mid-single digits in constant currency. In EMEA, we expect the lower third quarter trends to continue in the fourth quarter and, as a result, we are now planning full year revenue and constant currency to be down slightly compared to last year. We continue to expect gross margin to decrease approximately 250 basis points versus last year. On SG&A, we continue to expect expense to be lower in constant currency in 2025 compared to 2024 and our SG&A expenses as a percentage of revenue to decrease approximately 100 basis points, reflecting significant cost savings connected to our Growth Driver 5 Actions. Our interest expense projection is unchanged at approximately $80 million, and our tax rate for 2025 continues to be estimated at approximately 22%. Before we open up for questions, I just want to conclude by saying that while we are navigating a dynamic and uneven global consumer backdrop, within that, we continue to focus on taking proactive actions within our control and making progress across all dimensions of the business through execution of the PVH+ Plan, building momentum into 2026 to deliver sustainable and increasingly profitable growth for the long term. And with that, operator, we would like to open it up for questions. Operator: [Operator Instructions] Our first question comes from Bob Drbul with BTIG. Robert Drbul: Zac, best of luck, congratulations, and thanks for everything in the last few years. Zachary Coughlin: Thanks, Bob. Robert Drbul: I guess -- I was wondering, I think, Stefan, just when you look at the geographic performance of the business this quarter, can you just spend a few more minutes and just unpack a bit more sort of the dynamics that you're seeing across the Americas, across Europe and APAC and, I guess, just how you think about it a little bit more into '26? Stefan Larsson: Absolutely, Bob, and thank you for your question. You're right. Each region this quarter had its own dynamics. So starting with Europe, as I mentioned in my remarks, we started off the quarter on plan. September, we saw a more muted consumer backdrop. And then internally, we worked through our Calvin transitory challenges that was related to setting up the Calvin Klein product capability. And we worked through those as planned, but they had an effect in the quarter. So we had strain on the DC, all expected, but that cut some full price selling a few weeks. Those were the main drivers and then critically coming into the fourth quarter and the start of the holiday season. And looking at Europe now, Black Friday, Thanksgiving week is as important as it is in the U.S. as an indicator for holiday. So we had an on-plan start there. So the consumer came back for the start of the holiday. Switching to the Americas, revenue grew 2%. E-com was the big driver there. So we drew e-commerce double digits. Strong conversion, strong consumer recruitment. Americas also had an on-plan Black Friday and Thanksgiving week. Then switching into APAC. That's a really great story because we saw this quarter again that we exceeded our plan performance-wise. Notable improvements in China, Japan and Australia. And what we saw during the quarter was D2C returned to positive growth, driven by digital. Both Calvin and Tommy had very strong Double-11 activations, up 15% versus last year. And we keep seeing Calvin and Tommy at the top of the ranking in Tmall during the big weekend. So very strong execution by our APAC and China team. Zachary Coughlin: Yes. And Bob, just to add some financials to Stefan's comments, when you bring all of that together from a total PVH perspective, our third quarter operating margin ex tariffs was almost 10%. And in our guidance as well for 4Q, our operating margin is 10% ex tariffs as well. And so if you compare that to approximately 8% in the first half, the financials are also following those sequential improvements that Stefan has talked about. Operator: We'll take our next question from Jay Sole with UBS. Jay Sole: Great. Two-part question for me. First, Stefan, can you talk about marketing a little bit more and the impact you're seeing from the stepped-up spending that you've done in marketing? And then maybe, Zac, one for you. With the nice control on inventory that you're showing now, how do you think about operating cash flow for the full year? And what kind of impact on working capital do you see kind of going forward? Do you think you have to step up working capital? Or do you think the operating cash flow trend will continue into 2026? Stefan Larsson: Thanks, Jay. Starting with your marketing question, so we are very disciplined in how we approach marketing and where we put additional investments, because every season we invite the consumer into the aspirational world of Calvin and Tommy at the top of the funnel. And we do that connected to our key growth categories and increasingly connected when we expand our innovation into our key product franchises, we build the marketing around that. So in Calvin, we have done this now for a number of quarters where we lean into underwear and denim. And if you look at underwear, you will hear me talk a lot about underwear and denim in Calvin. But if you look at the world of underwear and world of denim together, it's more than 2/3 of Calvin Klein. So when we do these marketing campaigns cut-through at the top of the funnel, this season with Rosalia introducing our newest innovation in our biggest product franchise in women's, then we see a double-digit growth. And then the good news as well is looking at men's. So we had Bad Bunny introduce our innovation in our biggest product franchise in men's underwear previous quarter, in the second quarter. In the third quarter, we continued to bring that product franchise to line with NBA Star, Jalen Green, with European footballer Trent Alexander-Arnold, and we saw the 20% growth in that product franchise. And overall underwear is now up mid-single digit. And similar in denim, so worked with Jung Kook, one of the biggest, if not the biggest K-pop star in the world. And he anchored our denim lifestyle campaign. And we saw it going viral with billions of impact in social within 24 hours. And then we see it driven down to sales increase in our fashion denim. So you will see, both from a Calvin and a Tommy perspective, every season the continued innovation, because part of it is the discipline of driving the brand awareness and consideration into culture and into the front of the eye of the consumer, and then in the middle of the funnel, recruit that consumer with very strong product storytelling and then lower funnel conversion and then building the consumer base, building our target consumer base. And we are starting to build that flywheel and having some real proof points across both Calvin and Tommy. Zachary Coughlin: And Jay, on your second question, we feel great about where inventory is. We ended Q3 up 3% compared to last year, and that includes 2% impact of tariffs, so effectively flat to last year. We've also spent a lot of time on our inventory purchases over the next couple of seasons. And so we're confident that, that metric will stay a great place well into 2026. And as that translates to cash flow, we expect to have another strong free cash flow year this year. And we'll enter 2026 with a lot of cash, which we think that gives us optionality as we plan to build on the strength Stefan talked about into 2026 as well. Operator: We'll move to our next question from Michael Binetti with Evercore. Michael Binetti: Let me add my congrats to Zac on the new opportunity. I wish you the best of luck at Sirius. As you guys work through the Calvin Klein product design consolidation process, maybe talk to us a little bit about the proof points you've seen around the right path here, and any early feedback you have from wholesale partners that gives you confidence in the work you're doing? And then can you just help us think about the margin recapture opportunity from that work in the spring from the transitional issues that, Stefan, you mentioned a few times now that are on track for spring? And then just last quick one for me. Can I just ask if the weather improving in Europe now in fourth quarter to date, it sounds like, does that create an opportunity to get caught up on some of the outerwear sales that were a bit of a drag in 3Q? Stefan Larsson: Thanks, Michael. We're trying to keep track of the 3 parts of that question. Let me start on the product. The first season product capability build-out effects, the challenges that we have had to go through when we set up the global product capabilities in New York. So as you mentioned, yes, we are on track, both from on-time delivery coming into spring '26 and the margin recapture that we set out to take back. So on both fronts, we are on track, which is really good. And why we need it? Because when we ran into these initial transitory challenges for the team to learn, to get it going, I mentioned that it's painful now, but we had to do it, because in order to build premium products, differentiated product franchises with innovation, we need the global capability to do that. And now we have it for both Calvin and Tommy, so do our -- all of our best competitors in the premium space also have it. But we had to build that. And now you start to see it. Where do we start to see it, back to your question? We see it in underwear. And I was -- just yesterday and the day before, I was with the Calvin product team, David and the Calvin product team, and they took me through how they, in a very strategic way, build out new expanded product franchises around the product franchises that we already have. And then -- so think about it as the 2 big product franchises that we put innovation into, and think about it season by season, how we will expand that into new and neighboring product franchises that are hyper relevant to the customer. And then we bring that to market with the cut-through marketing and the product storytelling, and then in the marketplace. So what David and our regional leaders are doing now is -- and Lea as well on the Tommy side, working very strategic with here is how we are driving product strength, and then all the way into the shop-in-shops and our stores. And one highlight this quarter for me being out in all these key markets we have is, beyond engaging with our great team and our partners, is to seeing the new shop-in-shops coming into play. So it's a 360. And in order to drive that 360 consistently, and that will drive revenue growth that we see in both underwear and denim. And we see it in style icons and key categories in Tommy like sweaters, cable-knit franchise, very successful. But in order to build that 360, we need that strong global product capability. So yes, very promising what I see from the teams on how they are leveraging the strength now of having 2 global product capabilities. Zachary Coughlin: Yes. And I think, Michael, if we think about gross margin, I think it's actually worth looking at 3Q. We know we've got improvements ready for coming in spring '26. But if we take a look at third quarter, margin was down 210 basis points versus last year. 110 basis points of that is tariffs, 50 basis points is the women's sportswear license take-back, and then 50 basis points of headwind of those other performance drivers. As you look ahead at 4Q, the guidance here 200 basis points down. That's 150 basis points of tariffs and 50 of the women's take-back. And so really 0 other performance drivers. And I want to sort of put that in context. If we look at the first half, gross margin was down 260 basis points. 60 basis points was tariff and women's take-back, 200 basis points was those other elements of performance. And so we've gone from down 200 basis points of performance in first half to 50 in third quarter to now flat to last year in the fourth quarter. So we've talked earlier this year about that steady sequential improvement. So yes, we'll see it in spring '26. We're absolutely seeing it already this year. Stefan Larsson: Sorry. Go ahead, Michael. Michael Binetti: Just the last question. I was just wondering if the weather in Europe improving is helping at all in the fourth quarter? Stefan Larsson: Yes. So yes, clearly, and I saw it when I was traveling in Europe a few weeks ago that the weather has changed. And that's sounding like we use the farmer's almanac here, but it's, of course, helping, when it gets cold, to sell cold weather categories. But I believe the most important learning for us and what we see with the consumer is that the consumer is shopping more and more transitional products, outerwear, very prominently in outerwear as well. And we switched more into transitional outerwear and had good performance, but we see the consumer shifting even more. Operator: We'll move next to Dana Telsey with TAG Advisors. Dana Telsey: Stefan, and also Zac, you've talked a lot about -- a little bit Black Friday holiday. I'd love some more thoughts what you saw from the consumer, how does it differ, whether stores, online or wholesale? And how does what happened Black Friday globally in each of the different regions inform you for planning for '26, whether it's first quarter, first half, what you saw, product, pricing, promotionality and channel? Stefan Larsson: Thanks, Dana. Yes. So if I look at Black Friday, and I started Black Friday this year being out at 6:00 a.m., not a lot of traffic going out of New York at 6:00 a.m. on Black Friday, but shopping center almost full parking lots before 7:00 a.m. And walking around in the centers, walking around seeing the consumer, it's really exciting to see that both our brands have a consumer base of wide range in incomes, wide range in generation, but really seeing the Gen-Z consumer being out there 7:00 a.m. in the brands that they love. So always great, best day of the year to see the consumer and see what they are interested in and shopping. And then as we said, in both Europe and North America, we saw that we were on plan. And as I mentioned earlier, that week in itself has become really important, both in North America and equally important in Europe. Operator: And we'll take our next question from Matthew Boss with JPMorgan. Matthew Boss: So Stefan, maybe on the Calvin brand, beyond the operational issues and the time line that you've laid out, could you speak to the pace of underlying improvement for the brand, new customer acquisition metrics, and just performance KPIs or target opportunities you see from enhanced marketing over time at Calvin? And then, Zac, with cost savings ramping in the fourth quarter, could you walk us through any high-level puts or takes to consider for '26 operating margins relative to performance this year? Stefan Larsson: Yes. Thanks, Matt, and thanks for your question. So yes, so starting on Calvin and the brand desirability that we are building quarter-by-quarter. From a consumer recruiting perspective, you see -- in e-commerce it's the easiest to see and the first to see that we build the consumer base in e-commerce. And you see that growth in both North America and APAC. And then on the slower moving metrics, you see us moving on the strength of awareness, consideration, and then you build that consumer base. And where we see the strength is coming back to the key categories. And again, I speak a lot about underwear and denim, but those 2 worlds are, again, over 2/3 of Calvin Klein. And we see the progress both in terms of consumer acquisition, how we get that consumer to want to engage in the mid-funnel product storytelling, and we also improve that product storytelling, and then we see it in the conversion and the sales. And so you'll see us consistently build that target consumer base and then engage that base through the funnel. And then you will see us build out strength. Right now, you see it in the world of underwear and the world of denim. And in Tommy, you'll see it in key growth categories for Tommy, key categories for Tommy and key style icons. And you see that across sweaters, you see it in shirts, you see it in pants, and you see it in especially transitional outerwear out of the outerwear category. But that's how we build the relevance full funnel and then engage the consumer. And in Calvin, last quarter, one thing we did as well was that we refreshed our loyalty program so that we are getting better at taking care of that consumer that we already have. Zachary Coughlin: Yes. And Matt, thanks for the question on cost. I think middle of last year, we announced the PVH+ Value Driver 5 initiative, which was meant to drive 200 to 300 basis points of improvement in SG&A. And I think we're happy to say we've already confirmed greater than 200 basis points of that by the end of 2025. And so that will flow through into 2026, and there'll be more to come next year on that. So a lot of progress on the teams around the world around those initiatives. And for the rest of 2026, we'll have more to talk about, obviously, at the fourth quarter earnings call. Operator: Thank you. This concludes the Q&A portion of today's call. I'll now turn the call back over to Stefan Larsson for any additional or closing remarks. Stefan Larsson: Again, I just want to thank Zac for the partnership over the past 4 years. It's been a great journey. Wishing you all the best. And then I want to thank you all for joining us on this journey where we build Calvin and Tommy into their full potential. And you see us, everything we do is going to go into the strengthening of the consumer offering and driving relevance into these iconic beloved brands. So looking forward to giving you all an update in the beginning of the year. But before that, wishing everybody a great holiday. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good afternoon, and welcome to the Fiscal 2025 Fourth Quarter Hewlett Packard Enterprise Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Paul Glaser, Head of Investor Relations. Please go ahead. Paul Glaser: Good afternoon. I am Paul Glaser, Head of Investor Relations for Hewlett Packard Enterprise. I would like to welcome you to our Fiscal 2025 Fourth Quarter Earnings Conference Call with Antonio Neri, HPE's President and Chief Executive Officer; and Marie Myers, HPE's Chief Financial Officer. Before handing the call to Antonio, let me remind you that this call is being webcast. A replay of the webcast will be available shortly after the call concludes. We have posted the press release and the slide presentation accompanying the release on our HPE Investor Relations web page. Elements of the financial information referenced on this call are forward-looking and are based on our best view of the world and our businesses as we see them today. HPE assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available at this time and could differ materially from the amounts ultimately reported in HPE's annual report on Form 10-K for the fiscal quarter ended October 31, 2025. For more detailed information, please see the disclaimers on the earnings materials relating to forward-looking statements that involve risks, uncertainties and assumptions. Please refer to HPE's filings with the SEC for a discussion of these risks. For financial information we have expressed on a non-GAAP basis, we have provided reconciliations to the comparable GAAP information on our website. Please refer to the tables and slide presentation accompanying today's earnings release on our website for details. Throughout this conference call, all revenue growth rates, unless noted otherwise, are presented on a year-over-year basis and adjusted to exclude the impact of currency. Antonio and Marie will be referencing our earnings presentation in their prepared comments. With that, let me turn it over to Antonio. Antonio Neri: Thank you, Paul. Good afternoon, everyone. HPE finished a transformative year with a record quarter of profitable growth and disciplined execution. Q4 revenue of $9.7 billion increased 14% year-over-year with non-GAAP operating profits growing faster, up 26% year-over-year. Non-GAAP operating margin was a record high at 12.2%, including server around 10% and networking at 23%, matching the high end of our expectations. Non-GAAP diluted net earnings per share of $0.62 exceeded the high end of our guidance. Stronger profitability also resulted in higher-than-expected free cash flow of $1.9 billion for the quarter, capping a solid fiscal year '25 performance. The underlying demand environment was strong throughout the quarter with orders growing faster than revenues. We saw an acceleration in orders in the last weeks of the quarter, signaling solid demand for our portfolio. The strong finish, coupled with the steps we have taken throughout the year to transform our company, positions us well in 2026. Reflecting our continued confidence and ongoing technology leadership, we are raising our fiscal year '26 non-GAAP diluted net earnings per share guidance and the midpoint of free cash flow guidance. Marie will provide more details about our Q4 financial results and our new fiscal year '26 outlook in a moment. We intend to capture the opportunity in 2026 and beyond by pursuing the key priorities we outlined at the Securities Analyst Meeting in October. These are building a new networking industry leader, profitably capturing the AI infrastructure build-out opportunity, accelerating our high-margin software and services growth through our GreenLake Cloud, capitalizing on the unstructured data market growth with our leading Alletra MP Storage offerings and driving the transition to our next-generation server platforms. This strategy underpins our long-term financial framework. By fiscal year '28, we are committed to generating at least $3 in non-GAAP diluted net earnings per share and more than $3.5 billion in free cash flow with improved cash conversion cycles. Also want to highlight that we recently announced agreements regarding our H3C stake in China. We will sell our remaining 19% stake for approximately $1.4 billion, which we expect to close during the first half of calendar year 2026. These transactions support our plan to reduce our net leverage to around 2x by the end of fiscal year '27. Looking back at fiscal year '25, I am proud of what a transformative year it was for our company. We celebrated our 10-year anniversary, a decade of focus, innovation and technology leadership. We completed the acquisition of Juniper Networks, strengthening our position in the networking market to create a new industry leader. We scaled our GreenLake Cloud, hybrid cloud software, Alletra MP Storage and AI businesses to new heights, and we continue to improve our cost structure through our Catalyst initiatives to operate more efficiently. Overall, HPE delivered full year revenue of $34.3 billion, a 14% increase year-over-year. Our revenue growth reflects solid performance across our 3 largest business segments and the addition of Juniper Networks. We exceeded our full year outlook for non-GAAP diluted net earnings per share and free cash flow, delivering $1.94 and $986 million, respectively. Networking played a pivotal role in our success. Segment revenue increased 51% in fiscal year '25, achieving $6.9 billion with the addition of 4 months of Juniper results. Orders for the new combined Networking segment grew at a faster rate than revenues in fiscal year '25 as the market recovered. We saw strong double-digit order and revenue growth across our key segments of the networking market on an as-reported basis. Regarding the integration of Juniper, I am pleased with the significant progress we have made in forming a new unified leader in networking. In the 5 months since closing the transaction, we have brought together our teams, technologies and go-to-market strategies and the response from our employees, customers, partners and the industry at large has been overwhelmingly positive. They are already seeing the benefits of our combined portfolio, the innovation we are driving and the cohesive customer experience we now deliver. Across the industry, stakeholders have expressed enthusiasm for combined company ability to accelerate innovation, deliver greater value and help organizations build secure, modern and high-performance networks for the future. The new combined networking team is performing exceptionally well. We increased orders and revenues on a pro forma basis during the first full quarter as one team. As a combined company, we are able to better compete with our comprehensive industry-leading networking portfolio. We saw good traction with our core customer segments, enterprise and service provider. As we integrate Juniper Networks and HP Aruba networking, we are building a modern secure AI-native networking portfolio, one that encompasses campus and branch, data center switching, routing and security. By combining our unique strengths in AIOps, Agentic AI, silicon IP and go-to-market scale, we are positioning HP to capture greater market share and revenue synergies. Our networks for AI solutions grew in fiscal year '25, where we saw notable strength in both WAN and data center switching. We are on track to achieve networking for AI cumulative order target of $1.5 billion by the end of fiscal year '26. The Campus and Branch business had a strong performance in fiscal year '25 with revenue up double digits with orders growing above revenues. Our AI for network solutions leverage both Mist AI large experience models and Aruba Agentic AI models, driving clear differentiation that is resonating with our customers. In our Service segment, fiscal year '25 revenue grew 10% year-over-year. We signed $6.8 billion in new AI system orders in fiscal year '25. Sovereign and enterprise bookings now account for more than 60% of the cumulative orders since Q1 of fiscal year '23, demonstrating our strategy to prioritize profitable AI infrastructure build-out opportunities. In traditional servers, revenue grew double digits year-over-year, benefiting from a refreshed cycle as customers upgrade to the latest generation 11 and 12 servers. These support greater workload performance with quantum-proof security, higher density and lower power consumption. I am pleased that we have returned server operating margin to approximately 10% in Q4. As we look to 2026, we will draw on our supply chain expertise to secure critical commodity supply and exercise our pricing management discipline. We expect DRAM and NAND costs to continue to increase in 2026, the majority of which we expect to pass to the market while monitoring demand. Hybrid cloud revenue grew 5% in fiscal year '25. We added approximately 7,000 new customers to GreenLake, ending the year with approximately 46,000 customers. Total company ARR was $3.2 billion, up 62% year-over-year with the addition of Juniper. We continue to differentiate ourselves in a market with unique cloud-native software, AIOps and services, which together represented over 80% of ARR. In storage, we continue to make excellent progress in shifting our portfolio to our own IP. We closed the year with strong demand for HPE Alletra MP with 4 consecutive quarters of double-digit growth in both orders and revenue. We have now shipped over 7,400 Alletra MP Storage arrays, more than doubling year-over-year. We added more than 1,300 new customers in fiscal year 2025, further solidifying our leadership in this space. Demand for our newer differentiated private cloud solutions, private cloud AI and private cloud for virtualization with our HPE Morpheus VM Essential software ramped throughout the year. We set new milestones, including approximately 100 new PC AI customers. Total orders for our Private Cloud Solutions, which also includes Private Cloud Business Edition and Private Cloud Enterprise offerings, increased more than 20% year-over-year. HPE is proud to have been named a leader in the 2025 Gartner Magic Quadrant for Infrastructure platform consumption services, positioned highest in execution and furthest in vision. This acknowledgment spotlights our innovative cloud-native software and services experience, which help customers accelerate transformation and drive operational efficiency across their hybrid IT environments. This week, more than 5,000 attendees participated in our HPE Discover Barcelona customer and partner event. We introduced new innovations and demonstrated the considerable progress we have made in bringing together HPE and Juniper in a short period of time. For example, in AI for networks, we announced new AIOps capabilities and common infrastructure products that deliver a consistent self-driving experience across both HPE Aruba Networking Central and HPE Juniper Network in Mist cloud platforms. This is an important milestone in achieving a unified experience across campus and branch and demonstrates our commitment to quickly cross-pollinating our platforms and driving common infrastructure products for investment protection. In networks for AI, we announced the first OEM switch to leverage Broadcom Tomahawk 6 silicon. To address performance hungry computing for AI inferencing, our new HPE Juniper networking data center switch connects GPUs within data centers with the world's highest performance ultra Ethernet transport-ready switch, delivering 102.4 terabits per second total capacity. And our new HP Juniper multiservice edge router brings AI inferencing closer to the source of data generation with performance up to 1.6 terabits per second with full duplex 400 gigabits per second connectivity. Also in Barcelona, we extended the NVIDIA AI computing by HP portfolio, introducing new solutions for AI factoring scale and performance. In HPE's AI factory networking solutions, we introduced the new HPE Juniper network in edge on-ramp and long-haul data center interconnect with our HPE Juniper Networking MX and PTX high-speed routing platforms. Integrating our Juniper routing solutions with NVIDIA Spectrum-X Ethernet networking and NVIDIA BlueField 3 DPUs enables high-speed, secure and efficient edge on-ramp and AI data center interconnect use cases. We also announced the first AMD Helios AI rack-scale architecture with integrated HPE Juniper scale-up Ethernet networking. The solution leverages purpose-built HPE Juniper networking data center infrastructure and software to accelerate performance and deployment of at-scale AI training and inferencing for cloud service providers and sovereign clouds. In storage, we announced new solutions to accelerate AI data pipelines. The new HPE Alletra Storage MP X10000 data intelligent nodes transform the X10000 into an active data layer that enriches data in real time for AI pipelines. Finally, last month, at Supercomputer 2025, we demonstrated our next-generation liquid cool Cray GX and supercomputing platform at data center scale. We have already won contracts to build 5 large sovereign systems utilizing this technology, including a second-generation exascale AI supercomputer for the United States Department of Energy. These announcements highlight the strength of our innovation to deliver the best network in AI and cloud solutions for our customers and partners. As I reflect on the past year, I want to highlight a few critical milestones we have achieved as a company. First, we repositioned our business, creating a new networking leader by combining the strength of HPE Aruba Networking and Juniper Networks. Second, we scaled our AI business with focus on sovereign and enterprise customers, representing more than 60% of our bookings. Third, we advanced our cloud business with innovative offerings such as our own Alletra MP Storage for both structured and unstructured data, cloud ops suite software, HPE Morpheus Enterprise, VM Essentials and Private Cloud AI, which are all underpinned by our GreenLake cloud scale and experience. And lastly, we continue to improve our cost structure through our catalyst initiatives to operate more efficiently by leveraging automation and new AI technologies. We enter fiscal '26 with a world-class portfolio and a stronger market position. Networking, cloud and AI remain the 3 pillars of our strategy. Our organic investments are focused on higher-margin opportunities. And with a disciplined approach to the Juniper integration, we are positioned to accelerate value for shareholders. On behalf of the HPE management team, I want to thank our customers, partners and team members for their dedication this year. Your support has been instrumental in making fiscal '25 a transformative year for HPE. We look forward to successfully executing on our strategy to achieve our fiscal '26 and long-term plan commitments to our shareholders. With that, I will hand it over to Marie for a detailed review of Q4 financial results and our outlook for Q1 and the full fiscal year 2026. Marie Myers: Thank you, Antonio, and good afternoon, everyone. Fiscal year 2025 has been a transformative year for HPE. We took significant strides towards aligning with our long-term strategy, delivering on our commitments and positioning the company for sustainable growth. We closed the acquisition of Juniper Networks, our largest ever, which has expanded our reach into the data center and significantly bolstered our scale in the networking sector. The integration of Juniper is a top priority, and I'm pleased to share that our execution is progressing well. While it's early days, the initial synergies we are seeing are encouraging, reaffirming our belief in the potential of this acquisition to drive higher margin and higher growth opportunities for HPE. We have established a robust foundation to transform our cost structure through catalyst initiatives, which combined with the synergies from Juniper, are targeting approximately $1 billion in annualized structural savings by fiscal 2028. We are pleased with the significant Catalyst-related cost reductions we captured in fiscal '25. We exceeded our target of achieving 20% of $350 million in annual run rate cost savings as our results track ahead of plan. As part of Catalyst, we continue to optimize and streamline our portfolio to become a more agile and efficient organization. Turning to fiscal year 2025. Total revenue reached $34.3 billion, up 14% year-over-year. Non-GAAP diluted net earnings per share was $1.94, and free cash flow was $986 million, exceeding the outlook ranges provided at our Security Analyst Meeting in October. GAAP diluted net earnings per share was a loss of $0.04, below our outlook range, primarily driven by accounting adjustments related to the acquisition of Juniper and treatment of preferred stock. We returned $886 million to our common shareholders through dividends and share repurchases, further demonstrating our commitment to delivering value to our investors. Non-GAAP operating expenses of $7.5 billion increased 11% year-over-year and declined 60 basis points as a percentage of revenue. Excluding Juniper, non-GAAP operating expense was down modestly year-over-year, driven by ongoing cost management initiatives. Let me highlight some key segment-related metrics from our fiscal 2025 results. Networking emerged as a standout performer of the year. The acquisition of Juniper was instrumental in driving this success, particularly in our WAN business. Overall, networking orders were up strong double digits year-over-year on a pro forma basis. Meanwhile, our AI server business also had good traction with orders totaling $6.8 billion for the fiscal year and cumulative AI orders since Q1 fiscal 2023 reaching $13.4 billion. Additionally, we saw a strong double-digit year-over-year growth in Alletra MP Storage orders, signaling momentum as we focus on HPE developed intellectual property and innovation. Now let me walk you through our fourth quarter performance. Revenue for Q4 was $9.7 billion, up 14% year-over-year and 6% sequentially, coming in slightly below the low end of our outlook range due primarily to the pushout of some AI shipments. This growth was primarily driven by our acquisition of Juniper Networks and robust performance in the HPE Aruba Networking, partially offset by declines in server and hybrid cloud revenue. Our Q4 profitability was another highlight of the quarter. Non-GAAP gross margin reached a record 36%, driven by a favorable mix shift to networking, stable gross margins across our 3 largest business segments and disciplined pricing strategies. Non-GAAP operating expenses rose 40% year-over-year, primarily driven by the acquisition of Juniper. Excluding Juniper, non-GAAP operating expenses increased by 3%, reflecting our ongoing efforts to streamline our cost structure and maintain disciplined management of discretionary spending. Non-GAAP operating margin expanded to 12%, an improvement of 110 basis points year-over-year and 370 basis points sequentially. These improvements were supported by our catalyst cost savings and Juniper synergies. For the quarter, our non-GAAP diluted net EPS was $0.62, exceeding the high end of our guidance, while GAAP diluted net EPS was $0.11. The difference reflects the exclusion of certain items, including amortization of intangible assets, Juniper-related acquisition costs, stock-based compensation expense and cost reduction plan expense, partially offset by adjustments for taxes and other adjustments. Our annualized revenue run rate, or ARR, grew by 62% year-over-year, reaching $3.2 billion. This growth reflects the strength of our GreenLake platform, the accelerating adoption of our software solutions and the incremental contributions from Juniper. GreenLake continues to grow its footprint, adding around 2,000 new customers in the quarter, bringing our total to approximately 46,000 customers by year-end. I'm particularly pleased with our Q4 free cash flow of $1.9 billion, well above our expectations, bolstered by strong Juniper collections and better-than-expected profitability. Now let me provide some color by segment, starting with networking, which is the cornerstone of our transformation strategy. HPE is uniquely positioned to lead in the networking market, offering an industry-leading secure AI-native networking portfolio that spans campus and branch, data center switching, routing and security solutions. In Q4, networking generated revenue of $2.8 billion, representing a 150% year-over-year increase and a 62% sequential growth. Q4 revenue benefited from the first full quarter contribution of Juniper results alongside continued growth in our HPE Aruba networking business. We saw double-digit growth pro forma year-over-year across WAN, campus and branch and Security. We are particularly encouraged by the profitability of this newly consolidated networking business, which delivered an operating margin of 23%. While this represents a 140 basis point decline year-over-year, it marks a 220 basis point improvement quarter-over-quarter, driven by robust gross margin performance and higher revenue. Although we will not report Juniper's results separately going forward, we are pleased to note that integration synergies have already been materializing, enabling Juniper to deliver an 8-year high in operating profit margin during Q4. We remain focused on continuing to unlock the value of this integration. We are combining our 2 networking sales teams into a unified organization and implementing a new sales coverage model to drive efficiency and alignment. Starting in January, we will also introduce a unified sales compensation plan, promoting consistency across the integrated networking team. These actions position us well to build on the momentum we have established and capitalize on the significant market opportunities ahead. Moving to our server business. In Q4, server revenue totaled $4.5 billion, representing a 5% decline year-over-year and a 10% sequential decrease. This performance primarily reflects the timing of AI server shipments during the quarter and lower-than-expected U.S. federal spending. Despite these headwinds, we were encouraged by robust server order growth across both traditional server and AI offerings with demand significantly outpacing revenue in this period. Momentum in traditional server was driven by the continued shift toward next-generation platforms, which contributed to higher average selling prices. Our Gen11 and Gen12 platforms now comprise approximately 98% of our traditional server revenue mix. As we look ahead, we will maintain a disciplined focus on balancing profitability and unit growth for our traditional server business, emphasizing volume and services attached to support sustainable long-term cash flow. Turning to AI systems. Orders were strong in the fourth quarter, reaching $1.9 billion, largely fueled by demand for sovereign customers. Additionally, our AI server pipeline remains multiples of our backlog, underscoring the substantial interest we are seeing from sovereign and enterprise customers. It is worth noting that we expect AI demand to remain uneven as some of our larger sovereign customers are placing orders with extended lead times, which may defer shipments to future periods. We successfully delivered an operating margin of approximately 10%, consistent with our outlook. We improved our margin performance by 340 basis points sequentially, a result of our disciplined approach to managing AI volumes, executing on traditional server pricing and reducing operating expenses. Moving to our Hybrid Cloud segment. We reported revenue of $1.4 billion for the quarter, reflecting a 13% decline year-over-year and a 5% decline sequentially. While below our outlook for flattish revenue quarter-over-quarter, this performance reflected our strategy to sharpen our focus on higher-margin HPE developed solutions while intentionally reducing our exposure to low-margin non-IP-related businesses. As part of the strategic pivot, we are encouraged by the continued momentum in our innovative offerings. Orders for Alletra MP grew strong double digits year-over-year, underscoring the growing traction of the solution in the market. We are also seeing good growth in private cloud AI orders, which more than doubled sequentially, and we closed the year with approximately 100 new logos in this space. Hybrid Cloud operating margin for the quarter came in at 5%, representing a 280 basis point decline year-over-year and a 90 basis point decline sequentially. This reduction primarily reflects the scaling of operating expenses as we continue to invest in innovative and transformative solutions. Turning to Financial Services. Our Financial Services business delivered $889 million in revenue, roughly flat sequentially and down 2% year-over-year. Financing volumes totaled $1.5 billion, reflecting consistent demand within the segment. Operating margin expanded meaningfully to 12%, up 230 basis points year-over-year and 160 basis points quarter-over-quarter, driven by a favorable lease portfolio mix and lower bad debt levels. Our Q4 loss ratio held steady at approximately 0.5%, while return on equity reached 21%, our highest level in over 5 years. These results underscore the strength and resilience of our financial services portfolio. For the quarter, we delivered strong operating cash flow of $2.5 billion and free cash flow of $1.9 billion, reinforcing our disciplined approach to financial management. Generating robust free cash flow and successfully integrating Juniper remain top priorities as we execute our fiscal 2026 strategy. Our Q4 cash conversion cycle improved last quarter by 5 days to 30 days. This was driven by a decrease in days receivable largely due to strong collections for Juniper, including early payments and a decrease in days of inventory due to lower purchases, offset by a decrease in days payable due to higher vendor payments. Inventory ended the year at $6.4 billion, reflecting a 19% decrease year-over-year and an 11% sequential decline. We continue to demonstrate our commitment to a balanced capital allocation strategy. During the quarter, we returned $171 million through dividends to common shareholders and an additional $100 million via share repurchases. At the same time, we reinforced our financial strength by improving our pro forma net leverage ratio from 3.1x to 2.7x, primarily due to an enhanced cash position resulting in a net paydown of $2 billion of term loan debt. In terms of portfolio optimization, as announced previously, we are selling the entirety of our remaining interest in H3C in transactions valued at $1.4 billion, subject to regulatory review and approval. We expect to conclude both sales in the first half of calendar 2026 and intend to use the proceeds to further deleverage our balance sheet, aligning with our strategic objective of maintaining a strong and flexible financial position. Before I get into the details of our guidance, let me first address the industry-wide commodity cost inflationary environment and provide some context around the actions we are taking. We are monitoring the DRAM and NAND markets daily and taking mitigating actions to preserve our margins. This includes partnering with our suppliers, taking pricing actions and working with our customers to shape demand. Overall, we expect to pass through the majority of component cost increases while monitoring demand elasticity with our customers. These dynamics are factored into our outlook with our server business most exposed, followed by storage and then networking. We will continue to focus on what we can control while navigating the environment as it evolves. Turning to our FY '26 outlook. We are reaffirming our revenue growth outlook range of 17% to 22% on a reported basis or 5% to 10% on a pro forma basis as was provided at our Security Analyst Meeting. We expect our revenue mix to be approximately 46% in the first half and 54% in the second half, which is a bit more back-ended than our typical seasonality given the composition of our AI server backlog and pipeline. We are raising our full year networking revenue growth outlook to 65% to 70% on a reported basis, implying approximately $11 billion as we see strong traction in the marketplace for our combined portfolio. The approximately $11 billion in revenue now translates to a mid-single-digit growth on a pro forma basis. Our FY '25 pro forma baseline shifted approximately $300 million related to the move-out of noncore assets to Corporate and Other, aligned with our restated financials for the new segmentation effective November 1, 2025. We are optimistic about our networking outlook with the commencement of our sales day 1 on January 1 when we combine our sales forces. We will update you on our progress as we move through the integration. We expect operating profit margin in the low 20% range, driven by top line growth and our cost optimization initiatives, resulting in networking constituting greater than 50% of our total operating profit for the year. We are reaffirming our cloud and AI revenue growth outlook of mid-single to low double-digit rate growth and operating margin of 7% to 9%. Given the increasing mix of sovereign customers and our AI backlog, we expect the majority of the backlog to be realized in the second half and beyond. We remain focused on prioritizing profitable server growth, implementing pricing actions to counter rising commodity costs while balancing the shift to higher-margin owned IP. We are raising our fiscal 2026 non-GAAP diluted net EPS outlook range to $2.25 to $2.45. We expect to recognize approximately 53% of EPS in the second half. Our revised outlook for seasonality versus what we provided at SAM reflects the rapidly shifting component environment. We now also expect a higher GAAP diluted net EPS range of $0.62 to $0.82. These estimates reflect a fully diluted share count of $1.44 billion, non-GAAP tax rate of 14% and OI&E of approximately $650 million. In addition, given faster-than-expected benefits from the integration of Juniper, we are raising the midpoint of our FY '26 free cash flow outlook and now expect a range of $1.7 billion to $2 billion, which includes approximately $700 million in costs related to the Juniper and Catalyst programs. Our slightly increased cash expense outlook reflects accelerated implementation of Catalyst-related initiatives in FY '26. For Q1, we expect total revenue will be between $9 billion and $9.4 billion, with sequential revenue decline roughly in line with historic seasonality. For networking, we expect revenue to grow 145% to 155% year-over-year on an as-reported basis or the high end of our updated pro forma revenue growth target range of mid-single digit. This growth is driven by strength in our backlog and Juniper seasonality. We expect continued strength in the business and synergy realization to drive an operating margin rate in line with our full year guidance. In cloud and AI, we continue to see the impact of lumpiness in AI server revenue and expect a sequential decline in the AI server revenue with the majority of AI deals shipping in the latter half of the year. Given the expected mix shift towards traditional server and benefits from recent pricing actions, we expect operating margins for cloud and AI to be slightly above the high end of our FY '26 target range. On a consolidated basis, we expect Q1 total operating expense to decrease sequentially. Combined with our commodity cost pricing mitigations, we expect our non-GAAP total operating margin rate to be up slightly sequentially. Consequently, we expect non-GAAP diluted net EPS between $0.57 and $0.61 and GAAP diluted net EPS between $0.09 and $0.13. In closing, FY '25 was a year of transition for HPE as we reposition the company for this next phase of growth, completing the integration of Juniper and taking decisive action on our cost structure. There is more work ahead, but we believe we have the right strategy, the right portfolio and a clear path to making HPE a leaner, more efficient company aligned with the networking, cloud and AI needs of our customers. I'm confident in the opportunity in front of us, and we remain firmly committed to consistent execution and the financial framework that we outlined for profitable growth and strong cash generation. With that, I'll turn the call back to the operator to begin the Q&A. Thank you. Operator: [Operator Instructions]. The first question will come from Amit Daryanani with Evercore. Amit Daryanani: I guess if I look at the fiscal '26 EPS free cash flow guide, you folks kind of raising both those numbers, while revenue guide is relatively unchanged. I assume this is just networking mix that's helping you a bit over here. But can you spend just some time talking more about how are you thinking about the memory headwinds in the fiscal guide versus what you were expecting back at SAM? And how do you think this memory cycle ends up being different versus what we saw back in '17, '18? That would be really helpful. Antonio Neri: Amit, this is Antonio. I will start and then Marie will provide further details. Look, we are very confident in the new guide we provided, which obviously raises the EPS and the free cash flow. And it has to do with the combination of the mix of the business, obviously, networking revenue increased now to the mid-single digits and the continuous actions that we take across the company, right? Catalyst is slightly ahead of what we wanted to be. But net-net, the driver of this is all the execution that we have seen now in Juniper. Now we are a networking-centric company, clearly drives all of that. And then on the component side, look, it looks a little bit the early part of the COVID time frame with -- it's all about the allocation of supply as we go forward, that drives cost increases. We already, by the way, Amit, have implemented price increases in the month of November. So that's already in place. And we have very strong capabilities in our supply chain to secure the allocation of components we need, and we have discipline in passing through the cost through our pricing, which, again, we already did in November. Everything we know as of today is in our guide. So what we know today is already included in the guide for both revenue and EPS. Marie Myers: And Amit, maybe I'll just add, just to clarify on the guide itself. So you're correct, we did raise the guide, the midpoint by $0.05, and that's actually driven by the revenue that moved out of Q4 into Q1. So we got some profit benefit there. And also, as you correctly said, some of the stronger networking backlog that we're seeing. So overall, look, it's a prudent guide. If we can do better, we will. And we're pleased with the cash flow as well. I think that's a great example of just some of the strengths that we saw in Juniper collections in Q4 because we had very good cash flow in Q4, and that's actually trickling through into '26 as well. So overall, they are the 2 drivers of the increases in the guide, Amit. Operator: The next question will come from Samik Chatterjee with JPMorgan. Samik Chatterjee: I guess, Antonio, just following up on the response to Amit's question. You did talk about acceleration in orders towards the end of the quarter and you're referring to price increases in November. Maybe if you can just sort of help us in terms of how you're interpreting the increase in orders that you saw towards the end of the quarter? And do you see sort of them largely being in response to price actions you're going to take in November? Just trying to understand what the drivers are, what you're seeing at your end. Antonio Neri: Yes. Thank you, Samik. We saw a very linear quarter in Q4. And in the last few weeks, we saw an acceleration of that, and it's true across the entire portfolio. Look, we closed the first quarter as a fully integrated networking business. The commodity cost has limited impact in the networking business because, obviously, DRAM and NAND are not really applicable to the networking business. And that business did really, really well. We saw orders growing faster than revenue there. Then we saw a continued momentum in Alletra MP Storage with double-digit year-over-year growth in both orders and revenues. And then the traditional server business orders did well. It's early to say if there was a pull-in of sorts on demand. But I will tell you that we felt prudent at this point in time, considering the early signals we got from our suppliers on DRAM, to take the actions on pricing. And we expect that the NAND part will follow in 2026, and therefore, we will do the same. The customers obviously have budgets that end on December 31. Most of the customers are on calendar year budgets. And so you should normally expect an acceleration of orders in the last part of the year. But we have conversations with customers about what we expect on commodities so they can make the right decisions and place the right orders. We really focus on conversion short term versus guaranteeing pricing long term because obviously, all our agreements have price protection. And therefore, we will be very upfront with customers when to place the orders and what to expect in terms of supply. Operator: Next question will come from Tim Long with Barclays. Timothy Long: I wanted to ask on the ARR and the GreenLake side, if I could. Could you just talk a little bit about traction you're seeing with the as-a-service models more broadly? And then obviously, the ARR jumped up a little bit with Juniper Mist being added. If you could just talk a little bit about what adding Juniper does to this part of the model? Does this help maybe accelerate, obviously, the networking part, but are there any broader benefits by having the 2 companies combined on the GreenLake side? Antonio Neri: Yes. Thanks, Tim. Look, all the ARR we added from Juniper is in the software subscription services because remember, our ARR is a combination of, call it, the SaaS, which is the software subscription on GreenLake and that's a combination of networking with Aruba Central, obviously, all the hybrid cloud software with Morpheus, VM Essentials, Zerto, OpsRamp and the like and also the storage business, right, with Alletra MP. And then we have the GreenLake Flex, which is the pure consumption model, which obviously is inclusive of hardware and financing and the financing is only for the operating leases part of the equation. But the addition of Juniper comes all the software subscription that are tied to things like Mist and Apstra and so forth. In fact, one of the key announcements we made yesterday when I was in Barcelona is the integration already of Apstra with OpsRamp as a part of GreenLake. That's an acceleration of AIR. But look, we now have a baseline that represents 80% of AIR is software and services. And that's very, very high. And as we continue to grow the networking business, which now we are at the core, I would argue, a networking-centric company with a tremendous amount of innovation. If you look at the innovation this week has been significantly higher than any other event we have had in the last few years. Rami came strong and articulated the strategy about cross-pollinating the Mist and Aruba Central. That means both will get the benefits of each other, which means more software added through the AIOps in addition to the fact now we support dual hardware on both platforms. We also announced the new Juniper QFX fabric, which is first direct liquid cooling. He took advantage of our direct liquid cooling. And that has also a component of software that will go into the subscription. So that's what we're seeing. And so obviously, now we have a $3.2 billion ARR. And from there, we expect to continue to grow at a bigger base, obviously. And that's where we are excited about what comes next with GreenLake. And all the AIOps intelligence we built around it. Operator: Next question will come from Erik Woodring with Morgan Stanley. Erik Woodring: Antonio, I'm going to go back to kind of where Amit and Samik were touching on, on the commodity stuff. I just really want to understand your thoughts on the pass-through and demand elasticity because we can look at server DRAM contract pricing up 50% in 4Q alone. DRAM is obviously a considerable -- considerable part of the server bill of materials. I guess simple math would say you'd have to raise pricing 15% just to account for the contract pricing in 4Q alone. So I guess maybe just -- is that the implication that you're kind of referencing here? And second, what are you assuming for demand elasticity just because if we take your kind of cloud and AI guide, it does assume a notable acceleration in growth through the year. So I'd love to just understand, are you talking about pricing increases that considerable? And two, how do you expect demand to respond? Antonio Neri: Thank you, Eric. I think you are spot on. I think you're not that far, to be honest with you. You may be a little bit short, in fact, I will say. Look, we have made pricing changes to reflect exactly what you say, which is the DRAM cost and the percentage of the mix of that in the BOM in our servers. And we expect that the NAND part of that will follow as we go forward. As demand elasticity, look, there are benefits to upgrade because we have shown customers that you can take a Generation 10, which is maybe 4 years old, down to 1, 7 Generation 10 servers down to 1. That helps reduce your energy cost by 65%, get better performance on a per core basis, more density. And at the same time, you can pay off that investment in less than 2 years. So the depreciation of that return is very, very fast. So as we said in my remarks, we are going to monitor the cost and the demand. And I think you will see a rebalancing over time between units and revenue. But remember, more than 2/3 of our AUP is structural. So I believe there are unit growth that we'll continue to see, but maybe a little bit more muted than maybe expected 6 months ago. But on the balance, the revenue will grow as implied in our revenue guidance because of the AUP mix shift. And I think you're spot on in your thesis. Marie Myers: I'll just add, Erik. Look, we're using multiple tools. You hit on pricing. But also, look, we've been down this track before. We know that other tools like demand shaping are critical to use through this process. So we will be looking at how we can shape demand with the parts that are available while we try to balance some of our key customer relationships. But as Antonio said, our guidance really reflects the best estimate of the impact of commodities and the actions as of now. Antonio Neri: And by the way, another point, Erik, is that when we have frame agreements, think about large enterprises that buy on a catalog of preconfigured products. They are priced protection guarantees there. So obviously, there is an ability for us to raise prices as a part of the changes we see in the industry. Operator: Next question will come from Wamsi Mohan with Bank of America. Wamsi Mohan: I wanted to clarify some of the comments around seasonality. In your slides, you talked about the $9 billion to $9.4 billion in 1Q is a decline consistent with historical seasonality. But I think, Marie, you said that there were some pushouts of servers from 4Q to 1Q. So should that not be driving much better seasonality and sort of a higher outlook in fiscal 1Q? And similarly, you noted that the AI server lumpiness and sort of timing would drive the second half of the fiscal year much higher relative to the first half. It's like different seasonality. So I'm just trying to piece those pieces together, what's baked in from pushouts into 1Q? And would the seasonality have been even worse had those pushouts not occurred. So hopefully, you can just maybe put that all in some context. Marie Myers: Sure. No problem, Wamsi. So why don't I just clarify the seasonality with respect to Q1, then I'll turn to Antonio to talk about the AI timing. So with respect to Q1 seasonality, the way to think about it is spot on, we did have some AI deals that moved out of Q4 into Q1. But just bear in mind that from a Q1 perspective, it is in line with our normal sort of historic seasonality for Q1 revenue. So sort of use that as an anchor to think about the year. And I think in the prepared remarks, I did mention that we have a split between revenue of 46% in the first half and 54% in the back half. So use that as another way to sort of think through the seasonality. So hopefully, that gives you the context on Q1. And then I'm going to sort of turn it to Antonio to talk specifically about the back half and how we see the AI shipments sort of placing themselves throughout the year. Antonio, over to you. Antonio Neri: Yes, Wamsi. Look, on the AI conversion, right, because now more than 60% of our orders are in sovereign and enterprise, and obviously, enterprise is a very large number of deals that get through, but they are smaller in size compared to potentially a sovereign AI cloud, which obviously is much larger. But when I think about that, look, they are longer to convert for a number of reasons, right? Number one, obviously, is the whole procurement process is much longer to get the funding locked and so forth, the data center readiness, the availability of power and cooling and the like. And some of these deals, by the way, are not current technologies, maybe they are for the back half set of technologies, particularly with NVIDIA, Vera and Rubin. So you have a combination of factors there. In regard to the pushout of the deals, look, there were some deals for the government related. They take time. They take time to really get the machine up and running again. Remember, we're just now a handful of weeks here since they came back online. That may take an extra full set of weeks. And then there was one particular deal that they didn't -- they weren't ready with the data center. And so we deploy a number of parts and those other parts will take a number of incremental weeks to get it done. So we expect that the back end of the year will have the biggest part of the AI revenue conversion. But at the same time, we continue to stay focused on those 2 segments because they are -- the focus is because of our ability to play and win with the right margin profiles and the right working capital. Operator: Next question will come from Aaron Rakers with Wells Fargo. Aaron Rakers: I wanted to ask about the networking business. It looks like on a pro forma basis using Juniper's results, you grew kind of in the low to maybe mid-teens range year-on-year this last quarter. It looks like you're guiding kind of the pro forma number to kind of grow in that mid-single-digit range next quarter in that range for the full year. I'm curious why necessarily you see a deceleration in that? Is that conservatism? And if you can, can you talk a little bit about Juniper's positioning in some of these AI fabric build-outs, what your discussions has been with customers thus far? I think Juniper's had a position in some larger build-outs in the past. Marie Myers: Yes. No worries. Why don't I just talk a little bit about the revenue and how we're thinking about it. Yes, you're right. Look, really pleased with the results, I'd say, for Q4, both in terms of both revenue and operating margins for the business. I think you're seeing the transformative power of those 2 networking companies coming together and just what we can drive here. What I would say, as you think about the rest of the year, we have kept revenue -- we did raise revenue actually in terms of the range that we gave you for networking. And a couple of things just to bear in mind. We do have a critical milestone in the integration that's taking place in this current quarter, which is actually the integration of both of the sales forces. So it's early days. And I think at this point, we've got a prudent outlook given where we're at relative to the integration itself. So a couple of things just to bear in mind in terms of drivers. There is some seasonality I mentioned earlier. We see some commodity pressures that you heard us talk about on the call. And then obviously, we've got the product mix in terms of a bit more cloud and AI. But I'd say, overall, we're comfortable with the guide that we've given you so far for networking for the year. Antonio Neri: So Tim, look, this is -- in my mind, it's very simple. We have an incredible portfolio in the campus and branch, we continue to make tremendous traction. Both platforms are winning in the market. There, it's more about integrating the sales force, getting them stabilized from an account coverage perspective. I think the channel will be the opportunity for us to drive upside because they are all super excited about that part of the business. And look, we had major wins on both sides. And so we expect that to continue in 2026. On the data center switches side, we expect that business to grow at or above market as we go forward. Networking for AI, we said we expect to achieve $1.5 billion by the end of 2026. Obviously, some of that will carry into '27 because you have the backlog conversion that has to take place. The one area that I am actually more excited in many ways is the routing business. The MX platform is the standard for on-ramp cloud. It is an amazing product that really is winning in the market. And even the PTX for the DCI, meaning the data center interconnect for long haul is the reference. And that business has a very large backlog that will convert later in the year. And Marie referenced to this, I think it's important that all of you remind yourself that Juniper is a back-end loaded conversion to revenue. That has been always the case. And that's why we have given this seasonality in line to also what HPE is going to do. But based on what we know today and the line of sight of the integration and still have to go through the sales integration on January 2, we still raised the revenue guidance to now, call it, the mid-single digit, call it, the 5-plus percent which is almost double of what we gave you at the Security Analyst Meeting and at the midpoint, which was between 2% and 5%. So that tells you we are growing confident. And as we go forward, we will see how the team executes. But look, we believe there is a tremendous opportunity. And the goal there is -- the goal for us is all about execution. Operator: And your final question today will come from Asiya Merchant with Citigroup. Asiya Merchant: Marie, if I can just ask about the sale of the assets that you have and how that is reflected in your OI&E. I believe the OI&E figure didn't really change from what you provided at the analyst event. So how should we think about the sale and how that should be factored into the OI&E. Marie Myers: Yes. Look, Asiya, at this point, I assume you're talking about H3C. Look, everything is factored into the OI&E numbers that I gave in my prepared remarks. We'd actually plan for this all along in '26. So it's all captured there in the prepared remarks that I gave you in the call today, Asiya. Antonio Neri: Yes. No, thank you. Thank you for the patience today. Look, Marie and I provided a lot of details. We provided a lot of data. I'm sure you will have follow-up questions that the IR team will handle. But we felt that this was the right time to give you as much data as possible as we enter 2026. And look, I will say that 2026 is a year where HPE has the opportunity to not only deliver what we committed, but really drive the transformation of this company to a new height based on the fact that we are now a networking-centric company. And on that foundation, with the latest innovation, we will deliver great experiences or growth opportunities in both cloud and AI. But we will maintain that strong discipline, focus on growth and operating margins that ultimately drive profitable growth and free cash flow. And I believe our strategy is working and the Juniper integration is working. And so that's what I will leave you today. And I take this opportunity to thank you for your coverage and feedback. And if I don't speak to you, I wish you and your families happy holidays. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Leila: Good afternoon, everyone. My name is Leila, and I will be your conference operator today. At this time, I would like to welcome you to Ulta Beauty's Third Quarter 2025 Earnings Call. This conference is being recorded, and all lines have been placed on mute to prevent any background noise. After the speakers' prepared remarks, there will be a question and answer session. At this time, I would like to turn the call over to Ms. Kiley Rawlins, Senior Vice President, Investor Relations. Miss Rawlins, please proceed. Kiley Rawlins: Afternoon, everyone, and thank you for joining us for a discussion of Ulta Beauty results for 2025. Hosting our call today are Kecia Steelman, President and Chief Executive Officer, and Chris Lialios, Interim Chief Financial Officer. As a reminder, today's earnings release and the comments made by management during this call include forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, factors identified in the earnings release and in our most recent 10-K's and 10-Q filings. The company undertakes no obligation to revise any forward-looking statement. And as always, the IR team will be available for any follow-up questions after the call. Now I'll turn the call over to Kecia. Kecia? Kecia Steelman: Thank you, Kiley, and good afternoon, everyone. The Ulta Beauty team delivered another quarter that exceeded our expectations. For the third quarter, net sales increased 12.9% to $2.9 billion. Operating profit was 10.8% of sales and diluted EPS was $5.14 per share. These results highlight the expanding relevance of the Ulta Beauty brand for our guests, the favorable impact of investments that we are making to support our long-term strategy, and the continued commitment of our teams. Today, I'll take a few minutes to outline the key drivers that fueled our outperformance, update you on our progress against the Ulta Beauty Unleashed strategy, and discuss our outlook for the upcoming holiday. As I reflect over the past eleven months in my role as CEO, I'm incredibly proud of the steps our teams have taken to accelerate our top-line growth, increase our market share, and how these actions continue to resonate with our guests and drive our results. The third quarter highlights are a clear result of these actions and include comparable sales growth of 6.3%, positive comps across all categories and channels with notable double-digit strength in our e-commerce results, continued market share gains in mass and prestige beauty including prestige market share gains in both brick and mortar and digital channels, loyalty member growth of 4% year over year to a record 46.3 million members, and ongoing improvement across several key performance indicators including brand engagement, earned media value, and app engagement. The investments to support our Ulta Beauty Unleashed strategy are fueling our strong top-line results. At the same time, we know we have opportunities to tighten SG&A spend and optimize resources to drive long-term profitable growth which will be a key area of focus as we turn to fiscal 2026. Before I dive into the drivers of our performance, let me touch on the beauty landscape more broadly. Despite a softening in overall consumer confidence in Q3, beauty engagement remained healthy. During the third quarter, both mass and prestige beauty markets delivered mid-single-digit growth, according to Surcana. Turning now to the key drivers of our performance, which center around our three strategic priorities: strengthening our core US business, scaling new businesses including expanding internationally to capitalize on key growth opportunities, and realigning our foundation for the future by streamlining our cost structure, optimizing our ways of working, and reenergizing our culture. Let me begin with our actions to strengthen our core US business which continues to power our overall results. We've been focused on the fundamentals and elevating our go-to-market approach through operational excellence, marketing leadership, and compelling merchandising innovation. Our enhanced go-to-market collaboration between our merchandising, marketing, and store teams has been a key unlock to improving our performance and we're leveraging this new approach to accelerate our brand-building digital and personalization efforts. In stores, our team's dedication to disciplined execution continues to underpin our performance. Stores are elevating and energizing the guest experience with improved in-stocks, well-staffed stores, friendly service, and engaging events. All translating into improving guest satisfaction results for the quarter. We drove solid in-store traffic and sales growth, with successful execution of key moments and events, including back to school, 21 days of beauty, and fall haul. In addition, we hosted nearly 33,000 in-store events across our fleet during the quarter. These unique activations included celebrity appearances, brand launches, brand education, and highlighted our differentiated in-store experience which truly makes Ulta Beauty an unmatched beauty destination for our guest. From a category perspective, all major categories exceeded our expectations and delivered positive comp growth against the third quarter last year. Fragrance sustained its position as our strongest growing category, delivering double-digit comp sales growth in Q3. Newness from luxury brands like Valentino and Dolce and Gabbana alongside compelling new-to-market brand launches from Miu Miu and Prestige and Squishmallows en masse resonated with the guest. This quarter demonstrated the power of our unique low-to-luxury brand assortment. In October, we also rolled out incremental shelf space for fragrance in more than 60% of our US stores, which we believe positions us to capture holiday demand and beyond for this important and growing category. Skincare, our second fastest growing category, delivered solid high single-digit comp growth driven primarily by the strength of prestige skincare, and solid growth of mass skincare. Our unmatched K-beauty assortment continues to resonate and drive skincare sales. In addition, prestige skincare also benefited from the highly successful launch of Fenty Skin Body exclusive to Ulta Beauty, and strengths in brands like Tatcha and Dermalogica. Mass skincare benefited from newness and social media virality in key brands like Bioma and Starface. In addition, our newly expanded wellness assortment also contributed positively to skincare performance. Makeup delivered another quarter of mid-single-digit comparable sales growth supported by growth in both mass and prestige makeup. Mass makeup growth was driven by compelling newness from brands like NYX, Morphe, and L'Oreal, as well as the benefit from market-wide price increases from select brands. Prestige makeup growth in the quarter was supported by a highly successful 21 days of beauty event with notable brand standouts being Estee Lauder and MAC within the event. Across the quarter, we also delivered strong growth across a number of our prestige brands including Hourglass and NARS and in our only-at-Ulta brand portfolio with newness in dibs. Our new K-beauty assortment in makeup is also driving strong growth. The hair care category delivered mid-single digits comps, fueled primarily by strong performance in prestige hair. Mass hair, hair color, and accessories also contributed positively. This growth was partially offset by sales declines in personal styling tools, which continues to navigate pressures from tariff-related price increases. From a brand perspective, major new prestige launches from Moroccan oil and Nutrafol along with guest favorites, Redken and Matrix, resonated with guests and delivered strong growth. Our exclusive brand, Sacred, continued to drive guests into the hair care category, and performed ahead of expectations. Finally, services delivered mid-single-digit comp growth in Q3, driven by strength in cut and color services, expanded brow services, and ongoing improvement in stylist productivity. During the quarter, we began offering benefit brow services in our salon, expanding capacity and convenience for our guest. Execution of our salon works workshop strategy featuring events like back to school blowout drove sales and member trial. Moving to our long-term strategy to enhance our assortment and brand-building capabilities. Overall, we are intensely focused on strengthening and modernizing our full low-to-luxury assortment. And during the quarter, we launched more than 35 new brands, many of which were exclusive. Our new brands are thoughtfully selected to drive incrementality and complement our balanced portfolio of the best brands across all categories, all life stages, and all price points. Strengthening our brand-building capability is key to this strategy. And we are focused on leveraging our unique advantages to be the retail partner of choice to launch, build, scale, and globalize brands. Our enhanced focus and capabilities are already delivering. With Beyonce's hair care line, Sacred, only available at Ulta being a great example of how we can uniquely unlock the power of 46 million loyalty members to launch and scale a new retail brand successfully in just a few months. Based on its first six months of performance, Sacred is the most successful prestige hair care launch in Ulta Beauty's history. Our K-beauty assortment is another example of our holistic brand-building strategy. With an already established stronghold in K-beauty skincare, with long-standing exclusive brands like Peach and Lily, we saw space for growing K-beauty trends in both skincare and makeup. We moved with agility to build a complementary and largely exclusive pipeline including a portfolio of new and many exclusive brands throughout 2025 like Anua, Medicube, Tiertear, Fui, and Unlecia. We have leveraged all of the Ulta Beauty go-to-market levers to drive excitement and awareness of these new brands attracting the next generation of beauty guests. Our core assortment is now being complemented with the recent launch of UB Marketplace, I will give you more details on in a moment. Shifting to marketing, we are elevating our marketing efforts to spark excitement and awareness, drive engagement, and attract and retain loyalty members. During the third quarter, we debuted our new brand equity campaign, beauty happens here on social and across traditional and connected The new campaign aims to inspire and reinforce that Ulta Beauty is where beauty lives and is the destination for all ages and all life stages. The campaign is already driving significant awareness gains broadly and with key cohorts and is also driving strong brand health In addition, we continue to leverage our integrated marketing efforts to support events and strategies. Including high impact merchandising campaigns like twenty one days of beauty in fall haul, designed to drive engagement and conversion against priority categories. Our exclusive only at Ulta brand launches and category plans reinforcing our leadership in a differentiated way, and culturally relevant activations like hosting Ulta Beauty's first ever multimarket experiential activation the College Glow Up Tour, in collaboration with her campus. The tour delivered product sampling and education for various exclusive brands like Polite Society, Isima, and SNF. Moving to our digital platforms, our investments to accelerate digital engagement and personalization are delivering results, and we continue to add capabilities that drive app engagement, enhance the guest shopping experience, and remove friction. From new features like replenish and save and wish list, to new payment choices like Venmo to doubling, shift from store locations to more than 1,000 stores we are steadily improving the guest experience and fueling our momentum. Our app engagement continues to grow and it accounted for 65% of our online member sales in Q3 up from 63% in Q2. In addition, buy online, pick up in store contribution highlights how guests value the powerful combination of our digital shop experience and the convenience of our stores. Next, turning to our second strategic priority. Scale new businesses to capitalize on key growth opportunities and ensure that we remain relevant in a rapidly changing world. Our international expansion efforts are building momentum and we are steadily growing our international presence. During the third quarter, we opened seven stores in Mexico, through our joint venture partnership with Grupo Vaxo. I had the privilege of attending the unforgettable grand opening of our first store in Mexico City. The energy was was palpable, and we had many key brand founders on-site. Including Isima founder and Grammy winning musician Shakira, to celebrate this important milestone for our business. In addition, the first Ulta Beauty store opened in The Middle East in Kuwait last month through a franchise partnership with Al Shai App. Similar to Mexico, the guest response to our arrival in The Middle East has been very positive and our grand opening celebration which featured Orabella founder, Bella Hadid, was an exciting way to introduce Ulta Beauty to this new market. We are excited about the uniquely Ulta Beauty experience and curated assortments that we are bringing to these markets which feature a mix of local brand favorites, exciting new to market brands, and only at Ulta exclusives. We are encouraged by the strong positive guest responses that we're seeing and excited excited to expand our presence over time. Finally, in The UK, Space NK continues to perform well and our teams are making important progress in integrating SpaceNK with the rest of our business. I had the pleasure of spending time visiting stores in The UK with the incredibly talented Space and k leadership team, during the quarter. I remain excited about the opportunity to transfer learnings across markets to elevate our business globally and capture even greater growth opportunities in the future. Turning to marketplace. We reached a key milestone with the successful launch of UB Marketplace in the third quarter. Through our Marketplace initiative, we are expanding our assortment for our guests, offering a broader and complementary array of beauty, wellness, and lifestyle products from both established and emerging brands on ulta.com. With minimal inventory risk to our business. We launched the platform in late Q3 curating the addition of more than a 120 brands and over 3,500 SKUs to our online assortment. We are pleased with the initial performance and optimistic about how new capability can help us strengthen our existing category authority attract new guests, and capitalize on incremental growth opportunities to new subcategories like luxury, professional, and wellness. In wellness, we're focused on leveraging our position as a trusted guide to expand more meaningfully into the vast and growing wellness category. We believe we are uniquely positioned to meet guest wellness needs in approachable, welcoming ways that celebrate a guest individual's journey In the third quarter, we continue to add new brands to our assortment. Like Therabody, Bird and Bee, and Hatch Sleep products, and continued our in store expansion efforts with the introduction of elevated fixtures, in about 50 stores. These investments will enable us to learn more about guest engagement and help us tailor the assortment as we continue to build upon our approach to maximize this key growth initiative. Turning to our third strategic priority, realigning our foundation for the future. During the third quarter, our supply chain and IT team successfully completed the retrofit of our Dallas distribution center, introducing advanced automation and robotics, an upgraded warehouse management system, and a new warehouse execution system. We incorporated key learnings from prior retro fits and executed this upgrade flawlessly. We expect these upgrades to strengthen our foundation, further enhancing inventory flow and increasing capacity. As I've shared previously, one of my top priorities has to make sure that I have the right leadership team in place to drive our future growth. And I couldn't be more pleased than to welcome Chris Delorphis to Ulta Beauty as he assumes the role of chief financial officer tomorrow. He joins us from Becton Dickinson where he serves as CFO for the last four years and brings more than thirty years of diverse corporate finance experience. I wanna express my gratitude to Chris Lialios our interim CFO, for his partnership and leadership during this important time of our business. And, thankfully, he's not going anywhere. He will continue his role as SVP and corporate controller and help ensure that we have a smooth transition. In addition to shaping our leadership team, I've been keenly focused on reenergizing our culture, Over the past several months, I've had the opportunity to spend time across our broader organization. From store visits in key regions to walking the floor of our distribution centers, and engaging with our international teams and partners. I've been truly inspired by the energy, pride, and purpose that our teams bring to their work. These visits strengthen my belief that our success is built on people. Their commitment to our values, their relentless focus on the customer, and their ability to adapt. Finally, to our plans and expectations for the upcoming holiday. Our teams have been hard at work to ensure that we're well positioned to deliver a strong 2025 holiday season. Hiring and onboarding seasonal associates developing compelling holiday assortments and merchandising strategies, creating bold celebrity glam filled marketing plans, all offered in festive, fun, and easy to shop stores and digital channels and our supply chain is ready and ready to deliver with speed. The holiday season is in full fight. And we're pleased with our Black Friday and Cyber Monday performance. At the same time, we know the biggest selling weeks are still ahead of us, and we are mindful of the challenging macro backdrop. Our insights suggest beauty consumers' budgets are tight, and they are focused on value. Despite this, beauty enthusiasts tell us that they intend to spend on beauty for seasonal needs, affordable splurges, and gifts for loved ones. They are focused on replenishing their essentials and strategically making smart purchases around strong value, holiday limited editions and deals, and early gift set drops. We will leverage these key insights to ensure that we're staying relevant and delivering for our guest during this important holiday season. We are confident in our plans and the improvements that we've made. And our teams are ready to go make holiday happen here at Ulta Beauty. Driving excitement and delivering for our guests and their loved ones. I wanna close by expressing my gratitude to our teams and partners across the globe. Their efforts are driving meaningful progress and positioning us well for the long term value creation. And with that, I'll turn it over to Chris to cover the financial results for the third quarter and our update financial outlook before we take your questions. Chris? Thanks, Kecia. Chris Lialios: And good afternoon, everyone. I'll begin with a discussion of our consolidated third quarter results and then share our expectations for the fourth quarter and full year. As a reminder, our results for 2025 include financial results for Space NK, which was acquired in July, and is not material to our consolidated financial statements. The Ulta Beauty team delivered strong performance again this quarter, reflecting better than expected growth from comparable sales, favorable shrink results, and stronger merchandise margin. Consolidated net sales for the quarter increased 12.9% to $2.9 billion compared to $2.5 billion last year. During the quarter, we opened 28 new Ulta Beauty stores, remodeled 15 stores, and closed one store. We also opened two new Space NK stores, relocated one store, and closed one store. We ended the period with 1,500 Ulta Beauty stores and 84 Space NK stores. Comparable sales increased 6.3% driven by a 3.8% increase in average ticket and a 2.4% increase in transactions. Other revenue increased approximately $8 million versus the third quarter last year. Looking at the cadence of comp sales through the quarter, growth was fairly consistent across all periods. From a channel perspective, both store and digital channels contributed to comp growth. With e-commerce sales increasing in the mid-teen range and comp stores delivering mid-single-digit growth. Consolidated gross margin for the quarter increased 70 basis points to 40.4% of sales, compared to 39.7% last year. The increase was primarily due to lower inventory shrink and higher merchandise margin, which was partially offset by adverse channel mix reflecting strong growth from our digital platforms. Our team's focus on reducing inventory shrink while also delivering great guest experiences continues to produce meaningful results. Our investments in fixtures and process improvements as well as focused associate training and store-specific action plans have delivered shrink reductions across every category and almost every region. Merchandise margin increased this quarter primarily due to the timing of market-wide price actions from select brands and more effective promotion strategies. These benefits were partially offset by unfavorable category mix. While many of our brand partners continue to be cautious about passing through tariff-related price changes, we saw more brand-driven price increases in Q3 as compared to Q2. Reflecting on our average cost inventory valuation methodology, we often see a short-term benefit to cost of goods as we move through the lower cost inventory after the retail price change is executed. Merchandise margin in the quarter also benefited from greater promotional effectiveness. We delivered strong performance from key events including 21 days of beauty and fall haul. And eliminated unproductive offers. As a result, the impact to merchandise margin from promotional activity was lower than last year. Moving to expenses. Consolidated SG&A increased 23.3% to $841 million. SG&A growth was elevated this quarter primarily reflecting higher incentive compensation, the impact of Space NK, and the timing of investments we're making to support our Ulta Beauty Unleashed strategy. Excluding the impact of incentive compensation in Space NK, SG&A growth for the quarter was about 14%. As a percentage of sales, SG&A increased 240 basis points to 29.4% compared to 27% last year. Largely due to higher incentive compensation reflecting our better than planned performance as well as the lapping of a benefit from lower incentive compensation in the third quarter last year. Higher store payroll and benefit expense, store expenses, and amortization of cloud-based software investments also deleveraged as a percent of sales. Store payroll and benefit expenses increased primarily due to additional selling hours to support the guest experience and higher health care costs. The deleverage of store expenses largely reflects higher supplies to support key merchandising initiatives and inflationary pressures. The growth of cloud investment amortization reflects the impact of technology investments we are making to support our long-term growth. Over the last several years, we've upgraded key elements of our technology infrastructure including our ERP system, digital store platform, POS systems, data infrastructure, and critical supply chain systems. With this foundation in place, this year, we've invested in new go-to-market capabilities including marketplace, personalization, and other digital enhancements to support the guest and associate experience. Many of these investments are cloud-based arrangements, and as we launch and operationalize these capabilities, we are experiencing higher operating expense. While these investments are driving near-term expense pressure, we expect they will support long-term revenue and market share growth. Operating profit was $309 million compared to $319 million last year. As a percent of sales, operating margin was 10.8% of sales, compared to 12.6% last year. Wrapping up the P&L, diluted earnings per share was $5.14 per share or flat to last year. Moving to highlights from the balance sheet and cash flow statement. We ended the quarter with $205 million in cash and cash equivalents and $552 million in short-term debt. Similar to the third quarter in past years, we leveraged our revolving credit facility during the quarter to support working capital needs and ongoing capital allocation priorities. Including share repurchases and capital expenditures. As a reminder, we funded the Space NK acquisition in Q2 with cash on hand and borrowings under our existing credit facility. Total inventory increased 16% to $2.7 billion compared to $2.4 billion last year. Primarily reflecting additional inventory to support new brand launches, Space NK, and the impact of 63 net new Ulta Beauty stores. Capital expenditures were $87 million for the quarter, mostly driven by investments in new and existing stores and IT systems. Depreciation increased 13% to $76 million compared to $67 million last year. Largely reflecting store investments. In the quarter, we repurchased 427,000 shares bringing the year-to-date total for our share buyback program to 1.7 million shares or $693 million. At the end of the quarter, we had $2 billion remaining under our current $3 billion repurchase authorization. Turning now to our updated outlook for the year. We have increased our fiscal 2025 guidance to reflect our third quarter results as well as our updated expectations for the fourth quarter. For the year, we now expect net sales will be approximately $12.3 billion with comp sales growth between 4.4% and 4.7%. We now expect operating margin will be between 12.3% and 12.4% of net sales. With the deleverage driven primarily by SG&A. We expect gross margin will be roughly flat for the year. Reflecting these assumptions, we expect diluted EPS for the year will be between $25.20 and $25.50. With one quarter left in the year, I want to share how we are thinking about Q4. We have increased our outlook for revenue growth but believe it is prudent to continue to take a cautious view of consumer spending this holiday season. Given the dynamic macroeconomic and operating environment. Reflecting our performance through Cyber Monday, we now expect Q4 comp growth will be between 2.5% and 3.5%. For Q4 modeling purposes, we expect operating margin will be between 12% and 12.3%. Driven by gross margin and SG&A deleverage. And we expect EPS for the quarter will be between $7.61 and $7.90. And now I'll turn the call over to our operator to moderate the Q&A session. Leila: We will now begin Q&A. Again, that's star five on your telephone to ask a question. Please limit to one question before jumping back in the queue. Thank you. We will now pause a moment to assemble the queue. Our first question will come from Lorraine Hutchinson with Bank of America. Your line is now open. Please go ahead. Can you talk about what you're hearing from brands about pricing? The 3.8% ticket comp was very impressive. Do you think this might build in the coming quarters? Kecia Steelman: Hi, Lorraine. Thanks for the question. I would say that, you know, we generally have pricing increases, you know, quarter to quarter as brands come through. And there were plenty of publicly traded companies that announced that they were taking price increases, Elf, Cody, and Helen of Troy, just to name a few. That, you know, we were seeing some price increases with this quarter. Chris, maybe I'll let you give a little bit more color around what the pricing increases look like for the quarter. But, you know, pricing increases are not new in this part of the business and I think that we saw anything that was, like, extraordinary by any means, Chris. Chris Lialios: Yes. Hi, Lorraine. Thank you for the question. As we mentioned, we are starting to see more market-wide price increases come through in this with select brands. Versus Q2. But, you know, we continue to work with our brand partners to understand how they're thinking about tariff mitigation going forward and price increases. And they are being very thoughtful, considering the consumer wallet pressures and making sure that we continue to provide value to our guests. As far as how the price increases flow through the P&L, as I had mentioned, there is a short-term benefit to cost of goods as we sell through the product. But eventually that catches up as we sell through the older product and we replenish with newer product. Leila: Your next question will come from Steve Forbes with Guggenheim Securities. Your line is now open. Steve Forbes: Good afternoon, Kecia, Chris. Kecia, you mentioned app engagement and also app online sales penetration. So I was curious if you can maybe just give us more color around what you're seeing from a consumer standpoint and whether consumers are actually migrating to purchasing across channels as you think about the mix of customers that are maybe dual channel purchasers versus single channel purchasers? And the reason I asked, right, is you think about that 15% or mid-teens e-commerce growth profile it's sort of indicative of, you know, really strong wallet share and market share performance. So just trying to gain conviction around you know, what's driving that. Kecia Steelman: Well, thanks, Steve, for the question. What I would like to highlight first is that we've had strength in both categories because stores are continuing to grow too. And if you look at the percentage of our business, 80% of our business is still coming from stores. Our app engagement, we're really pleased with what we're seeing. You know, it grew 65% from 63% last quarter. And we are building on our momentum in e-commerce. We've had three consecutive quarters of double-digit comp. I think that a couple things that are playing into that. We've introduced new capabilities in 2025 that are really helping us strengthen our momentum in e-commerce. In Q1, we had split cart launching which, you know, made you could you could pick it up in the store. You could have something you sent to your home. That was a new technology that we didn't previously have. In Q2 we launched replenish and save. Q3 wish list and Venmo just in time for the holiday season. And then, you know, as I mentioned in the prepared remarks, we've added we have a thousand stores now for ship from stores so speed is really important. You know as our investments are continuing to elevate our digital experience and this whole acceleration around personalization is fueling our performance. It's really driving both channels up and we're really pleased with what we're seeing across both stores and e-commerce. What I will say is I'll just finish by saying that there's no finish line in our technology and our advancements and the investments that we're making. And it's just great to see that our Ulta Beauty Unleashed plans and what we're investing in is really starting to come through and show on the top line sales. Leila: Your next question will come from Anthony Chukumba with Loop Capital. Anthony Chukumba: Thank you so much for taking my question. Congrats on a really strong quarter. I guess my first question is, I look at your comp performance on a two-year stack basis. This is the second quarter where the comp accelerated onto your stack basis. And I guess, and I know it's probably hard to parse this out super finitely, but was just wondering much of that do you think is the product newness versus the better execution in store versus the better promotions? Maybe it's a mix of all that. And it does sound like the industry continuing to grow. So how do you just sort think about that? Kecia Steelman: Well, I think it's all thanks, Anthony, for the question. I'll start by saying that, I would say it's all of that really playing in together. And what I'm seeing is that the company is really hitting on all cylinders. We have a very clear plan, and everyone's working on the Ulta Beauty Unleashed plan and understands the role that they play. I couldn't be more pleased with what I'm seeing also from our frontline associates all the way to the senior executive team and really raising to the occasion and really driving the business. You know, I'd say that there's four areas that we're really leaning into. It's merchandising, especially this time of year, we're really focused on gifting, Fragrance, we call that was really strong. We've got a lot of holiday exclusives and newness that's driving the business. In digital, you know, our capabilities, which I just shared in the last question, They're really driving that e-commerce channel marketing. We're amplifying the ways that we're communicating We've launched our new brand equity campaign and then it's all underpinned by operations and just delivering on a great guest experience from insects to guest satisfaction and the speed in which we're delivering products to our stores. So, you know, it's the game plan working together collectively along with the team supporting it that I think is where you're seeing the momentum come. And we're going against, you know, the Super Bowl of the season here in fourth quarter and we're just going to continue to lean into our operational excellence and continuing to deliver the best results that we can have for the rest of this year. Leila: Your next question will come from Anna Andreeva with Piper Sandler. Anna Andreeva: Great. Thank you so much. And let me add my congrats on a great quarter. Had a follow-up on SG&A. How much of that growth was the incremental brand campaign that you guys did during the quarter? And you've talked about '25 being more of a catch-up year in terms of investments. Can you talk about if we should expect 26% SG&A to be managed closer to sales? What areas are you guys still investing in? And not sure if you can comment, how we should think about Space NK. Contribution to sales and as we think about SG&A for next year. Thanks so much. Chris Lialios: Thank you for the question, Anna. I'll start off with the SG&A increase. As you know, we deleveraged about 240 basis points prior primarily due to higher incentive comps, store payroll, and benefit expense and store expenses and the amortization cloud-based software. As far as breaking out the advertising piece, we leverage our advertising as a result of the higher top-line revenue. And, as far as the growth of store payroll expense, we again, it's primarily due to additional selling hours to support the guest experience. Kecia Steelman: And then, you know, we're gonna share more about our SG&A plans in March when we're gonna talk about our 2026 plans. But, you know, we understand, and I shared in the comments, this is an investment year. And we knew that and that this was what the plan was. And we look like we're gonna be hitting what our focus has been forecast has been that we've shared earlier. But we'll be able to share more about what the plans around SG&A in March. Leila: Alright fair enough Best best of luck for the holiday. Kecia Steelman: Thank you. Leila: Your next question will come from Rupesh Parikh with Oppenheimer. Good afternoon. Thanks for taking my question. Also congrats on a really nice quarter. Rupesh Parikh: So Kecia, just on the brand or I guess the innovation pipeline, exclusive brands, know last year, team was very upbeat in terms of innovation for this year. So just curious, based on your current visibility into next year, just how do you feel about the pipeline out there? Kecia Steelman: Yeah. Thanks for the question, Rupesh. You know, our merchandising vision is to really curate and inspire guests with the best beauty and wellness assortment for all life stages. And Lauren has come in and really brought some great thought leadership and is really helping us refine the merchandising vision and brand-building strategy. What I will say is that our merchants have been hard at work in developing their plans for fiscal 2026. We have an exciting pipeline of newness and I'm pleased with what I see right now and it's balanced across the portfolio very similar to how this year was. So while we're in the midst of our planning and I'll share more specifics in March, the team has done a really nice job and they have really prioritized newness and innovation because we know how important it is to really drive this business overall. So I feel bottom line really great about what I'm seeing for 2026. Rupesh Parikh: Great. Thank you. Best of luck. Kecia Steelman: Thank you. Leila: Your next question will come from Kelly Crago with Citi. Hi. Thanks for taking our question and congrats on the great quarter. Kecia, I was hoping you could elaborate on sort of your philosophy around your EBIT margin, long-term EBIT margin, of 12%. You're running ahead of that this year despite significant SG&A deleverage. Should we still anchor to that, the 12% as we think about F-twenty '6 and with that you know, you talked about SG&A and maybe finding some efficiencies. Is SG&A a source of leverage as we look forward? Or will you still sort of try to drive the gross margin and maybe invest against that? Thanks. Kecia Steelman: Yeah. Thanks, Kelly, for the question. I will say this is a great position to be in. Because we're outperforming what the original plan was. And while our guidance for '25 now is between twelve point three and twelve point four. You know, as we're looking at 2026 we're focused on building a plan that really positions us to deliver against our long-term targets. We're still in the planning process we need to see where 2025 lands because we still have the rest of this quarter to go. But reflecting on our commitment that 2026 will not be another big heavy investment year, we would not EBIT margin next year to deteriorate from 2025 levels. Now you asked also about the long-term plan. Well, our performance, you know, is better than what we had planned. It's still premature to change our long-term growth targets at this time. We're confident that we can deliver our targets over time, but there are so much nuances that can happen from year to year. My focus as a leader is to make sure that we're building a plan that we can continue to invest in this business, remain relevant, and take share. And as you know, we have a brand new CFO starting tomorrow. And as he gets into the operations, I'm sure he's gonna have a perspective too. He and I are gonna work together along with the board to make sure that we have a long-term plan that really our business and taking market share and being a profitable business over time. So bottom line I would say that you should not look for EBIT margins to deteriorate from fiscal year twenty twenty five levels. Leila: Thank you. Thanks. Your next question will come from Michael Lasser with UBS. Michael Lasser: Good evening. Thank you so much for taking my question. You said there's been some debate around the start of the holiday season, Ulta's carried a lot of momentum over the last six months. Are you finding that some of the momentum is starting to fade where consumers are shopping more around events and in between those periods, got a little quieter? And does that give you pause about the need to continue to make investments in order to drive the business. Thank you so much. Kecia Steelman: Thanks, Michael, for the question. Know, what I would say is that comp growth during the quarter was really consistent across all periods. And as I shared, we were pleased with Black Friday and Cyber Monday. You know, beauty is still a very important category for the consumer in our lives and also for shopping for their holiday needs. And Ulta Beauty is also very important to them. I'm confident in our plans and staying really focused on execution. And, you know, we're happy a lot of fun. We're working really hard on this plan. The teams having a good time doing it. We've got momentum on our side. I like what I'm seeing in the newness pipeline. I just I think, you know, we're gonna continue to play our game and continue to stay focused at keeping the consumer at the center of everything that we're doing and I just don't necessarily see that momentum changing anytime soon. Michael Lasser: Thank you. Kecia Steelman: Thank you. Leila: Your next question will come from Ike Boruchow with Wells Fargo. Ike Boruchow: Hey, good afternoon. Just I want to ask about the shrink benefits that you guys have seen all year. Any chance you could quantify it for the third quarter? Are you expecting benefits into the fourth quarter? And then I guess, that is there more tailwind to that? Or is this was this a big kind of catch-up year for you guys? I know, you know, two years ago, there were some issues you've clearly worked through. So just kind looking for more clarity there. Thanks. Chris Lialios: Thanks for the question, Ike. We are pleased with the progress. Obviously, as we stated in our prepared remarks, there was a modest improvement. And in Q4, we expect that we've made to reduce shrink. In Q3, another modest improvement in shrink. And we do expect for the full year '25, the shrink will be lower than twenty four. We believe there's still some opportunity to reduce shrink further. But the teams are working very hard, and we're very pleased with all the initiatives that we've put in place. Leila: Thanks. Your next question will come from Mike Baker with D. A. Davidson. Mike Baker: Thanks. Could you discuss the competitive situation Amazon Premium Beauty still seems to be growing a lot. I think Sephora at Kohl's actually comped negative, yet LVMH's selective retail was positive. A lot of different moving parts from your competitors. How do you see the competitive situation today versus three months ago or earlier in the year? Kecia Steelman: Thank you for the question, Mike. Beauty has always been a competitive category. And there's been consistent growth, and it's been combined with you know, attractive profit margins, There is a it's attracted a variety of players into the category. But that's what our Ulta Beauty Unleashed plan is designed to do. Is to really accelerate and amplify our differentiation, what makes us unique. You know, I will just say that we're doubling down on the drivers that we know with us having 46.3 million loyalty members. We know what our consumers are purchasing, how they're purchasing. We have, like I said, the pipeline of newness. Our merchants are doing a fantastic job of listening to the consumer. What is that they're looking for. We are the only one that really offers everything from low to lux and everything in between underpinned with services and activations and the investments that we're making in our eventing. So the experiential shopping makes us different. When you look at our e-commerce business and you see like one of the big drivers in e-commerce is BOPUS It further substantiates that our e-commerce business strength is there, but they still like coming into the store. So I do think that while, yes, it's a very competitive environment, we are uniquely positioned to continue to win and take share in the industry. So you know, like I said, I feel really great about our plans. The plans are working. We're still in the early phases of them and they're continue gonna continue to mow you know, the momentum is gonna continue to be on our side. Mike Baker: Thank you. Kecia Steelman: Thank you. Leila: Your next question will come from Dana Telsey with Telsey Group. Hi, good afternoon everyone and congratulations on the nice results. Kecia, as you think of top line and you think of the categories, and prestige and mass, what are you seeing on prestige and mass? Is there a difference? And as you go forward through this holiday season, is the newness at all different this holiday season than it was last year or any way you're triangulating it? And lastly, you mentioned on SpaceNK. Bringing things here. What are you bringing? Has it been tested? How is it reacting? How do you see that moving forward? Thank you. Kecia Steelman: Thank you, Dana. I think that might have been a three-part question. I'll try to make sure I cover all of the points. But in regards to market share, you know, prestige beauty, the industry grew in mid-single digits, and we gained share primarily driven by our strength in skin and fragrance. But makeup also increased. We're seeing steady improvements in prestige hair care in our trends. And you know what's great about prestige is that we gain share in both brick and mortar and digital channels with elevated competition even out there. And then in mass, mass grew as an industry mid-single digits in Q3 and we gained share primarily driven by strength in mass makeup. So what I'd say is that I'm really encouraged to see that our plans are working to improve our performance and really drive market share. And we're gaining our efforts are gaining traction. We're confident in our goal for plans. You know, market share is a battle, but we're staying focused on building on our successes to continue to drive sustained market share improvements. Over the long haul. You asked a little bit about SpaceNK. And what I would say is that with Space NK, it's still early. We're in the early innings, but of the things that was really attractive to us is the nuance of their ability to really have client eling and really have close relationships with their consumer be really agile. They've just now launched their app themselves It's just like I said I think this is a situation where one plus one can equal three They've figured out how to do high street really well. In smaller box locations and be really efficient with their space. I think what we can bring to them is back office operations and how did you continue to leverage the size and the scale and the operational efficiencies that we have. So it's really early still in the innings is what I would say, but we have the ability to really learn a lot from each other. I wanna protect what makes SpaceNK unique. I do not wanna turn SpaceNK into a mini Ulta Beauty. I think that's what's made Space NK so special. I think, like I said, there's learnings that we can share from them and to us and us and to them that will help us both be better in the long run. Thank you. Leila: Your next question will come from Michael Binetti with Evercore. Michael Binetti: Guys. Liam, my congrats. Great quarter. I'm you know, I'm still trying to get my head around the SG&A and how we got from 13% to 14% growth for the year on the last call. To 23% in the third quarter. And I think it grosses are flat back into 15% to 16% growth for the year now, I know you called out a couple of items within the 23% growth in third quarter, but I'm I don't understand if those were included in the 13% to 14% for the year previously. Or not? Just maybe help us understand the bridge there. And then you have I know you have talked a lot about SG&A a lot. And the 12% margin EBITDAR margin, but the gross margin flat for the year on a 4% to five comp I was trying to think through that a little bit and think what the comp leverage point is that you guys are comfortable with there. Is it think the last publicly available documents we saw, SpaceNK, had a gross margin profile closer to 43% for a couple of years a row, pretty stable, so three or four points higher than where you're at. Does that kind of a comp in the model lever SG&A in normalized environment once we get past some of the Space Mk impact? Chris Lialios: Thanks for the question, Michael. There seems like there was a question there, so we'll try to tackle couple in there. Try to tackle them here. As far as space and k, so space and k does not become comp until Q3 of next year. So you will have some space and k impact year over year in the first half of twenty twenty six. As far as the the deleverage FY '25, we expect gross margin will be roughly flat again, driven by lower shrink and higher merchandise margin. Offset by the deleverage of other revenue and store occupancy costs as well as the adverse channel mix that we talked about. For the fourth quarter, expect we expect GM deleverage driven primarily by store fixed and other revenue as well. Largely reflecting our fourth quarter comp expectation. And the adverse channel mix, again, still plays into Effect there in Q4. Offset by you know, we will see some leverage in our supply chain costs. Leila: Your next question will come from Adrian Yee with Barclays. Adrian Yee: Great. You very much. On the end, my congratulations to stores look fantastic. Just in one this afternoon. Keisha, can you talk about the target 100 number of stores at the Analyst Day. It was a couple 100 more from the October 24 kind of anchor. And your top line is two times the sale, the rate of category growth. Next year, we're going to shed over 600 of the target x, Alta I'm just wondering, is there how do feel about the pace And has anything changed there? And then for Chris, a question just on kind of the modeling of the the kind of pricing with the price benefit that you had. And the tariff inventory hitting the income statement, should we expect more of a parity, a matching effect on the pricing actions versus the tariff impact actions starting in maybe 1Q or 2Q? Thank you. Kecia Steelman: Thanks, Adrian, for the question, and I'm happy to hear in our stores, and, hopefully, you're shopping. I would say that, you know, we our long-term algorithm that what we've shared for new stores is we've said 1,800, and we're still confident with that 1,800 store count going forward. And then Chris Salla kick it over to you. Chris Lialios: So on the pricing impact, obviously, we'll talk more about the impact of price increases in Q1 of q and Q2 next year in March. But as far as the price increase, in Q4, we do expect to see price increases modest price increases like we've seen in other years. And and the tariff the the inventory will not yet fully be expressed with the pressure Is that correct? So it's similar to the third quarter? Adrian Yee: In terms of a net benefit? Chris Lialios: Yeah. As you know, it's based on our inventory valuation method, the average cost. So it's gonna take a while for it to reach the new cost level. But it most likely, it takes about one or two quarters for it to flush through. Adrian Yee: Okay. Great. Leila: Thank you very much. Best of luck for holiday. Michael Binetti: Your next question will come from Simeon Gutman with Morgan Stanley. Simeon Gutman: Hi, everyone. Hi, Keisha. Can I take your temperature on Newness I think it's been a theme for twenty five? What are you seeing as it wraps into next year? And if you're able to, to separate, this year has been a lot of improvement. Some of it's newness. Some of it's marketing. And then you've talked a lot about early innings of some things sound like basic things that you brought, like the payment thing. So can you talk about how much internal improvements you would chalk this year up to and how much you know, more is to go in the in the future? Thanks. Kecia Steelman: Yeah. Thanks, Simeon, for the question. You know, I feel really good about the newness pipeline that I'm seeing for 2020 The merchants have been hard at work developing plans, and that's one of the rigors that Lauren's really brought, I think, into the company is taking a look at the current year and building a plan, like, how we're gonna combat newness that's gonna be flowing next year and being really balanced across the portfolio. So in regards to newness, I feel good about what next year looks like. The second part of your question was, I mentioned early innings and that there's there's some things that I think can continue to come play. That's what I mean by that is this has been a heavy, heavy investment year. In a lot of our technology, investments in our teams. And there there's benefits to letting things marinate a bit and we've been coming off of two, what I call really high or a few high years of investment in our foundation. So for the last three years, before this last year we were investing in our ERP, our POS, supply chain, back end operations, digital, I mean all pretty much all aspects of the business. And then we had fallen behind in our go to market. So that's what happened this year we shifted more into the go to market type strategies. And so we've been it's been a heavy up investment investment year in more guest facing, sales driving, market initiatives. There is gonna be benefit to being I would say, hyper prioritized next year. We always are gonna wanna invest in the business. But we're gonna be more prioritized next year There's gonna be less investments next year, very thoughtfully done. And we need to see the benefits from some of these investments that we've made over the last few years really kind of settle in, marinate, and get the benefit from them. So that's why I'm saying I feel like we're still in the early innings is that there's major opportunity for us to continue to see these things come to play. Kiley Rawlins: I think we have time for one more question. Leila: Your final question will come from Olivia Tong with Raymond James. Great. Thank you, and congrats on the quarter. Your early read from Black Friday through Cyber Monday sounded promising. So wondering if you could unpack the expectations for deceleration to 2.5% to three point comp? Was there any impact from the government shutdown? Any change in consumer habits with pricing? And if you could, what quarter to date looked like? Then just thinking about the initiatives going forward, you're going into next year with a ton of momentum it seems. But curious how you think about some of these initiatives for next year to some pretty amazing top line growth this year? You already talked about the newness. But what about next twelve months versus last twelve months in international wellness marketplace, other new initiatives, the ability to continue to build those so that the contribution continues to get bigger as you comp these numbers. Thank you. Kecia Steelman: Yeah. As I mentioned, thanks, Olivia, for the question. As I mentioned, Black Friday and Cyber Monday performance, we were really pleased with. And what I'm excited about is that we came out of the really strong business with even stronger insects than we've seen ever coming into a hot out of a holiday, peak holiday weekend. You know, while this is a challenging, this is also a very fun time. But these next nine weeks are big weeks, and there's just so much volatility that can happen. You could have bad weather that happens on a key critical weekend. You know, who knows you know, what could happen between now and the end of the quarter. So I think we're just being very prudent in our guidance and making sure that I kinda like the plan of not missing a quarter as a new CFO first year in position. So I'm wanting to put something out there that I feel like is an achievable plan and one at the team can continue to work towards. In regards to your question around you know, long term and how confident am I in that we can continue to sustain momentum. I believe that we are a company that can continue to grow share, and that's what our plan that we built is built to do. I look forward to sharing more with you in March after we finish the year and we can share what our plans are for next year. But the team's been working really hard along with myself to build a good game plan for what 2026 looks like. Like I said, we're in the early phases of that. We're looking forward to be able to share that with you all. But we've got good fundamentals in place. You know, I grew up through operations. Understand the levers that it takes to really drive a profitable retail business. And I'm committed to doing that. Alright. Thank you all for joining us today and discussing our third quarter results. We're excited about the progress we're making against our Ulta Beauty Unleashed strategy and focused on closing out the year strong. We appreciate your continued interest in Ulta Beauty and hope you all have a safe and happy holiday season. We look forward to speaking to you all again in March when we report our fourth quarter and full year results. Have a great evening, everyone. Leila: Thank you for joining. This concludes today's call, and you may now disconnect.
Operator: Day, everyone, and welcome to Smith & Wesson Brands, Inc. Second Quarter Fiscal 2026 Financial Results Conference Call. This call is being recorded. At this time, I'd now like to turn the call over to Kevin Alden Maxwell, Smith & Wesson's general counsel. Will give us information about today's call. Thank you. Please proceed. Kevin Alden Maxwell: Thank you, and good afternoon. Our comments today may contain forward-looking statements. Our use of the words anticipate, project, estimate, expect, intend, believe, and other similar expressions are intended to identify forward-looking statements. Forward-looking statements may also include statements on topics such as our product development, objectives, strategies, market share, demand, consumer preferences, inventory conditions for our products, growth opportunities and trends, and industry conditions in general. Forward-looking statements represent our current judgment about the future, are subject to risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by our statements today. These risks and uncertainties are described in our SEC filings which are available on our website along with a replay of today's call. We have no obligation to update forward-looking statements. We reference certain non-GAAP financial results. Our non-GAAP financial results exclude relocation expense and one-time costs related to the grand opening event for the Smith & Wesson Academy. Reconciliations of GAAP financial measures to non-GAAP financial measures can be found in our SEC filings and in today's earnings press release. Each of which is available on our website. Also, when we reference EPS, we are always referencing fully diluted EPS. And any reference to EBITDAS is to adjusted EBITDAS. Before I hand the call over to our speakers, I would like to remind you that when we discuss mix results, we are referring to adjusted mix a metric published by the National Shooting Sports Foundation based on FBI NICS data. Adjusted NICS removes those background checks conducted for purposes other than firearms purchases. Adjusted mix is generally considered the best available proxy for consumer firearm demand at the retail counter. Because we transfer firearms only to law enforcement agencies and federally licensed distributors and retailers, and not to end consumers, mix generally does not directly correlate to our shipments or market share in any given time period, we believe mostly due to inventory levels in the channel. Joining us on today's call are Mark Peter Smith, our President and CEO, and Deana L. McPherson, our CFO. With that, I will turn the call over to Mark. Mark Peter Smith: Thank you, Kevin. And thanks everyone for joining us today. We were pleased with our second quarter results which continued to demonstrate the strength of the Smith & Wesson brand, the ongoing success of our innovation strategy, and our disciplined focus on managing operations allocating capital. As we anticipated, excellent efficiency in our business allowed us to deliver solid profitability of $15 million of EBITDA, on net sales of nearly $125 million. We also saw great results on our balance sheet, with a significant reduction in inventory, thanks to our disciplined sales and operations plan process. Which ensures our factories are right-sized to demand levels. This generated healthy operating cash flow of over $27 million in the quarter. Further, our new products continue to be a significant catalyst accounting for nearly 40% of sales in the quarter. I'm proud to see our award-winning engineering and design teams continuing to deliver products that resonate with consumers. Looking at market dynamics, we believe that the market continues to be healthy and stable, following normal seasonal trends. And that our brand strength, award-winning product portfolio, experienced team, and disciplined management allowed us to continue gaining share during the quarter. In handguns, our unit shipments into the sporting goods channel were down 1.9% versus mix being up 2.9%. However, when we adjust for channel inventory fluctuations in the period to understand true consumer demand, we had a 12,000 unit decrease in distributor inventory during Q2. This indicates that our handgun sell-through at the retail counter was actually up 7.7%, we believe reflecting market share growth. As I just mentioned, this was driven by the continued success of our entire line of new products. As well as solid performance from the core line. In long guns, our shipments into the sporting goods channel declined 5.1%, while mix was down 8.3%. When we adjust for inventory fluctuations in the channel, we did underperform the overall long gun category during the period. However, this represents typical category seasonality for us, as demand for long guns in the fall season is heavily weighted towards the traditional hunting segment. Where we currently have a relatively limited presence. In summary on the overall market, our handgun outperformance far outweighed the impact of long gun seasonality. After inventory fluctuation adjustments, our total firearm unit shipment into the sporting good category were up 3.3% versus the market being down 2.7%. This represents solid results for the fall period, which, again, is heavily weighted. To the hunting category. Importantly, the strength of our brand allowed us to outperform the market in unit sales without sacrificing our average selling prices, which actually increased in Q2. Overall ASPs were up 3.5% versus a year ago, including a 2.1% increase in handguns to $418, and a 10.2% increase in long guns to $602. We also saw growth sequentially with overall ASPs up 6.5% comprised of a 3.7% increase in handguns, and a 15.1% increase in long guns. While our focus on innovation is a key factor in supporting ASPs, the growth we delivered in Q2 also illustrates the strength of the Smith & Wesson brand. Which allows us to largely avoid having to be reactive in our promotional participation. On that note, our balance sheet remains strong, and I'm particularly pleased with our inventory position as we move into the seasonally stronger second half of the fiscal year. We ended the quarter with $183 million of inventory, which was down from $196 million a year ago and from $203 million at the end of Q1. The team has done an incredible job managing production and inventory, ensuring we are aligned with consumer demand across our portfolio as well as retail and distributor inventory levels. Channel inventory at distributors continues to be very clean, declining over 5% sequentially and over 15% year on year. Positioning us to quickly convert incremental demand into shipments as we move into our typically busy second half of the fiscal year. In addition to putting us in a strong competitive position, as I mentioned earlier, focus on inventory management drove significant operating cash flow. Of over $27 million. Finally, just a quick update on our new Smith & Wesson Academy that I mentioned on our last call. Our grand opening ceremony was held on September 12, and we'd like to thank all of the federal and state senators, congressmen, women industry personalities, customers, and influencers who made the trip help us celebrate this latest milestone in Smith & Wesson's long legacy. Our goal with this state-of-the-art purpose-built facility is to offer tailored situational training to our current and prospective law enforcement federal agency, and military customers, as well as offer training classes to consumers of all skill sets looking to learn from the best of the best to enhance their firearms proficiency. As I mentioned on our last call, we are proud to have Mark Cochiolo leading the operations and training at the academy. Mark is a retired US Navy SEAL who proudly served our as a member of the elite SEAL team six, and after retirement, returned to San Diego where he spent the next sixteen years as a firearms and instructor. Training over 4,000 Navy SEAL candidates in that time. I'm happy to report that just over two months in, we have already had the pleasure of hosting dozens of current and prospective law enforcement customers held our first consumer training classes. The feedback has been overwhelmingly positive. And we look forward to continuing to exceed the expectations of our professional and consumer customers with this new addition to the Smith & Wesson brand experience. I encourage anyone interested to visit our website for more details, to sign up for a training class. As we look forward to the future, we remain focused on our proven strategy of innovation-driven growth disciplined cost management and maintaining our strong balance sheet. Our capital allocation strategy remains unchanged. Invest in our business, maintain financial flexibility, and return value to stockholders. With our industry-leading innovation pipeline and continued strong market positions, we believe we are well positioned for continued success. Before I call hand the call over to Deana, and as always, just want to thank our entire team of talented Smith & Wesson employees for their tireless dedication, in putting their skills to work. Each and every day. To make us successful. With that, I'll turn the call over to Deana to cover the financials. Deana L. McPherson: Thanks, Mark. Please note that all comparisons are between the 2026 and the 2025 unless stated otherwise. Net sales for our second quarter of $124.7 million were $5 million or 3.9% below the prior year. During the quarter, distributor inventory in terms of actual units declined by over 5% from the end of the prior quarter and by 15% compared with the October 2024. This indicates continued positive sell-through of our products at retail and a good position for us as we look forward to the coming months. Handgun ASPs increased slightly from Q1 levels due to strong demand certain premium products partially offset by promotions and continued demand for lower-priced products. Long gun ASPs increased due to the mix of higher-priced products, and slightly increased overall volume. Gross margin of 24.3% was down 2.3% versus a year ago due primarily to decreased absorption on temporarily lower production. As we focus on inventory optimization and an 80 basis point negative impact from tariffs. Partially offset lower promotion costs and lower federal excise taxes as a result of the favorable outcome of a recent audit. Operating expenses of $26.2 million were $733,000 lower than a year ago with increases in selling and marketing costs related to the grand opening of the Smith & Wesson Academy being more than offset by lower G and A primarily due to lower legal costs. The lower revenue and associated margin resulted in net of $1.9 million compared with $4.5 million in the prior year period. Earnings per share during the second quarter was 4¢ compared with 10¢ a year ago. Cash generated from operations during the second quarter was $27.3 million compared with cash used from operations of $7.4 million in the prior year quarter due primarily to lower inventory and income taxes paid. Inventory decreased $20 million versus an increase of $6.2 million in the prior year quarter. We spent $11 million on capital projects in the second quarter, compared with $3.3 million a year ago but the increase primarily related to the Smith & Wesson Academy. Expect our capital spending for the year to be between $25 and $30 million. We paid $5.8 million in dividends, and ended the quarter with $27.3 million in cash and investments and $90 million in borrowings on our line of credit. Since the end of Q2, we have so far repaid $15 million on the line bringing our current total borrowings on our line of credit to $75 million. Finally, our board has authorized our cent quarterly dividend to be paid to stockholders of record on December 18 with payment to be made on January 2. Looking forward to our third quarter, although we continue to see uncertainty regarding macro conditions, including tariffs, believe that the strength of our brand, product assortment, and new product offerings should allow us to continue performing well. Therefore, we expect our third quarter sales will be 8% to 10% over our Q3 fiscal 2025 sales with no significant impact either or negatively from channel inventory. With two additional operating days, and an increase in production to meet demand during our busiest quarter in Q4, we expect Q3 gross margins to increase by a few percentage points both sequentially and year over year. Operating expenses in Q3 will likely be about 15 higher than in Q2 with increases due to the SHOT Show in January, new product development costs, increased promotions, and increased profit sharing. Additionally, we expect continued healthy cash generation through the second half of the fiscal year. Our effective tax rate is expected to be approximately 28%. With that, operator, can we please open the call to questions from our analysts? Operator: Thank you. With that, we will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick One moment while we poll for questions. And our first question comes from the line of Mark Eric Smith with Lake Street Capital. Please proceed with your question. Mark Eric Smith: Yeah. Hey, guys. Yeah. Alex on the line Mark Eric Smith today. Thanks for taking my questions. First one for me, you know, you noted an 80 or 80 basis point headwind in the quarter. Could you just walk us through, you know, what you're seeing in input costs right now, steel, components, tariffs, and how you're thinking about gross margins over the next couple of quarters? Mark Peter Smith: Sure. Hey, Alex. This is Mark. Yeah. The you know, you know, we're mostly a US-based manufacturer, low you know, in the global economy that we do have some some source components from overseas. You know, I I think our our impact from tariffs, you know, you can probably expect it to pick up a little bit as we go through the back half of the year just, you know, as we work through some of the inventory that we had already in stock from, kind of the pre-tariff days. But, you know, it shouldn't have a material impact on our on our profitability as we go through the back half. Deana L. McPherson: Okay. That's great. Next oh, sorry. Go ahead. I would just say one one other point. The back half of the year, we have more operating days. And as I said on the the prepared remarks, given given inventory has declined and we're now ramping back up, absorption will probably be a little bit favorable. So you'll see a little bit of positive impact that should be able to offset that that impact of tariff cost. Mark Eric Smith: Okay. That's great. Second one for me. You know, OpEx looked really clean this quarter, specifically g and a. You is this a level you feel you can hold on to, or should we expect G and A to tick up we move through the rest of the year? Mark Peter Smith: Yeah. I mean, our our operating expenses are usually fairly consistent year to year. So, you know, we we always have an increase for SHOT Show in January. So I think, you know, you can kinda look at, you know, how we've performed on operating expenses in past years and Q3 and Q4, and, you know, I think you can kind of expect that to be held in line. You know, we're we're pretty disciplined in in managing the know, the the OpEx line in general. And so I hope that that performance in Q3, Q4 kinda last year, I think you can kinda expect the same cadence this year. Mark Eric Smith: Okay. That's great. And then last one for me. You know, it sounds like you're seeing some nice tailwinds given the Q3 outlook. Any early thoughts on how Q4 is shaping up from where you sit today? Mark Peter Smith: Yeah. We've been really pleased with the, you know, performance you know, in in Q2 and first half of the year. You know, the strength of the brand is really kinda showing through and resonating new products are doing very, very well across the board. You know, we expect that we'll continue to focus on innovation. It's one of the core strategies, you know, that marketing and design teams are, you know, continue to kinda hit it out of the park with blockbuster. Launches. And, you know, so I think, you know, as you can see in the, you know, the kind of the the color and guidance for Q3, we expect that to continue into Q3. And And for Q4, as I said in the prepared remarks, the market is stable, normal, kind of back to back to how it how it always how it always performs. Which puts our Q4 always as our strongest quarter in in this this year, I don't think it's gonna be any different. I think you can expect, you know, somewhere high single digit, low low double digit growth in Q4 over Q3 this year. Mark Eric Smith: Alright. That's great. Thanks for answering my questions. Mark Peter Smith: Thank you. You got it. Thanks, Alex. Operator: Thanks, Alex. And our next question comes from the line of Rommel Dionisio with Aegis Capital. Please proceed with your question. Rommel Dionisio: Thank you very much. I know SHOT Show is still about a month away, but I wonder if I you've already had some conversations with retailers and distributors I wonder if you could just give us a little heads up in terms of the feedback you're receiving with regards to you know, research revenue for new products, outlook for twenty calendar twenty twenty six, and the industry overall? Thank you. Mark Peter Smith: Yeah. Great. Thanks, Rommel. I mean, the the conversations we've been having with our with our whether it's distributors, retailers, know, all of our channel partners have been very positive around Smith & Wesson. I mean and and really kind of underscores the comments we made in the in the prepared remarks about the market share gains. You know? So, you know, the the the portfolio is performing extremely well. The strength of the brand is really starting to show through. So I think they're very pleased. Their inventory is in a really great spot as we kinda covered earlier. You know, we we always say we try and target about eight weeks of supply, and we're right there. Right at eight weeks right now. So, you know, their inventory is very clean across the line. You know, and and performing efficiently for them. So, you know, they're they're very pleased with the Smith & Wesson brand. As far as SHOT Show and, you know, what we got coming up there, you to keep your eye out. Obviously, as you know, we don't give any forward guidance into the new products, but, you know, we all I'll say is, you know, we we expect for the back half of this year absolutely to continue that, momentum on new products. You know? They're they continue to, you know, do really well for us in a in a competitive environment. Really what drives the needle, you know, for for us and, really, frankly, any any consumer good company. So we're gonna keep the keep the foot on the gas there. Rommel Dionisio: Great. Look forward to hearing about Thank you. Mark Peter Smith: Thanks, Rommel. Operator: Thank you. And with that, there are no further questions at this time. I'd like to pass it back to Mark Peter Smith for any closing remarks. Mark Peter Smith: Alright. Thank you, operator. And thank you every for joining us today and your interest in Smith & Wesson. And, we look forward to speaking with everybody again next quarter. Operator: Thank you. And with that, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time. And have a wonderful day.
Operator: Thank you for standing by. Welcome to the Sportsman's Warehouse Holdings, Inc. third quarter 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, please press star 11 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Riley Timmer, investor relations. Please go ahead, sir. Riley Timmer: Thank you, operator. Participating on our Q3 call today is Paul Stone, our Chief Executive Officer, and Jennifer Fall Jung, our Chief Financial Officer. I'll now take a moment and remind everyone of the company's safe harbor. The statements we make today contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which includes statements regarding expectations about our future results of operations, demand for our products, and growth of our industry. Actual results may differ materially from those suggested in such statements due to a number of risks and uncertainties, including those described in the company's most recent Form 10-K and the company's other filings made with the SEC. We will also disclose non-GAAP financial measures during today's call. Definitions of such non-GAAP measures, as well as reconciliations to the most directly comparable GAAP financial measures, are provided as supplemental financial information in our press release included as Exhibit 99.1 to the Form 8-K we furnished with the SEC today, which is also available on the Investor Relations section of our website at sportsmans.com. I will now turn the call over to Paul. Paul Stone: Thank you, Riley, and good afternoon, everyone. Before we begin, I want to recognize our team of dedicated outfitters across the country. Each day, they deliver on our promise of great gear and exceptional service, and their commitment continues to help drive our momentum. Turning now to our third quarter results. I'm encouraged by the solid progress our team continues to make as we execute against our transformation strategy. Despite a tough consumer environment and the impact of a prolonged government shutdown, we delivered our third consecutive quarter of positive same-store sales growth. Same-store sales grew 2.2% versus last year, with broad-based strength in our core categories of hunting and shooting sports as well as fishing. Our firearms business once again outperformed adjusted NIC checks, extending our market share gains for yet another quarter. While adjusting mix checks declined, our farm unit sales increased, despite the election-driven headwinds from Q3 last year, underscoring the continued focus and improvements on a curated assortment with depth in key products, strong in-stocks, and seasonal readiness with inventory, our enhanced marketing efforts, and our Outfitter-led in-store experience. In ammunition, sales demand remained strong, growing nearly 2% in Q3. Our EDLP strategy on core calibers, complemented by healthier in-stocks and bulk ammo strategy, continues to resonate with customers. With average unit retail up in the low single digits, we are seeing sustained engagement from customers as we lean in further to drive the areas of our business. Looking now at our key categories. We drove meaningful growth across several strategically important departments. Hunting and shooting sports increased 5%, supported by strong inventory levels with relevant local assortments heading into our peak fall season. Fishing delivered exceptional growth of 14%, reflecting broad participation in the category and strong execution from our teams. Apparel grew about 1% with particular strength in technical outdoor wear that supports our solution selling approach. Camping, however, remained challenged. Sales declined versus last year, reflecting the highly discretionary nature of this category. This is a category where we continue to refine and curate this assortment to complement the pursuits that drive customers into our stores. In fact, inventory in this category was down more than sales, highlighting greater efficiency with our inventory and investments in our key sales and traffic-driving categories. E-commerce was another bright spot, delivering growth of 8% in the quarter. Both ship-to-home and buy online pickup in-store performed well, with BOPUS continuing to drive traffic and improve conversion in our stores. Our digital-first marketing efforts are supporting higher engagement and customer acquisition across all channels. The improvements we're seeing across the business remain tied to the strategic priorities guiding our transformation. Inventory precision. We meaningfully reduced inventory from Q2 to Q3 while supporting peak seasonal demand, demonstrating improved planning, forecasting, and allocation disciplines. Importantly, we paid down debt during the quarter and remain on track to finish the year with lower total inventory than last year and positive free cash flow. Our focus on fast-returning, regionally relevant assortments continues to drive both margin and working capital efficiency. Local relevance. Aligning our merchandise and marketing to local outdoor pursuits continues to drive measurable results. We are expanding targeted marketing, community partnerships, and in-store educational events that reinforce our position as the local authority for outdoor enthusiasts. Jennifer Fall Jung: Personal protection. Paul Stone: This category continued to resonate strongly with customers, with strength across both lethal and non-lethal solutions. Burn and taser remain strong growth drivers, and the try-before-you-buy model in our archery lanes and enclosed pod is differentiating our store experience in meaningful ways. We added burn in additional stores during Q3 and now have live demos available in 116 of our 147 stores across the country. We are committed to building on this momentum as we further position Sportsman's Warehouse Holdings, Inc. as the authority in personal protection. Brand awareness. Q3 marked an important milestone in our brand awareness journey. Our Adventure Like a Local campaign and digital-first go-to-market strategy has proven to resonate with customers as we noted highest year-to-date engagement, deepened our loyalty subscribers, and strengthened brand affinity. Using our new first-party data insights, this now gives us the foundation to strengthen retention and value through the transformation of our Explore rewards program. Focused on increasing AOV, transactions per customer, and long-term customer value. Q4 will be dedicated to road mapping an enterprise-level 2026 customer acquisition strategy that reduces reliance on promotion and shifts the business towards more sustainable profitable growth. In early November, we were pleased to open our newest store in Surprise, Arizona. Our eleventh location in the state. Arizona is a market we know very well, with several of our top-performing stores already operating in the region. This new location features a unique personal protection-focused format, the first of its kind in our fleet, designed to meet the needs of the customer seeking both lethal and non-lethal solutions. This will be our only planned store opening for both 2025 and 2026, reflecting our disciplined approach to growth and our commitment to investing where we see the greatest opportunity for long-term returns. I'll now provide a little color on the current market conditions creating headwinds on the business. Starting in mid-October, we started to see a slowdown in our positive sales trend, which we believe was partially driven by external disruptions from a prolonged government shutdown impacting consumer confidence. This has made for a challenging start to Q4, and while still early in the quarter, we believe it's prudent to take a conservative approach to the balance of the year. With the U.S. consumer under pressure and a very promotional retail landscape, we are navigating the environment carefully and maintaining disciplined control over variable costs and inventory productivity. Given these dynamics, we are taking a cautious view of the fourth quarter. So we remain confident that our strategic priorities and ability to adjust with speed will support modest sales growth for the full year. We remain confident in our ability to finish the year with lower inventory than last year, generate positive free cash flow, and a lower debt balance. Now, I will turn the call over to Jennifer. Jennifer Fall Jung: Thank you, Paul, and good afternoon, everyone. We delivered our third consecutive quarter of same-store sales growth in Q3, with comps up 2.2% year over year, maintaining our positive trend from the second quarter. Net sales for the quarter were $331.3 million, an increase of 2.2% compared to the prior year. We are pleased to report that the company achieved three consecutive quarters of year-over-year comp store sales growth. This has been the result of a focused strategy to win the seasons in hunting and fishing and our conviction to lean in heavily to the personal protection category, an area where others in the industry are backing away. Reflective of this focus is the 5.3% growth we achieved in Q3 in our Hunting and Shooting Sports department and the 14.1% increase in fishing, which on a two-year comp stack is up 17.9%. Additionally, apparel was up 1.4% in the quarter. The combination of this growth was partially offset by decreases in our other departments. Gross margin for the quarter was 32.8%, a 100 basis point improvement versus Q3 last year. This increase was largely driven by improved overall product margins from healthier inventory, lower freight expense due to lower inventory receipts, improved shrink, and a higher penetration of sales from our fishing department, which has a higher overall gross margin. This increase was partially offset by an outsized mix shift to firearms and ammo, which has lower gross margin and a lower penetration in the camping and footwear departments, which carry higher margin rates. SG&A expenses were $104.5 million or 31.5% of net sales, versus 30.8% in the prior year. This increase was driven by a reinvestment in our customer-facing areas of the business, including store and support area labor, and digital marketing to drive sales and omnichannel traffic. Additionally, SG&A was pressured this quarter from about $3 million of additional nonrecurring add-back expenses. Excluding add-back expenses in both years, SG&A as a percent of sales was 30.3% versus 30.1%. We will continue to closely manage our variable operating expenses. Net income improved to $8,000 or $0.00 per diluted share versus negative $0.01 per diluted share in the third quarter of last year. Adjusted net income in the third quarter was $3 million or $0.08 per diluted share compared with adjusted net income of $1.4 million or $0.04 per diluted share in the third quarter of last year. Adjusted EBITDA for the third quarter grew 13% to $18.6 million compared with adjusted EBITDA of $16.4 million in the third quarter of last year, an improvement of 50 basis points as a percentage of net sales. Now turning to inventory. Total inventory at the end of Q3 was $424 million compared to $438.1 million in the same period last year, a decrease of $14.1 million or 3.2%. As anticipated, we also reduced inventory by approximately $20 million compared with Q2. We strategically pulled inventory forward in the first half of the year and into early Q3. This was in an effort to ensure our stores were well prepared and set on time for the fall hunting and fishing season and to be ready and on time to support the holiday selling season. Our focus remains to build depth in core items and eliminate the slow-moving inventory that doesn't resonate with the customer. It's critical that our inventory is seasonally and regionally relevant, faster churning, and supported by predictable customer demand, which will produce lower inventory balances. This will continue to be a focused effort for 2026 and provide efficiency in our operating model. Through enhanced buying discipline, our goal is to be in season earlier, exit earlier, and achieve clean sell-throughs across the categories, which will improve the return on our working capital. Given the improvements in working capital efficiency, we expect to end the year with ending inventory less than $330 million, which is $12 million less than prior year on a higher base of sales. In regards to liquidity, during the quarter, we paid down $13.2 million of debt and ended the quarter with a total debt balance of $181.9 million and total liquidity of $111.9 million. Additionally, in November, we drew inventory down by $23 million and paid down an additional $9 million in debt. As we move through the holiday selling season and end of the year, we expect to end the year both free cash flow positive and total debt to be lower than our ending balance last year. Inventory efficiency and tight control of variable expenses remain top priorities as we manage the business prudently through Q4 and into 2026. Finally, let me speak to our update on full-year guidance. Starting late in the third quarter and now into Q4, we are seeing accelerated macroeconomic headwinds from a pressured U.S. consumer and what we believe are the prolonged effects of a government shutdown. Given this pressure, we have increased our promotional efforts to maintain inventory efficiency while driving sales, which is putting pressures on margins. Additionally, we have increased our digital marketing spend to be more competitive in the marketplace to accelerate omnichannel traffic during this period of high shopper demand. Accordingly, as we recognize and navigate current market conditions, we are revising our full-year guidance. For the full fiscal year 2025, we are adjusting our net sales range to be flat to up slightly. Again, this adjustment reflects a tough Q4 environment due to a challenged U.S. consumer. Furthermore, we are adjusting our full-year EBITDA guidance due to margin pressure from the very promotional Q4 and lower than anticipated Q4 sales. We now expect adjusted EBITDA to be in the range of $22 million to $26 million. As mentioned earlier, we expect ending inventory to be less than $330 million, and we expect our capital expenditures to be less than $25 million for the full year. As we move forward into 2026, we anticipate continued progress around our strategic initiatives, with very modest top-line growth and a focus on improved profitability through disciplined cost management, inventory efficiency, and improved gross margins. I will now turn the call back to the operator to facilitate any questions. Operator: Certainly. And as a reminder, ladies and gentlemen, if you have a question at this time, please press 11 on your telephone. Our first question comes from the line of Ryan Sigdahl from Craig Hallum Capital. Your question, please. Ryan Sigdahl: Hey. Good afternoon. I want to start with what you're seeing in recent weeks, Black Friday, Cyber Monday, etcetera, and if you've seen any improvement. And then maybe separately to that, given the cut to the guidance, weak consumer, you mentioned government shutdown. Curious if those trends have been persistent or if you've seen any improvement now that the government shutdown is no longer. Jennifer Fall Jung: Great. Hey, Ryan. This is Jennifer. Thanks for the question. Yes, I think as we spoke about in our guidance, what we saw in the end of October where our trajectory turned more negative. We started to see that through November as well. We didn't necessarily see a pickup from right after the government shutdown. So that's really reflected in our guidance for the quarter. Ryan Sigdahl: Gotcha. Maybe just gross margin, help us out for Q4. I guess, how much of this is you guys gonna lean into promotions to try and bring customers in versus trying to more hold profitability and manage the margin side? Jennifer Fall Jung: Yes. It's a little bit of using the inventory we have to drive sales and to drive foot traffic into the store, but it's also inventory management. There's a seasonal component to our business, and we know that we need to exit this inventory when the customer is shopping for it. We don't want to carry aged inventory into 2026. So it's twofold. One, managing our inventory, managing our networking capital, and two, using it to help stimulate our sales. Ryan Sigdahl: Last one for me is just we have a Florida second amendment sales tax holiday. Curious if you guys saw any benefit to the business, and how you think that trends into the New Year as that goes away? Jennifer Fall Jung: Yeah. Not necessarily. That's not one of our larger markets, but no huge impact to us. Ryan Sigdahl: Thanks, Jennifer. Good luck, guys. Jennifer Fall Jung: Thank you. Operator: Thank you. And our next question comes from the line of Anna Glaessgen from B. Riley Securities. Your question, please. Anna Glaessgen: Hey. Good afternoon, guys. I'd like to touch on the marketing spend commentary in Q4, you know, understanding the headwinds that you're seeing from the consumer and the government shutdown impacting sentiment. I guess, what are your thoughts on elevating marketing when the consumer seems to be responding to more external headwinds and, you know, what are you expecting in terms of that marketing efficiency in the quarter? Jennifer Fall Jung: Hey, Anna. This is Jennifer. Thanks for the question. So the way we're really thinking about it is twofold. First off, you know, as we look across the competitive landscape, it is highly promotional and highly marketed out there. So it's really, you know, for us to be competitive in the marketplace, we feel we need to spend. We did go up against print last year in the month of November, which we did not have this year. We've turned more to digital marketing and email. But that's really what's been working for us. And so yeah, we have a lot of great deals out there right now, and we're just gonna start leaning in heavier into firearms and ammo. And so we need to tell our customer that's what they come to us for, so we need to communicate that to them. Anna Glaessgen: Got it. And then turning to CAMP, could you give us what the comp was in the quarter? And then bigger picture, I guess, what do you think needs to happen for that department to perform more consistently? Thanks. Jennifer Fall Jung: Thanks. Yeah. For CAMP, as you know, it was tough on camp. Q3 has been tough on camp. So we've been expecting that. That being said, their inventory trend is below their sales trend. On the quarter, they were down high single digits from a same-store sales perspective. But their inventory is down double digits. So we're managing it. We know we have an area of opportunity there and from an assortment standpoint. And so that's definitely what we'll be focused on right now and in 2026. Paul Stone: I think the other thing just on that end is that's one of the biggest categories we hit from a general way standpoint. As we were evaluating where to redeploy working capital dollars. So as we were pulling back on inventory at the same time to be able to reinvest back into fish and to hunt and shoot, that department took the biggest hit as far as being able to pull back on our inventory versus the other categories. Anna Glaessgen: Great. Thanks, guys. Take care. Operator: And our next question comes from the line of Mark Smith from Lake Street. Your question, please. Mark Smith: Hi, guys. First, I want to ask just about kind of the promotional environment, in particular around Black Friday. Jennifer, you just talked about how you guys didn't have print this year. It seems like and correct me if I'm wrong. That you weren't as promotional as we historically think about kind of doorbusters and print ads. Was this purposeful? And I'm curious your thoughts around kind of the impact on your outlook for Q4 purely around kind of Black Friday weekend? Jennifer Fall Jung: Yeah. Great question. Hey, Mark. Thanks for the question. For Black Friday, we're definitely promotional, but you called it out. We didn't necessarily go out with doorbusters like a lot of our competitors were. You know, right now, during the month of December, we're reimplementing some of those doorbusters. Because it's still a high traffic area. So that's where we were a little bit different. But if you looked across our box, we were very promotional. A lot of it was in-store signage. In terms of what our big deals were. And we kept a lot of them on for maybe a couple of weeks versus churning them constantly like some of our competitors were. So you know, we're writing that and changing our strategy in the month of December to go after what our customer wants and to continue to drive foot traffic to the stores. Paul Stone: And I think looking year to year promotion to promotion, much heavier this year on the total promotion. The doorbuster we'd look at that. We'll continue to look at that on what that means and what it means to the customer markets as we think about it. But as we look at it now and then we think we have some runway over the next few weeks to be able to light up promotions actually starting tomorrow to be able to help us in a different time frame, but at the same time, be able to be super aggressive promotionally to be able to drive traffic as needed. Mark Smith: Okay. And then as we think about kind of inventory by category, and I don't know how much you can share with us on this. You just talked about camping down kind of double digits. I'm curious as we think about and the inventory looks good, down sequentially, down year over year. But if there's certain categories where maybe you're a little heavier and as we see more promotions or marketing spend here over the next thirty plus days. You know, what should this be really heavy in kind of that hunt shoot category, or is it maybe more widespread as we think about inventory that you wanna move through here? Jennifer Fall Jung: Yeah. I'll start with the category perspective. So if you look at inventory by category, all of the categories that were down in the quarter, they actually have inventory that is more down. So they are doing a great job managing the inventory for those categories that weren't performing. The only two categories that were up were fish, which as we mentioned, was very successful in the quarter, and then slightly up in hunt. But not much. You know, I think it was, like, less than 2%. But, you know, as we look forward to the coming weeks, we are gonna be leaning on the hunt and shoot category to drive sales because, you know, that's what we know drives our customer to our store. It's a large portion of our sales, and we have the inventory to do so. So that's how we're gonna leverage that category. Paul Stone: I would just add, Mark. At this point, we're not worried about inventory. The team's done a great job all year where we do have it in fish, and we're running and continue to run strong performance in fish. And then firearms and ammo is in the best position it's been, and we feel good and have the opportunity, we think, here over the next seven weeks to be able to deploy more firearms and ammo from a promotional standpoint to be able to help drive that traffic. But as we look at inventory where we're at and where we're working, our glide path down, we feel very comfortable even given the current macros we're facing to put inventory in a good position. Mark Smith: Okay. And the last question for me, just, you know, personal protection. It seems like you're seeing some solid results there. I'm curious if you can share any thoughts around kind of the margin profile, as we think about burnout, taser, you know, lethal, nonlethal, if there's any real difference in that nonlethal personal protection margin profile versus maybe traditional carry firearms? Jennifer Fall Jung: Yeah. Personal protection has been great for us, and it is one of our strategic pillars. So you know, that'll be a theme you'll continue to hear on calls. From a margin perspective, it is accretive. The nonlethal is accretive to the category. You know? And right now, it's in at least Berna is in 117 stores. Taser not as many. But, you know, we'll continue to evaluate stores to put those in. But it's been a success, and we're glad to see it bring in a different customer base. I mean, we think that's one of the values of it. You know, you have a lot of customers coming in and buying it for other members of their family. Maybe their wife, maybe their daughters. I had a friend that bought four of them for his entire family. So, yeah, it's bringing in people that are just looking for something different that don't necessarily want something that's lethal. Mark Smith: Okay. Excellent. Jennifer Fall Jung: Thank you. Operator: Thank you. And our next question comes from the line of Matt Koranda from ROTH Capital. Your question, please. Joseph (for Matt Koranda): Hey, guys. This is Joseph on for Matt. Just kind of hop into your response on driving traffic for promotions in hunt and shoot. Is that the only lever that we have here to pull in terms of returning back to positive comps here? It looks like 3Q was down about 8%. Just anything else that we can pull to return back to those positive comps in hunt and shoot? Jennifer Fall Jung: Okay. Hey, Joseph. This is Jen. So our Q3 comp was a positive two. I'm not sure if I misunderstood your last comment. So we have been positive comping for three consecutive quarters. As we look forward into holiday, we're not leaning strictly on firearms ammo. That's more of a later on. I mean, holiday is a very promotional season anyway, so there'll be many promotions throughout the store. That's just something we are layering on that we didn't have as upfront in November or as in Q3. Paul Stone: Yeah. I think just to answer that, I mean, Hunt puts us for the queue as north of 5%. Hunt and shoot, as we define it, puts up over 5% for the queue. Clearly, that's the traffic drivers along with ammunition that helps to drive it, but also the attachment parts of the business too. Around optics and the different components and the total solution of the firearm piece of it. But the kind of the milk and bread is clearly firearms and ammunition to be able to drive people, and it really gives our operators the opportunity to be able to attach to increase the AOV and the UPT as well. So I think we'll use that. You've got ammo, like I said, we'll start seeing that tomorrow. Extremely aggressive. Prices on AMLO even our inventory is in great position, but it'll be a driver to be able to help us to attach increase the overall boxes, AOV, and UPT. Joseph (for Matt Koranda): Got it. And just if you guys could give us any preliminary thoughts on margin expansion, just going into fiscal twenty-six. I know this current tougher demand environment sustains. Can we still deliver any margin expansion in the next year? Jennifer Fall Jung: We haven't quite given guidance on 2026, but what we'll be focused on really is efficiency and profitable growth. We will continue to look at our inventory and make sure that we are getting as much margin accretion out of that as possible. But, yeah, we're really focused on 2026 on our profitable sales growth and managing inventory and margins. And continue to look at our cost structure. Joseph (for Matt Koranda): Got it. I'll leave it there. Thanks for answering my questions. Operator: Thanks. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Riley Timmer for any further remarks. Riley Timmer: Thank you for joining the call today, and thank you to all our passionate outfitters around the country for their commitment to Sportsman's Warehouse Holdings, Inc. Together, we look forward to providing our customers with great gear and exceptional service. Thank you all. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Good afternoon, ladies and gentlemen, and welcome to the Rubrik Third Quarter Fiscal Year 2026 Results Conference Call. [Operator Instructions]. This call is being recorded on Thursday, December 4, 2025. I would now like to turn the conference over to Melissa Franchi, Head of Investor Relations. Please go ahead. Melissa Franchi: Hello, everyone. Welcome to Rubrik's Third Quarter Fiscal Year 2026 Financial Results Conference Call. On the call with me today are Bipul Sinha, CEO, Chairman and Co-Founder of Rubrik, and Kiran Choudary, Chief Financial Officer. Our earnings press release was issued today after the market closed and may be downloaded from the Investor Relations page at www.ir.rubrik.com. Also on this page, you'll be able to find a slide deck with financial highlights that, along with our earnings release includes a reconciliation of GAAP to non-GAAP financial results. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. During this call, we will make forward-looking statements, including statements regarding our financial outlook for the fourth quarter and full fiscal year 2026. Our expectations regarding market trends, our market position, opportunities, including with respect to generative AI, growth strategies, current initiatives and expectations regarding those initiatives and our go-to-market motions. These statements are only predictions that are based on what we believe today, and actual results may differ materially. These forward-looking statements are subject to risks and other factors that could affect our performance and financial results, which we discuss in detail in our filings with the SEC. Rubrik assumes no obligation to update any forward-looking statements we may make on today's call. With that, I'll hand the call over to Bipul. Bipul Sinha: Thank you, Melissa, and thank you all for joining us today. Let me start by saying our third quarter results were exceptional. Every quarter for the past several quarters, we have successfully delivered in many cases, record numbers. In fact, this quarter has been our best ever. We have not only added record net new subscription ARR, but also generated tremendous free cash flow. And I'm happy to report we once again exceeded all guided metrics across top line and profitability. Here are 5 key numbers. First, subscription ARR reached $1.35 billion, growing 34% year-over-year. Net new subscription ARR reached a record $94 million. Second, our subscription revenue was $336 million, growing 52% year-over-year. Third, our subscription NRR remained strong once again, over 120%. Fourth, customers with $100,000 or more in subscription ARR reached 2,638, growing 27% year-over-year. And finally, on profitability, we once again made material improvement in subscription ARR contribution margin, up about 1,400 basis points year-over-year. We generated a record $77 million in free cash flow this quarter. This combination of top line growth and cash flow margin at our scale is best in class. We remain confident about the opportunity ahead, and thus, we are again raising our outlook for the year. Bipul Sinha: But let me begin by providing some additional context on our market opportunity as well as our areas of focus. Our mission is to lead Rubrik into our next era as the, let me repeat, the security and AI operations company. My discussions with IT and security leaders consistently reveal an assume breach mentality, which means being prepared for the inevitable reality that every enterprise will face a successful cyber breach. This preparation includes 2 things: First, understanding the risk of a cyber breach in terms of both data content and identities. And second, the ability to remediate and recover from the breach to ensure business continuity. But the landscape in which these threats occur has dramatically evolved. Organizations are now facing a new cyber landscape with AI potentially enabling threat actors to inflict 10x more damage in 1/10 of the time. Alongside these challenges, enterprises are also focused on modernizing their infrastructure in anticipation of the impending enterprise AI transformation. While AI presents 100x more risk, the AI transformation promises 100x more opportunities, much like every big generational shift in enterprise technology. When cloud redefined IT, Rubrik ensured simple and reliable recovery. When cyber threat surged, we extended our Rubrik Security Cloud product suite across data and identity to deliver true cyber resilience. Now with the rise of AI agents, a new transformation is underway. AI transformation presents unique challenges. An agent operates within an organization's environment runs business processes, assumes identity, touches critical data and impacts mission-critical applications at unprecedented speed and scale. These agents are effectively superhuman, but organizations don't yet have the guardrails to monitor and contain what they do. We need to think about AI agents very differently. Through this AI transformation, Rubrik's mission and its strategy remains the same, to accelerate our customers' journey to AI enterprise. I will delve deeper into our AI agent innovations later in my remarks. Bipul Sinha: As companies shift deeper into cloud and AI, customers continue to turn to Rubrik for complete cyber resilience, which includes 2 key set of capabilities. First, consistent data and identity security policy controls, and second, rapid and accurate recovery from cyber attacks. While we believe we have a tremendous opportunity in enterprise AI acceleration, we continue to focus on and when the vast cyber resilience market, which includes our core data protection solutions and identity resilience. Let me provide some more details across our 3 businesses: data protection, identity resilience and AI operations. Our cyber resilient data protection journey remains in its early stages, particularly as data availability and security become the most crucial element for AI. We continue to add new solutions across data center, cloud and SaaS workloads, leveraging the same underlying preemptive recovery engine to deliver complete risk and remediation capabilities. Our unique architecture consistently enables us to outperform both legacy and new gen backup vendors. In fact, in the third quarter, bookings from legacy replacements accelerated year-on-year, surpassing the growth rates seen in the first half of the year. Let me provide 2 specific examples of legacy replacements in very large enterprises. First, one of the largest banks in Asia and worldwide selected Rubrik as the strategic cyber resilience partner, replacing a long-standing legacy vendor. We outcompeted several new gen backup vendors for this opportunity. Rubrik's platform now provides data protection across its data center and cloud workloads for mission-critical applications. The customer also chose the Rubrik's Identity Recovery solution for over 250,000 users. And the second, a Fortune 250 professional services firm selected Rubrik to displace its 15-year legacy backup vendor. Rubrik again outcompeted several new gen competitors for this opportunity. Rubrik will provide a unified cyber resilience platform across the customer's rapidly evolving hybrid and multi-cloud environments. Bipul Sinha: Let me now talk about the momentum we are seeing in cloud protection. Many sophisticated cyber attack inevitably occurs, organizations need to recover quickly and seamlessly, which is difficult across multiple workloads, tools and interfaces. Rubrik Security Cloud delivers complete cloud and SaaS protection from a single platform that understands the relationship among data, applications and identities regardless of where they live. We continue to build upon our core to cloud cyber resilience offerings, which delivers protection from the first line of code to full stack application in production across the major hyperscalers. For example, we recently announced Rubrik DevOps protection for Azure, DevOps and GitHub. This new solution is designed to ensure our customers most valuable intellectual property and development pipeline are protected and preserved. Now let me illustrate our momentum in cloud protection with 2 specific customer wins. A health and wellness technology company chose Rubrik cloud protection to protect a multi-petabyte mission-critical workload containing user data. Rubrik offered not only cyber resilience, but also a significant cost reduction compared to cloud-native backup solutions due to our unique platform. With Rubrik, this customer can confidently meet their minimal viable business plans with our immutable and secure data protection solution. And second, a Fortune 150 biopharmaceuticals company strengthened the partnership with Rubrik this quarter by adding cloud protection for its multi-petabyte public cloud data estate. We not only replaced native backup solutions, but also outcompeted new gen vendors. Rubrik was selected due to the strength of our cyber resilience capabilities as well as lower TCO with an estimated 30% annual cost savings. Bipul Sinha: Next, let's talk about our Identity business. As we have discussed, our comprehensive identity resilience platform uniquely combines identity posture and recovery with the Data Security Posture Management, or DSPM to deliver complete identity risk and remediation solutions. Our Identity line of business has been highly successful in garnering budget from CSOs, extending Rubrik beyond our traditional CIO and CTO buying personas. This business has achieved significant momentum in just over 3 quarters of the first general availability, reaching about $20 million in subscription ARR. In Q3 alone, we more than doubled the total number of identity customers. In fact, 40% of those identity customers added in the third quarter were net new to Rubrik. As you might recall, we started our identity journey with the release of identity recovery, which provides the rapid recovery of identity services following cyber attacks or operational failures to minimize business disruption. This quarter, we announced support for Okta Identity making Rubrik the only identity recovery solution to support Okta, Active Directory and Entra ID recovery. We also announced a new identity integration with CrowdStrike this quarter. With this integration, our customers can not only detect identity threats in real time, with Falcon Next-Gen Identity Security, but also surgically roll back malicious changes and restore their identity system to a safe operational state with Rubrik Security Cloud. CSOs are increasingly turning to Rubrik for a more comprehensive identity strategy. This quarter, we launched Rubrik identity resilience a higher tier addition above identity recovery. This solution monitors and protects both human and nonhuman identities, tracks misconfigurations and high risk or malicious changes within active directory and Entra ID. It also enhances risk posture and accelerates cyber recovery by linking identity-based information such as privileged access with Rubrik's DSPM's sensitive data context and activity. In just 1 quarter of selling, we closed 65 deals for identity resilience. This early momentum makes us very excited about what's ahead for identity resilience. Bipul Sinha: Let me share 2 illustrative customer wins. Our U.K. government agency added identity resilience for its large user base, alongside cloud data protection for Azure and AWS, as they sought to bolster resilience for critical national infrastructure amid rising cyber attacks in the U.K. This agency also consolidated several disparate tools with the Rubrik platform and replaced native cloud backup solution, which proved unscalable for the customer's massive and complex data estate. And second, a U.S. state agency turned to Rubrik this quarter after the rise of cyber attacks on governments nationwide. And in particular, after a recent incident, that impacted a critical state agency, seeking to bolster its cyber strategy and reduce recovery times, the agency chose Rubrik identity resilience and M365 protection for 100,000 users, replacing their native cloud protection and traditional data center identity backup. With Rubrik, cyber recovery times will move to mere hours compared to months with the incumbent solution. Bipul Sinha: Lastly, I will talk about our innovations in the AI space. As I mentioned earlier, agentic AI can unlock significant new efficiencies for every organization. It also introduces considerable risks, including threats by bad actors and the issue of hallucinations. To help accelerate AI transformation, we recently launched Rubrik Agent Cloud, or RAC, a new product suite that enables enterprises to deploy AI agents safely and confidently at scale. With the release of Rubrik Agent Cloud, Rubrik now operates 2 complementary product suites built on the same Rubrik platform, which combines application, data and identity context across all enterprise workloads. First, Rubrik Security Cloud for cyber resilience and accelerated cloud adoption. And second, Rubrik Agent Cloud for AI resilience and accelerated AI agent adoption. Our competitive advantage is Rubrik's core platform that sits in the center of data application and identity. Following the acquisition of Predibase last quarter, we now have agent context in the mix as well. Together, this forms the Rubrik Agent Cloud, the first integrated enterprise control layer for managing the AI agent life cycle. RAC answers the 3 most critical questions currently facing every CIO and CISO. Number one, what agents do I have? And what are their capabilities and activities. Number two, what data are these agents allowed to access? And are they operating within the enterprise guardrails? And number three, if something goes wrong, can I undo it. RAC provides organization with the ability to answer these questions through its core capabilities, namely agent monitoring, agent governance and full agent remediation. This includes Rubrik Agent Rewind, which we announced last quarter, Agent Rewind helps customers undo the mistakes of AI agents, which is crucial for a scalable and secure AI adoption. We also recently announced that Rubrik Agent Cloud will integrate with Microsoft Copilot Studio and AWS Bedrock. As we have said previously, we are still in the initial phase of a multiyear effort to scale Rubrik's AI solutions. Rubrik Agent Cloud is currently in beta, but we are very excited about the early customer enthusiasm. Looking ahead, we plan to expand our capabilities and investments to enable confident enterprise AI transformation and agentic work adoption. Bipul Sinha: In closing, I would like to share my gratitude to my fellow Rubrikans. Rubrik continues to win the cyber resilience market. And at the same time, we are defining the AI enterprise future. Rubrikan's collective focus and disciplined execution always inspired me. Also, I extend my sincere gratitude to our customers and partners. Your confidence in us motivates our continuous effort to lead and shape the future of cybersecurity and enterprise AI. And lastly, of course, thank you to you, our shareholders, for your continued support and trust. A number of you have mentioned to me the consistency with which we have been delivering the beat and raise cadence since our IPO. This is true. We have done so quarter after quarter. We are confident in closing out this year strong and continuing our great momentum into the next year and beyond. With that, I'm pleased to pass it over to our Chief Financial Officer, Kiran Choudary. Kiran Choudary: Thank you, Bipul. Good afternoon, everyone, and thank you for joining us today. We had a very strong Q3 marked by record net new subscription ARR and continued improvement in profitability metrics. These results reinforce our leading position in the large and expanding cyber resilience market. We are raising our Q4 outlook as we look forward to a strong close to the fiscal year. Let me start by briefly recapping our third quarter fiscal 2026 financial results and key operating metrics, and then I'll provide guidance for the fourth quarter and full year fiscal 2026. All comparisons, unless otherwise noted, are on a year-over-year basis. We are very pleased to have ended Q3 with subscription ARR of $1.35 billion, growing 34%. We added $94 million in net new subscription ARR, a record amount for Rubrik. We continue to drive adoption of our Rubrik Security Cloud, which resulted in $1.17 billion of cloud ARR up 53%. Our differentiated land-and-expand model benefits from multiple avenues to gain new customers and grow our footprint after the initial contract. Expansion occurs through data growth in existing applications, securing more applications or identities or adding more security products. As a result, we continue to see a strong subscription net retention rate, which remained over 120% in the third quarter. We are very proud of the high customer retention and expansion dynamics of our business. All vectors of expansion are healthy contributors to our NRR, highlighting the meaningful runway we have to more deeply penetrate our customer base. Adoption of additional security products contributed over 40% of our subscription net retention rate in the quarter, up from 32% in the year ago period. In the third quarter, we saw significant growth in our largest accounts with the number of customers contributing $100,000 or more in subscription ARR rising 27% to 2,638. These large customers now represent 86% of our subscription ARR, an increase from 83% a year ago. Furthermore, we added a record 23 new customers with subscription ARR of $1 million or more driving over 50% growth in our $1 million subscription base. For our third quarter, subscription revenue was $336 million, up 52%. Total revenue was $350 million, up 48%. Revenue in Q3 primarily benefited from a strong ARR growth. However, we again had tailwinds from our cloud transformation, resulting in higher nonrecurring revenue, which is accounted for as material rights. Material rights contributed approximately $25 million to revenue this quarter, modestly ahead of our expectation. Revenue growth normalized for material rights was approximately 36% in the quarter. Turning to the geographic mix of revenue. Revenue from the Americas grew 51% to $256 million. Revenue from outside the Americas grew [ 51% ] to $94 million. Before turning to gross margins, expenses and profitability, I would like to note that I'll be discussing results in a non-GAAP basis going forward. Our non-GAAP gross margin was 83% in the third quarter, compared to 79% in the year ago period. Our gross margin benefited from the revenue outperformance, including higher nonrecurring revenue and the improved efficiency of our customer support organization. As a reminder, we look at subscription ARR contribution margin as a key measure of operating leverage. We believe the improvement in our subscription ARR contribution margin demonstrates our ability to drive operating leverage and profitability at scale. Subscription ARR contribution margin was positive 10% in the last 12 months ended October 31, compared to negative 3% in the year ago period, an improvement of approximately 1,400 basis points. When normalizing for the $23 million in employee payroll taxes associated with the IPO in the prior period, the improvement was approximately 1,200 basis points. The improvement in subscription ARR contribution margin was driven by higher sales, the benefits of scale and improving efficiencies and management of costs across the business. Free cash flow was $77 million compared to $16 million in the third quarter of fiscal 2025. This increase was driven by higher sales, improving operating leverage and optimizing our capital structure. Kiran Choudary: Turning to our balance sheet. We ended the third quarter in a strong cash position with $1.6 billion in cash, cash equivalents, restricted cash and marketable securities and $1.1 billion in convertible debt. Let me now provide some context on our guidance. We are confident in our outlook driven by the robust cyber resilience market and strong demand for our unique offerings. We expect these factors, combined with our consistent and effective execution to deliver strong subscription ARR growth ahead. We plan to continue making operational investments across 2 key areas. First, we'll continue to invest in R&D to accelerate innovation in the large, but developing markets of data security and AI. Second, we will invest in our go-to-market, specifically targeting regions and verticals that offer the most attractive ROI. These go-to-market investments will also focus on achieving product market fit and scaling our newer innovations such as identity resilience platform and Rubrik Agent Cloud. Kiran Choudary: Now turning to guidance for the fourth quarter and full year fiscal 2026. In Q4, we expect revenue of $341 million to $343 million, up 33% or approximately 30% when normalized for material rights. We expect non-GAAP EPS of negative $0.12 to negative $0.10 based on approximately 201 million weighted average shares outstanding. For the full year fiscal 2026, we now expect subscription ARR in the range of $1.439 billion to $1.453 billion, reflecting a year-over-year growth rate of approximately 32%. We expect total revenue for the full year fiscal 2026 in the range of $1.280 billion to $1.282 billion, up approximately 44% or 35% when normalized for material rights. We expect material rights related to our cloud transformation to contribute approximately $68 million to revenue in fiscal year 2026. We expect non-GAAP subscription ARR contribution margins of approximately 9%. We expect non-GAAP EPS of negative $0.20 to negative $0.16 based on approximately 197 million weighted average shares outstanding for the full year. We expect free cash flow of $194 million to $202 million. As we progress through the final stages of our successful cloud journey, our reported revenue growth has seen significant tailwinds from our cloud transformation, including material rights in fiscal 2026. In fiscal 2027, dynamics related to our successful cloud transformation and a substantial reduction in material rights revenue will represent a headwind to our reported revenue growth. However, normalized revenue growth will be ahead of subscription ARR growth. As we have always communicated, subscription ARR is the primary top line metric to evaluate our business performance as it is not impacted by the aforementioned accounting dynamics related to our cloud transformation. In terms of profitability, we will continue to stay focused on taking advantage of the market opportunity in cybersecurity and AI while balancing growth with improved efficiency. Based on our current investment plans, we expect to deliver modest improvement in our subscription ARR contribution margin and modestly higher free cash flow for the fiscal year 2027. In addition, we included some additional modeling notes in our investor presentation. In closing, we are pleased with our strong performance in the third quarter. We look forward to finishing the year strong, given our leadership, innovation and ability to execute on a large and growing market opportunity. With that, we'd like to open up the call for any questions. Operator: Your first question comes from Saket Kalia of Barclays. Saket Kalia: Nice quarter. Bipul, maybe for you. It's very clear that you're taking share in kind of the core cyber resilience, right, the first of 3 pillars. But you're also growing other businesses like identity. And so I'm curious, how additive can identity be to an average data protection deal? And maybe relatedly, is identity replacing any established tools or is that creating new budget as you sell increasingly to CISOs? Bipul Sinha: Identity is completely additive to the deal. So it is a net new buyer for Rubrik. We are selling identity to the CISO organization to IM persona. And in some cases, we are replacing legacy or new gen vendor, a new gen identity recovery vendor. In other cases, it's a white space. Nevertheless, it's a net new buyer for Rubrik, which is a CISO organization and a net new solution that we have created completely from scratch. In fact, this product went into GA -- first GA in December last year. And we are seeing 40% of new customers last quarter is net new to Rubrik. So this is very exciting. Kiran Choudary: Saket, this is Kiran. I also wanted to add that in my prepared remarks, I had mentioned that our NRR was again 120% plus for the quarter. And while all the drivers were good contributors, the security component crossed 40% and identity is one of the key components of that -- or drivers for that. Saket Kalia: That's super helpful. I would love to squeeze in just 1 housekeeping question, Kiran, maybe if I can for you. The SaaS ARR line really speaks for itself. But I was wondering if you could just comment on the non-SaaS ARR line, right? There's an element of there that's conversion. There's also some natural churn. Can you -- since we're all together here on the call, can you just talk about how we should think about modeling that going into Q4 and then maybe into next year? Kiran Choudary: Sure, Saket. I'll add my thoughts to that. So as you know, we are predominantly a cloud SaaS business now. We are very pleased with how the cloud transformation has progressed in the last few years. This quarter, we were around 87%. Cloud ARR as a percentage of subscription and we grew 53%. When you look at the non-cloud run, that is one of the lines which is also contributing to the cloud ARR growth, one with smaller components, but is contributing. So as a result, that declines, and that's declined now for a few quarters. And we'll continue a bit more because we believe there is more room to run in our cloud ARR -- cloud business as a percentage of subscription ARR. Operator: Your next question comes from Matt Martino of Goldman Sachs. Matthew Martino: Bipul, do your comment that bookings from legacy replacement accelerated year-over-year stood out to me. I guess from your perspective, what's driving the acceleration there? Is it the modernization ahead of AI that you flagged in the prepared remarks or maybe a growing recognition from CIOs that they simply can't wait to modernize due to the growing threat vectors out there. Bipul Sinha: Thanks. It's both. It's definitely preparing for AI and modernizing the infrastructure, that's a big driver. And the other driver is cyber attacks are inevitable and Rubrik has a unique platform that delivers cyber recovery, leveraging our preemptive recovery engine that is unique in the marketplace. And our speed of recovery is the key factor in making this decision. So CIOs and CISOs are looking at their legacy landscape, including new gen vendors and saying that I'm at risk. Cyber attacks are going to come to me. And if I can't keep my business up and running, it threatens the very existence of the business, and that's what is also driving legacy replacement. Operator: Your next question comes from Fatima Boolani of Citi. Fatima Boolani: Bipul, this one I want to direct to you. Since your IPO, there has been an absolute avalanche of new product introductions and new capabilities and you're showing and putting points on the board with respect to installed base and new customer uptake in adoption. What I wanted to ask you was just with respect to the platform having expanded so dramatically in the span of the last 18 months. I'm curious how that's influencing your overall sales strategy? And really, the spirit of the question here is what's become very involved and certainly, the companies we cover and the broader enterprise software is this notion of providing flex or consumption-oriented type vehicles to enable customers to have a more fulsome frictionless access to the full portfolio. So a long-winded way to ask you, is that something that you would potentially consider just given how quickly and how robustly the platform's expanded? And how would you idea around that? Bipul Sinha: Thanks, Fatima. So if you look at Rubrik from day 1, our strategy has been a true platform company. And you might ask what is a platform company. Our definition of a platform company is a product when -- a platform when the customer adopts more than 1 product, their value from the platform goes up. I'll give you an example. When our customers buy Rubrik Security Cloud for both data center as well as AWS or Azure cloud, if there is a threat actor in the cloud and same threat actor is in the data center, we can auto correlate threat and give you the full cyber resilience intelligence and recovery on that threat actor. You don't have to pull the logs into Splunk and then try to analyze and figure out what's going on. Rubrik automatically does that for you. Now the same platform is expanded into identity. So now you can actually see what's happening to your identity vis-a-vis data when the privilege gets escalated. Now the same platform we have launched a new product suite in Rubrik Agent Cloud. So now we have 2 distinct product suite. Rubrik Security Cloud for cyber resilience, Rubrik Agent Cloud for enterprise AI acceleration. So our strategy has always been give customer a comprehensive platform and be the strategic IT vendor for that customer for years and years to come. Obviously, we want to make it easier for our customers to consume Rubrik product, try new Rubrik product. And we don't easily lose customers because we provide a mission-critical solution and customer retention has been one of the hallmarks of Rubrik. So we are looking at all avenues going forward to make it easier for our customers to adopt Rubrik, consume Rubrik because we are selling is only 5% of my job, 95% of my job is to ensure customer delight, the first use experience, repeated user experience, expansion experience and providing end-to-end cyber resilience. Operator: Your next question comes from John DiFucci of Guggenheim. John DiFucci: This is an impressive quarter. And I'd just like to congratulate the extended Rubrik team beyond even those on this call. Bipul, I want to sort of go high level with you on something because you hit something that everybody is hitting now and we are just trying to figure out. It seems really early when it comes to securing AI agents. But things can move really fast. It seems that everybody in security is saying they're best positioned to serve this role, which looks like it can be huge, right? Can you explain why Rubrik is well positioned to capture this opportunity or maybe even just part of the opportunity? And if that's the case, what else do customers -- what else will they need to have beyond Rubrik to solve this problem? Bipul Sinha: Thanks, John. That's a really good question. If you take a step back, Rubrik is all about data, identity and business applications. And these are the 3 main things even to deliver AI. AI is not a purely security question. Neither it is purely operations question. AI sits at the intersection of security, which is risk management and governance, plus the operations, which is how do you deliver the accurate AI, how do you fine-tune the model? How do you create real-time operational guardrails and observability and undo action if they misbehave because of cyber compromise or hallucination. And Rubrik is squarely at the intersection of operations and security. So this is a natural place for us to deliver a complete agentic operation platform, agentic management platform, if I can be so bold to call it agentic ERP. And what does agentic ERP needs to deliver? 3 things. How many agents do I have, including the ones that is sanctioned as well as the ones that are non-sanctioned. What the hell they are doing? What do I want them to do in terms of my operational guardrail? Are they hallucinating, can I make them more accurate so that humans can be confident of the results of the AI agents. And if they misbehave, can I take -- press the rewind button and take away the effect of them, of misbehaving agent. So this requires an end-to-end complete platform across monitor, govern and remediate. So this is a very natural extension to Rubrik's core strategy. And you know what? On top of it, Rubrik is also secure data lake. So we have additional opportunity to bring Rubrik data to do fine-tuning of the model, to deliver more accuracy with Predibase acquisition, we have the ability to virtualize GPU, to reduce the cost or to multiplex different training model to be able to deliver perfect guardrail for our customers to have confidence in the agentic actions. So we believe that we are strongly positioned to deliver this new infrastructure product suite, Rubrik Agent Cloud. And then we are integrating this across the ecosystem. You saw our announcement with Copilot Studio, with AWS Bedrock, we are extending and expanding this platform across all the tools that users can use to build agents. And this is, again, a [ strategic ] opportunity just like cyber resilience across all business applications. Rubrik Agent Cloud is product suite across all agent tool builders, whether it's AWS, Azure, GCP, M365, Salesforce, Agentforce, no matter whether it is infrastructure as a service agent or platform as a service agent, Rubrik Agent Cloud is giving our customers the confidence to do the AI transformation, deploy agents at a scale and truly take advantage of the AI opportunity. John DiFucci: That actually -- that is the first time I've heard anything about this described in a way that I can understand. So thank you very much. Operator: Your next question comes from Brad Zelnick of Deutsche Bank. Brad Zelnick: Excellent. And I echo my congrats as well. What a great quarter. And my question actually follows on what John just asked about Rubrik Agent Cloud, across monitor, govern and remediate. And I reflect on the announcement this week adding Amazon Bedrock along with Copilot Studio support. Bipul, how are these partnerships structured with the AI platforms. Is there a co-investment in go-to-market and co-innovation on product? And what are the ways you'll monetize Rubrik Agent Cloud along with the platforms. Bipul Sinha: Thanks, Brad. We have been working with hyperscalers for a number of years. And our initial -- our big partnership started with cyber resilience, and we have found tremendous success. We have hundreds, if not thousands of customers with them and joint customers where we are helping hyperscalers deliver a complete business transformation, cloud transformation with confidence of cyber resilience. And now we are expanding on that partnership to bring Rubrik Agent Cloud. And so the idea is if you develop your agents on AWS Bedrock or on Copilot to Studio, you can manage that on Rubrik Agent Cloud. And so we have prebuilt go-to-market partnership with hyperscalers, and we expect to leverage those existing infrastructure with the new teams that are involved on the AI side to expand the go-to-market. Brad Zelnick: And from a monetization standpoint, Bipul, these are dedicated SKUs that are incremental. The strategy isn't necessarily to migrate customers up different tiers of the core product. Is there anything we should know about the way that you'll monetize? Bipul Sinha: So Rubrik Agent Cloud is a completely separate product suite. It is early where the product is in beta, but we are getting very strong customer feedback on these products. I'll give you a couple of examples, a very large healthcare organization said that they are slow to adopt agents because they have yet to find a platform that they can confidently operationalize agents, which means that monitor and have visibility into agents. There was another pharma company where the exec said that why are we not having a product like Rubrik Agent Cloud already. And they said that they see our vision as really enabling them to an agentic future, and this is the right idea. Obviously, all of this is very early, but we are very encouraged by the reaction and obviously, we'll update you as we make progress, but I anticipate there to be a separate product suite that we'll sell. Operator: Your next question comes from Eric Heath of KeyBanc. Eric Heath: Great. Bipul and Kiran, I wanted to follow up on your comments about the strong beat and raise cadence that you've acknowledged and the outlook for Q4. When I look at the guide, it's shown a seasonally stronger growth rate than 3Q, which hasn't historically been the case. So can you just talk about the dynamic there? Is that purely a function of the sales comp change this year? Is it more so a reflection of the strong pipeline you see? Or anything else to call out? Kiran Choudary: Thanks, Eric. This is Kiran. I'll take that one. So we're very pleased with the Q3 results we delivered in terms of scale and growth. That gave us the confidence to raise Q4 as well. It's about a 3% raise on the net new ARR, 3% plus based on the implied Q4 guide from the last quarter's call. But as you know, we run the business on an annual basis on net new ARR and we have spoken about that in the past as well. So we look at the total net new ARR for the year, really, that's what we plan for and look to deliver. So the annual comp plan changes have progressed really nicely, but we have to finish the year as well, and we can give you an update on that after Q4. Operator: Your next question comes from Gregg Moskowitz of Mizuho. Gregg Moskowitz: And congratulations on the strong execution. I'd like to go back to Identity because Identity Recovery is off to a really strong start. And by the way, the feedback was also positive at AWS Reinvent this week. Bipul, when you look ahead, so Rubrik has many thousands of customers that you can potentially cross-sell into. And as you've noted, you're already landing with Identity as well. So when you look at Identity Recovery and now Identity Resilience in addition, how are you thinking about penetration rates for this part of the platform going forward? Bipul Sinha: We believe that Identity Recovery is a widely applicable horizontal platform in terms of the Identity Security strategy that we have. And going from Identity Recovery to Identity Resilience, we are really adding before and during pieces to ensure that if there is a privilege escalation, what kind of sensitive data gets exposed to. And that's where we are bringing the DSPM capabilities with identity capabilities to expose the full risk. Because if you take a step back, cyber resilience assumes that the attacks will happen to you. So if you know that attacks will happen to you, you have to understand the risk of the attack and be able to remediate. And the risk of the attack, you need to understand data risk and you need to understand the identity risk. Because you can't understand the full risk without understanding data and identity both. And then in terms of remediation, you have to remediate both, you need to do a cyber recovery on all the data to ensure that your applications are up and running plus you have to also recover Identity system partially or fully. So we believe that for full cyber resilience, both identity and data is applicable everywhere, Obviously, these are early days. We are just over 3 quarters into it. We are just about $20 million in subscription ARR. We doubled our number of customers in Q3. The customer excitement is very, very high. I'll give you an example. Our European consumer technology company. They were really worried about -- is scattered spider because one of their suppliers got hit. And as you know, scattered spider is detrimental to identity systems as well as virtual machines because they are bypassing the traditional EDR. So there is increased awareness of importance of identity systems, both full availability of the identity system plus the escalations, which are illegal and how data gets impacted. So we have a full vision to really create full cyber resilience solution. And as we said, we are also partnering with CrowdStrike ITDR solution to provide end-to-end confidence for our customers saying that Falcon will detect and will help roll back bad changes. Operator: Your next question comes from Todd Coupland of CIBC. Thomas Ingham: I wanted to ask about net new. That's been a little bit lumpy the last few quarters. And I'm just wondering if the acceleration that you experienced this quarter and going into Q4, is that the new normal? Or should this still be considered an area of volatility as we think about '27? Kiran Choudary: Hi Todd. This is Kiran. I'll take that one. So very pleased with the Q3. Net new ARR was a record for the company, $94 million. But the way to look at net new ARR really in our business is on an annual basis, and that's the number we planned for when we start a year, and there's obviously shifts between quarter-to-quarter because of deals pipeline, et cetera. So I would focus on the annual number, including the guide and then there's going to be some quarterly movements because of compared to previous years and timing. Operator: Your next question comes from Junaid Siddiqui of Truist. Junaid Siddiqui: Bipul, with cyber insurance requirements tightening and ransomware costs increasing, are you seeing Rubrik's platform play a role in lowering those insurance premiums for customers and do you see this convergence of identity and data security becoming a differentiator for cyber insurance and compliance frameworks. Bipul Sinha: Thanks Junaid. Absolutely, you need to have both identity resilience and cyber recovery to be able to drive complete cyber resilience. And for insurance company to underwrite, there is asymmetry of information and for them to have confidence that the customers have the right technology, it is definitely attractive for them to actually recommend Rubrik. In fact, one of the insurance companies, which is our customers actually became our reseller to their customer base, based on that same thesis. We believe that we are still in the early innings of cyber resilience as very large segment, and I would argue that the most important segment of cybersecurity and we believe that as this market continues to expand and as we continue to lead this market into the future around full cyber resilience across data and identity, we believe that there are a lots of opportunities, including around insurance for us. Operator: Your next question comes from Keith Bachman of BMO. Keith Bachman: I wanted to go back to the agent market. The identity market seems like a tremendous opportunity in a natural adjacency. I still struggle a little bit with the opportunities associated with the agent market. And so I wanted to just ask it in maybe some different threads, a, is the go-to-market going to be different for the identity that is to say, is there -- do you anticipate it being a different buyer in the agent market? It would seem to me that it's a different buyer, but I just wanted to get your perspective. And b, how do you think the competitive landscape is going to shape up. It's super early, and there's probably going to be more than 1 winner. And then finally, is there any thoughts about when you might emerge from beta to actually have production environments or GA into the market? Bipul Sinha: So if you look at agents, they assume identity, they work on data and they operate on many applications at a scale. And as I said before, the Rubrik platform is a combination of data, identity and applications. So we are naturally positioned to take advantage of this agentic opportunity. We are not building a platform for people to build agents. They have many platforms for them to build agents. We are helping our customers operationalize agents and have confidence and governance controls to be able to deliver the agentic outcome because that's the biggest inhibitor in terms of AI going into; production. And that's what we are focused on. In terms of the market, obviously, we are early. As I said, we are still in beta. We expect to go GA, not too far in the future. We'll continue to learn from this market, continue to enable our customers on this journey. So far, it feels like operations team, which is CTO, CIO organization would be responsible for agentic work transformation across line of businesses. So there is a convergence in the buying persona. But again, it's very early. We learn in the market, but we believe that we have a very strong vision for this market. And again, as this market evolves, we want to really take our customers on this agentic journey. Operator: Your next question comes from Shrenik Kothari of Baird. Shrenik Kothari: And many congrats on great execution. Bipul, of course, you mentioned we're launching the Identity Resilience this quarter and already noted, pretty strong early adoption. Can you speak to the uplift versus Identity Recovery? And just on that note, Kiran, highlighted that security represents over 40% now and was a major contributor to sustaining and or above 120%. Just with these modules that you're adding resilience and agent cloud adding more breadth, like just how should we think about the durability of that NRR. Kiran Choudary: Kiran, do you want to take the question? Kiran Choudary: Yes. So Shrenik, this is Kiran. I'll just give you some thoughts on how to think about the NRR. So obviously, and continued to have strong NRR 120% plus, which we see as best-in-class. And our business lends itself to strong NRR. We have a very strong gross retention, and this has been the case historically. And on top of that, we have multiple expansion vectors through different products. And that helps drive the strong NRR. But at the same time, we are scaling as a business with the strong growth rates and $1.35 billion in subscription ARR this quarter. So naturally, NRR tends to moderate over time at scale, but it will be strong NRR just given the drivers of the business. And then on the question you have on Identity Resilience, I would say it's early. We have just launched it. Obviously, that has got more features backed into it. So there will be a price uplift, but I think we need more data points to give you a sense for the amount of uplift. Shrenik Kothari: Great. Very helpful. Thanks a lot. Congrats again. Operator: There are no further questions at this time. I would hand over the call to Bipul Sinha for closing remarks. Please go ahead. Bipul Sinha: In closing, I would say thank you, everyone for continuing to be on Rubrik's journey. As I've mentioned before, our ambition is to build the next 100-year-plus company. And that 100-year plus company will be built based on all participants in the ecosystem to our customers, to our partners, to all the Rubrikans and our ability to continue to lead the market, imagine new product, validate that vision and produce the product. I'm very excited that Rubrik is able to organically create products such as Identity Resilience and Identity Recovery and create an independent product line and business. We want to continue to be on this journey with you. Thank you so much for your support. It's still early days for Rubrik. Look forward to talking to you soon. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.
Mike Chang: Good afternoon, and welcome to Samsara's Third Quarter Fiscal 2026 Earnings Call. I'm Mike Chang, Samsara's Vice President of Corporate Development and Investor Relations. Joining me today are Samsara Chief Executive Officer and Co-Founder, Sanjit Biswas; and our Chief Financial Officer, Dominic Phillips. In addition to our prepared remarks on this call, additional information can be found in our shareholder letter, press release, investor presentation and SEC filings on our Investor Relations website at investors.samsara.com. The matters we'll discuss today include forward-looking statements. Actual results may differ materially from those contained in the forward-looking statements and are subject to risks and uncertainties described more fully in our SEC filings. Any forward-looking statements that we make on this call are based on assumptions as of today, December 4, 2025, and we undertake no obligation to update these statements as a result of new information or future events unless required by law. During today's call, we'll discuss our third quarter fiscal 2026 financial results. We'd like to point out that the company reports non-GAAP results in addition to and not as a substitute for or superior to financial measures calculated in accordance with GAAP. We also report both actual and constant currency growth rates for certain metrics. On the call, we'll only provide constant currency commentary when there's a difference. Reconciliations of GAAP to non-GAAP financial measures and additional information on constant currency are provided in our press release and investor presentation. We'll make opening remarks, dive into highlights for the quarter and then open the call up for Q&A. With that, I'll hand over the call to Sanjit. Sanjit Biswas: Thanks, Mike, and thank you, everyone, for joining us today. Samsara delivered another strong quarter of durable and efficient growth. We ended Q3 with $1.75 billion in ARR, growing 29% year-over-year. We also achieved our first quarter of GAAP profitability. In Q3, we added 219 customers with $100,000 plus in ARR, a quarterly record. Our $100,000-plus ARR customers now contribute more than $1 billion of ARR, growing 36% year-over-year. We also added 17 $1 million-plus ARR customers tied for a quarterly record. Our growth is driven by our strategy to partner with the world's largest and most complex operations organizations. Q3 was a milestone quarter for large customers, and we partner with many new organizations, including the state of New York, one of the world's largest providers of oilfield services and one of the world's largest and most diversified media corporations. We're proud to partner with these industry leaders, driving safer and more efficient operations together. Large enterprises are quickly digitizing their operations, and they're demanding a partner that delivers scale and performance. We've become their platform of choice for a few key reasons. First, we unified data from many disparate systems across all their vehicles, equipment and frontline teams in a single system of record. Second, we solve challenges across their operations with our broad multi-application platform. Third, we use our massive data asset and AI to deliver actionable insights that save our customers money. Fourth, we provide an enterprise-grade platform that delivers the scalability, reliability and security our customers require. And lastly, we provide world-class support and expertise to help our customers drive change management and deliver outcomes, resulting in clear and fast ROI. Sanjit Biswas: I'd like to share 2 stories of new customers from Q3 that are using Samsara to transform their operations. The first is in student transportation, which is a complex and highly regulated network responsible for the safe transit of 26 million students every day. After landing First Student, the largest school bus provider in North America, in Q2, we partnered with another 1 of the top 5 largest school bus providers in Q3. They transport over 1 million students today in more than 500 school districts across 30-plus states and provinces. Their initial purchase included our Video-Based Safety, Telematics and AI Multicam products. They're looking for a highly accurate and reliable AI solution to enforce their 0 tolerance policy on driver mobile use and eliminate in-cab distractions and driver drowsiness. With Samsara, they'll be able to detect, alert and reduce these behaviors. The second example is with one of the largest mechanical contractors in the U.S. They have over 5,000 employees specializing in custom HVAC and plumbing systems for commercial and industrial projects. They help build major sports stadiums and critical medical and research facilities, and they also design and install the complex systems that power many modern data centers as part of the AI infrastructure build-out. The company is using our Video-Based Safety, Telematics, Connected Training and Driver Qualification products to ensure their complex field operations remain safe and efficient. In their pilot with Samsara, they saw a 44% reduction in the total safety event rate and a 72% reduction in mobile usage. We're proud of the impact we're creating together, and we're excited for the decades-long opportunity ahead. Sanjit Biswas: Physical operations are the mission-critical infrastructure to keep the world running, representing over 40% of global GDP. These asset-heavy and labor-intensive organizations typically spend around 80% of their revenue on labor and assets. Running these complex operations carries significant inherent risk, from driving large commercial vehicles carrying hazardous materials to deploying frontline workers for services to operating heavy machinery. Unfortunately, a frontline worker dies from a work-related injury approximately every 99 minutes in the U.S. We help our customers protect their workers and support their top safety goals that have a material impact on their financials, brand and talent. This work is critical because accidents and noncompliance directly translates to substantial financial costs, including higher insurance premiums and large payouts. And these costs are increasing with the rise of large nuclear verdicts and accident litigation. Our customers also care about protecting their reputation to maintain a competitive edge, which can be hurt by a weak safety culture or history of incidents. And lastly, employees stay with companies that demonstrate their commitment to keeping them safe, which is important in a tight labor market. As we look ahead, we see a huge opportunity for AI to transform safety coaching and more broadly, automate coaching across operations. This will help our customers scale their coaching programs without adding more head count. Sanjit Biswas: We recently added -- we recently launched new AI-powered coaching features: Automated Coaching, Group Coaching and Workflow Automations. Starting with Automated Coaching. This is the first advanced automated coaching to help with the entirety of the driver experience, including safety, compliance, idling and more. Coaches can quickly create their own digital doubles or use premade avatars to create tailored coaching videos for each worker. Next, Group Coaching helps managers recognize and coach front-line workers in group settings using operational data. It uses AI to generate ready-to-use coaching session that highlights positive recognition, fuel efficiency, compliance and safety. Last, Workflow Automations is a no-code workflow builder that uses our data asset to streamline coaching and training processes. It allows for the intelligent management of compliance and safety programs, automatically directing lower priority events to the driver for self-review while ensuring that high priority incidents are flagged for manager coaching. We're excited to introduce these new AI-powered features for our customers. All of our innovation is translating to real-world customer impact. We recently released our safety report, which analyzed data from over 2,600 Samsara customers operating medium and large fleets. Fleets using are dual-facing AI dash cameras, real-time in-cab alerts and driver coaching saw an aggregate 37% reduction in accidents after the first 6 months, and this increased to a 73% reduction in accidents after 30 months. These are life-saving outcomes that show our platform is transforming safety culture and demonstrating measurable results for our customers. Sanjit Biswas: Now I'd like to turn to the international growth opportunity. I've met with dozens of customers in our international markets this year. Every time I meet with them, I'm inspired by the long-term opportunity to expand our impact. There are a few reasons for this. First, the international market is very large. There are more assets and frontline workers in Europe, Canada and Mexico than in the U.S. Second, the international market is less penetrated than the U.S. and earlier in its digitization journey. Third, we believe the opportunity for impact and customer ROI is similar to the U.S. These customers are achieving similar savings from insurance payouts and premiums, fuel costs, improve worker retention and asset utilization. Over the last few months, we hosted our annual Go Beyond customer events in London and Mexico City. At Go Beyond U.K., we announced a new feature for our European customers, Samsara Smart Compliance. This helps fleet use in-cab audio alerts to prevent costly driving time infringements before they occur. We've also continued to strengthen our ecosystem through industry-leading partnerships in the U.K. and Mexico. This quarter, we announced a new partnership with Allianz, one of the largest general insurers in the U.K. This partnership gives Allianz insured commercial customers preferred access to Samsara's AI safety cameras and our connected operations platform. Also, building on our successful relationship with Element Fleet Management, we extended our partnership to the Mexico market. Together, we are providing organizations with an integrated full life cycle solution that drives down operational costs and enhances safety and efficiency in the region. We're excited about the impact we're making for our customers every day, transforming their operations to be safer, more efficient and more sustainable. We're just getting started and look forward to the multi-decade opportunity ahead. We're also proud that our long-term growth potential was recognized by Fortune this quarter, ranking us seventh on their Fortune Future 50 list. We want to thank all of our Samsarians, customers, partners and investors for joining us on this journey. I'll now hand it over to Dominic to go over the financial highlights for the quarter. Dominic Phillips: Thank you, Sanjit. Q3 was another quarter of durable growth and improved profitability. The quarter was highlighted by strong performance across several key metrics, including 23% year-over-year net new ARR growth in constant currency, our highest growth rate in the past 7 quarters; 219 $100,000-plus ARR customers added, a quarterly record; and 17 $1 million-plus ARR customers added, tying a quarterly record; 8 $1 million-plus net new ACV transactions in Q3, also tying a quarterly record; 20% of net new ACV from emerging products launched since last year; and achieving our first quarter of GAAP profitability. More broadly, our durable and increasingly efficient growth demonstrates the large yet still early opportunity for digital transformation across physical operations. Looking ahead, we believe Samsara is well positioned to deliver durable growth and create long-term shareholder value for several key reasons. First, we have a unique defensible data advantage. By instrumenting physical assets with IoT devices, we generate a large and growing proprietary data asset that cannot be easily replicated or sourced elsewhere. Second, AI is accelerating our innovation, enabling us to release new products and meaningful features at a faster pace, driving higher customer engagement and usage. Third, our business model scales with fiscal assets rather than head count or knowledge workers and aligns us with end markets poised to benefit from major initiatives such as the global AI infrastructure build-out. Fourth, our products have a differentiated value prop and mission-critical workflows, delivering fast, tangible ROI and quick payback periods that make us essential to our customers' operations. And lastly, we're targeting the large and less discretionary operations budget, which represents approximately 80% of our customers' revenue on average. And because we help them optimize the significant and durable cost base, we have a large opportunity to drive customer impact and long-term growth. Dominic Phillips: Okay. Now turning to our results. Q3 ending ARR was $1.75 billion, an increase of 29% year-over-year. Within that, we added $105 million of net new ARR, an increase of 24% year-over-year or 23% in constant currency, resulting in the second consecutive quarter of accelerating sequential growth and the highest net new ARR growth rate in the past 7 quarters. And Q3 revenue was $416 million, growing 29% year-over-year. Several factors drove our strong top line performance in Q3. First, large customer momentum is leading to higher growth at scale. In terms of large deals, we signed 8 $1 million-plus net new ACV transactions in Q3, tying a quarterly record. This reflects the success of our R&D and go-to-market investments to support these larger customer opportunities. At the same time, these larger deals have inherently longer and less predictable sales cycles, which could introduce more variability into our quarterly ARR results than in the past. In terms of large customers, we ended Q3 with 2,990 $100,000-plus ARR customers, a quarterly record increase of 219. ARR from $100,00-plus customers exceeded $1 billion, increasing 36% year-over-year, resulting in accelerating sequential growth at a larger scale. $100,000-plus ARR customers now represent 60% of total ARR, up from 57% 1 year ago. We also ended Q3 with 164 $1 million-plus ARR customers, tying a quarterly record increase of 17, $1 million-plus ARR customers contributed more than 20% of total ARR, and year-over-year ARR growth from this cohort accelerated sequentially for the second consecutive quarter at a larger scale. Dominic Phillips: Second, our customers increasingly utilize Samsara as a system of record for physical operations by subscribing to multiple applications on a single unified platform. Over 95% of our $100,000-plus ARR customers subscribe to 2 or more products, and approximately 70% subscribe to 3 or more products. In Q3, 10 of the top 10 net new ACV deals included 2 or more products and 9 of the top 10 included 3 or more products. In Q3, we signed a large expansion with one of the world's largest home improvement retailers. In the quarter, they increased their total licenses for video-based safety, vehicle telematics and Connected Equipment after achieving significant ROI, including a more than 50% reduction in total auto liability claims by leveraging Samsara's AI detections. In Q3, they also added Connected Workflows to digitize and streamline operational processes for vehicle life cycle management and driver activities, covering everything from preventative maintenance and incident review to vehicle disposal and ride-along compliance. As a result of our strong multiproduct adoption, we achieved our target dollar-based net retention rate of approximately 115%. Dominic Phillips: And third, we demonstrated strong execution across several frontier markets. In terms of emerging products, 20% of our net new ACV in Q3 came from our new products launched since last year, including AI Multicam, Asset Maintenance, Asset Tags, Connected Training and Connected Workflows. 34 transactions in Q3 included more than $100,000 in emerging product net new ACV. 8 of the top 10 net new ACV transactions included an emerging product, and Asset Tags ARR grew more than 400% year-over-year. Also, Q3 included our largest ever Asset Tags deal with a global leader in chemistry solutions and engineered equipment for the oil and gas industry. The company manages thousands of reusable chemical totes but has historically lacked visibility into where these high-value assets are deployed, how long they remain at customer sites and overall inventory levels. By adopting Samsara's Level Monitoring Asset Tags, they'll gain real-time visibility for the first time, unlocking the ability to improve their tote fleet efficiency by 25% and through the elimination of excess inventory and more efficient utilization. Additionally, the customer expects to cut the manual labor required for quarterly inventory checks by more than 90%, driving immediate productivity gains and significant cost savings. Dominic Phillips: In terms of end markets, we saw strong momentum across construction and public sector. Construction contributed the highest net new ACV mix of all industries for the ninth consecutive quarter and public sector contributed its highest ever net new ACV mix with wins across Texas, New York, Massachusetts and Chicago. Also, public sector net new ACV grew approximately 100% year-over-year, its highest growth rate in almost 3 years and crossed more than $100 million in ending ARR. And in terms of international, 16% of net new ACV came from non-U.S. geographies. Europe contributed its highest ever quarterly net new ACV mix, and year-over-year net new ACV growth in Europe accelerated for the second consecutive quarter, resulting in its highest growth rate in the last 7 quarters. And as a result, Europe's overall ARR growth rate also accelerated for the second consecutive quarter. Dominic Phillips: In addition to driving strong top line growth, we continue to deliver operating leverage across our business as we scale. Non-GAAP gross margin was 78% in Q3, a slight increase year-over-year. Non-GAAP operating margin was a quarterly record 19%, up 9 percentage points from 1 year ago, and free cash flow margin was 13% in Q3, up 4 percentage points year-over-year. Dominic Phillips: Okay. Now turning to guidance based on FX rates as of November 1. For Q4, we expect revenue to be between $421 million and $423 million, representing 22% year-over-year growth or 21% growth in constant currency; non-GAAP operating margin to be 16%; and non-GAAP EPS to be between $0.12 and $0.13. For full year FY '26, we expect revenue to be between $1.595 billion and $1.597 billion, representing 28% year-over-year growth; non-GAAP operating margin to be 16%; and non-GAAP EPS to be between $0.50 and $0.51. And finally, please see the additional modeling notes in our shareholder letter. Dominic Phillips: So to wrap up, in Q3, we delivered high growth at scale while also delivering operating efficiency gains. Looking ahead, we believe Samsara is well positioned to sustain durable and efficient growth because we generate a unique defensible data asset that powers differentiated AI innovation and deeper customer engagement. We are aligned with secular growth in physical operations that is poised to benefit from major initiatives such as the global AI infrastructure build-out, and we deliver tangible ROI through mission-critical workflows, helping customers achieve fast payback periods on their investments. We look forward to building on this momentum as we help our customers operate more safely, efficiently and sustainably at a greater scale. And with that, I'll hand it over to Mike to moderate Q&A. Mike Chang: Thanks, Dominic. We will now open the line up for questions. [Operator Instructions] The first question today comes from Michael Turrin with Wells Fargo, followed by Alex Zukin with Wolfe. Michael Turrin: Sanjit, the large customer momentum, really standing out the past couple of quarters here. Can you just speak to what's enabling that from a product perspective and how significant a competitive advantage that is becoming for Samsara here? Sanjit Biswas: Sure. So we've been investing in the sort of scale and security and infrastructure needed to serve large customers for a number of years, both on the R&D and the go-to-market side. I would say on the product side, it's our ability to just manage these massive amounts of data, also customize the product to the needs of these large complex organizations and their org structures. And then on the go-to-market side, we really operate as a true partner to these companies, understanding their business, figuring out how to unlock the most value for them, and then we tailor the use of the product to meet those needs. I think the combination of those 2 has been the big unlock, and we're seeing it come through in the numbers now. Michael Turrin: Just to follow on, Dom, I know it's early, but you have a fairly good level of visibility in this model. Is there any high-level commentary you're willing to give us on fiscal '27 that's just helpful as we're rolling through some of the results from the rest of the year here? Dominic Phillips: Yes. So look, yes, we're not in a position obviously to give formal guidance for next year. Q4 tends to be our seasonally largest quarter, and so we really need to get through the next couple of months before we finalize our FY '27 plan. I will say that based on our current outlook, I would expect that our initial FY '27 revenue guide in terms of the dollars will be higher than where current consensus is right now just given the Q3 outperformance. Mike Chang: The next question today comes from Alex Zukin with Wolfe Research, followed by Keith Weiss with Morgan Stanley. Aleksandr Zukin: Sanjit, maybe for you. The contribution from new products, that jumped to 20% of net new ACV from 8% last quarter. Maybe just dig a little bit deeper of kind of what went better or what's outperforming your expectations to drive that kind of inflection. And then I've got a quick follow-up. Sanjit Biswas: Sure. So we launched a number of new products at the customer conference earlier this year, and I think it took a few months for customers to trial them out, see how they worked. And it's been great to see the contribution early on from these new products. So that 20% up from 8%, I think, reflects growth across a number of different products. So it was no single product but really kind of balanced across a number of different products. Aleksandr Zukin: Perfect. And then, Dom, maybe for you. It's a little bit -- it's great and rare to see sequential growth in net new ARR for you guys in a Q3, particularly given some of the mechanics around some deals pushing out from 1Q to 2Q. So maybe can you just highlight like what drove that strength? Maybe comment on the First Student deal. Was that more impactful in Q2 or Q3? And anything else that we should keep in mind? Dominic Phillips: Yes. Thanks. So yes, so Q2, obviously, we talked about this 3 months ago, and we had the benefit of some of the deals from Q1 that slipped into Q2, and we closed those in May at the beginning of the quarter. And so we called that out last quarter. In terms of First Student, that was a deal that we signed in Q2. It's going to be a phased rollout. So the ARR will be added over time. That's very common for our large deals to do these phased rollouts. We actually added more ARR from that deal in Q2 than we did in Q3, so it really wasn't much of a contributor to this quarter. Q3 was really driven by things like the record number of large customers that we added, both $100,000 and $1 million plus, we tied the quarterly record again for $1 million-plus net new ACV transactions, strength across emerging products, strength in international. It was just -- it was really strong across the board kind of firing on all cylinders versus kind of one thing that drove the second consecutive quarter of accelerating growth. Aleksandr Zukin: Congrats, guys. Mike Chang: The next question comes from Keith Weiss with Morgan Stanley, followed by Matt Bullock with BofA. Keith Weiss: Congratulations on a really solid quarter. I wanted to dig in on sort of the 20% from emerging products. It seems like with the broader product portfolio that you guys have put out there, now you're seeing traction across multiple products. You're seeing those multiproduct deals really hit. Any sense you could give us on kind of the latent opportunity, if you will, within the customer base? Like how expansive could these products be within existing customers? How much further can you go in terms of growing existing customers with the expanded product portfolio? Dominic Phillips: Yes. I mean most of our net new ACV or slightly more of it generally comes from expansions to existing customers, even within our core products, and so that's definitely also the case in these emerging products. We're really just scratching the surface. Again, these are products in totality that have been rolled out going back to the beginning of last year, but they're really allowing us to land larger in some of these customers. We called out that 9 of the top 10 net new ACV deals included 3 or more products. So that includes things outside of our core products. And that just wasn't the case before the beginning of last year, and so we're really seeing good momentum from the emerging products. And Sanjit said, it's not any one given product. We're really seeing good uptake across the board. Keith Weiss: Got it. I mean is there any kind of rule of thumb that you could kind of point us to if your average like $100,000-plus customers paying you $350,000 per year, today, if they fully buy in across the solution portfolio? Can that go to $700,000? Like is it like a 2x, 3x uplift potential from the expanded solution portfolio? Dominic Phillips: I don't think there's like a really good rule of thumb for that. Some customers may have more assets out in the field or more frontline workers than they do commercial vehicles. Some of these deals are more of the net new ACV is coming from the emerging products than the kind of the core products. And so there's not really one rule of thumb, but it's just giving us more opportunities to land broader, again, really thinking about Samsara as a system of record and providing more kind of full-scale ROI for the customers. Keith Weiss: Got it. And then maybe just as a follow-up. Taking the combination of the first 2 questions that my colleagues asked. The last 2 quarters have been pretty remarkable in terms of the acceleration and the net new ARR growth. It sounds like it's a combination of like more products hitting into the existing accounts and large customer go-to-market motion hitting. Is that it? Like is it just like your initiatives are sort of compounding against each other to drive that? Or is there something else under the hood that's enabling you guys to see this type of acceleration in the net new? Dominic Phillips: Yes. I mean, yes, and if you go back to Q2 where we had accelerating net new ARR growth versus Q1, obviously, again, we had the benefit of the Q1 deals that slipped in and we talked about First Student with Alex' question, Q3 was just really strong across the board. Again, quarterly record number of large customers added, tying a quarterly record in terms of largest deals, strength across emerging products, strength in international. It was just -- it was really strong across the board kind of firing on all cylinders versus kind of one thing that drove the second consecutive quarter of accelerating growth. Mike Chang: The next question comes from Matt Bullock with BofA, followed by Matt Hedberg with RBC. Matthew Bullock: Excellent. I wanted to ask a quick follow-up to Alex' question to clarify some of the math I've done over here because I have to admit, looking at the initial stock reaction relative to that reported net new ARR number, I'm a little bit confused here. So even in our more aggressive upside model, $105 million in net new ARR was well above our estimate when you adjust for that approximately $5 million in incremental net new ARR tailwinds that you had in 2Q from the Liberation Day slippage. Am I correct in saying this will be the first sequential growth quarter in 3 years at about 5% plus or so when you do some of that math? Or do I have my numbers correct there? Dominic Phillips: Yes. I don't think we've like commented exactly on what the Q1 Liberation Day kind of impact was. We did say mid-single digits, and that is an amount that slipped out of Q1 and we landed in Q2. And so that definitely had an impact. I think if you look back over the last couple of years, even beyond that, Q3 has been a little bit below Q2. And so I think sequentially, that's one way to look at it. The other way is obviously just the overall net new ARR growth rate. It's not only is it the second consecutive quarter of accelerating. It's the highest net new ARR growth rate in the last 7 quarters. So again, not one thing to call out that really drove that strength. It was really across the board. Matthew Bullock: Awesome. And then a quick follow-up if I could. On the First Student deal, obviously, a huge amount of vehicles, 46,000. You're attaching video, telematics, commercial NAV, impressive deal. But over the long term, it looks to me, even when you underwrite conservative pricing assumptions, this could be $30 million, $40 million-plus ACV customer. Maybe just help us think about how deals of this magnitude typically roll out, right? Obviously, they're staged rollouts. But what percentage of those 46,000 you think can be deployed in the first 6 months to a year? Dominic Phillips: It really depends. It's customer by customer. I mean some customers can deploy a lot faster. There's a lot of change management, project management required internally at the customers to deploy these systems, and so it really is customer by customer in terms of how long they will get rolled up. But many customers of this size or our largest deals get phased out over several quarters. Mike Chang: The next question comes from Matt Hedberg with RBC, followed by Jim Fish with Piper Sandler. Matthew Hedberg: Great. I'll offer my congrats as well. I mean seeing this kind of growth at scale and GAAP profitability is elite to say the least. Sanjit, I wanted to ask about international, something that we've been -- and you have been focused on over the last several years, and it's great to see the progress there. I think you said Europe accelerated now for the second straight quarter. It's still early clearly from an international perspective, less penetrated in the U.S. If you were to sort of like look at a scorecard and say we think we're in the X inning of this journey, where are we? And as we think forward in the future, I mean, this feels like it could be a significant driver of total ACV growth. Just thoughts on kind of where we're at in this international journey. Sanjit Biswas: Yes. Matt, I would agree with you that we're early. For us, international has always been an exciting long-term opportunity. We talked about this on the prepared remarks. There are more assets. Basically, there's more physical operations out in Europe, Mexico and Canada than there are in the U.S., so more vehicle count and so on. That being said, they're earlier in their digitization journey, so they're maybe kind of earlier on how they're piloting these technologies, how they're implementing them. So we're kind of in the early innings is the way I would put it, and we're investing for the long term. We want to make sure we have a great product market fit. We're spending time out in the field with those customers. I referenced our local customer conferences. They've been awesome. So we're going to continue to invest there, but it really is against that long-term opportunity to digitize operations at a more global scale. Matthew Hedberg: Got it. And then on AI, you continue to roll out new products at your user conference. I'm just curious, like philosophically speaking, how do you think AI itself contributes to growth? Like is it additive to growth? And I guess, in the future, do you see pricing and packaging evolving when you continue to layer on more AI and GenAI features? Sanjit Biswas: Well, I think of AI as just being an incredible unlock for this customer value. So we have this data asset that we've been compounding that gives us a lot of visibility into the physical operations, but it's way more data than any team of people can look at. And so I talked about automations, for example, being able to scale the impact of this product using AI, that's powered by LLMs, GenAI and a bunch of the newer technologies you've been hearing about. So again, I think of it as an unlock of what's going to make it possible for these industries to digitize in a practical way without having to add a ton of head count, get value from that data. So that both improves our ability to deliver the existing products that enhances them, and it creates a possibility for some of the newer products that we launched beyond. So it really is sort of being applied across the board on both existing and new products. Mike Chang: The next question comes from Jim Fish with Piper Sandler, followed by Kirk Materne with Evercore. James Fish: Nice quarter. Maybe just going back to the school bus example. I mean, it's the second big school bus provider win. I guess, is there a way to think about how big of a vertical this is today? I assume very small, but really the crux of my question is how big of an opportunity in the U.S. alone it is as we think about your TAM. Sanjit Biswas: I don't have an exact number for you in terms of how big the school bus vertical is off the top of my head. One of the exciting things we've seen is once these industry verticals start to open up, they really go. So we've seen this with construction as we've gotten adoption. We've seen it in segments like building materials. And now with student transportation, I think landing the largest -- landing another top 5, we're really starting to see the entire industry say, "Hey, this is a technology we need to implement because it massively improves safety. It helps us be competitive". So we look forward to seeing more growth in the student transport industry, but unfortunately, I don't have a specific number off the top of my head for you. James Fish: All good. And just on the newer products, I mean, Asset Tags ended -- ending ARR growing over 400%. I assume that's a reacceleration, albeit off of a smaller base. Is there a way to think about how that sizing now compares to that $10 million ARR given at Beyond? And more on the emerging products, how commercial navigation is going at this point? Dominic Phillips: We'll give Asset Tag kind of ARR as we cross like important milestones, but you're right. I mean it was very strong growth. And I think one thing that's really helping to open that up is that we're really expanding what Asset Tags can do. We rolled out the kind of first version of it last year. And then this year, we rolled out the tank level monitoring aspects in addition to kind of the Bluetooth location. And so we'll continue to add more and more products on to the Samsara network, and that's just another kind of extension, which has allowed us to -- again, to win our largest deal, Asset Tags deal ever in Q3. Mike Chang: Great. The next question comes from Kirk Materne with Evercore, followed by Dylan Becker with William Blair. S. Kirk Materne: Sanjit, I want to follow up a little bit on Matt's question earlier about AI. And I was kind of curious, when your customers are thinking about their budgets next year, are they thinking about apportioning part of that towards AI? And do you guys get the benefit from that as a platform that obviously sort of future proofs them when it comes to that technology longer term? I'm just kind of curious if the discussions with bigger customers are actually benefiting from the fact that you're a platform that sort of will embed AI for them over time. Sanjit Biswas: Yes. I think, first of all, the budget we sell into is the operations budget. That tends to be the largest operational budget in these companies, and they are really thinking about how do they get value. Where is the ROI going to come from? AI is, I think, intuitive to a lot of buyers now. This is going to be an unlock, but ultimately, they want to see savings when it comes to safety and efficiency and kind of the core tenets of their operation. So I do think it's a nice tailwind for us in some of these deals. It helps us articulate why it is possible now to see this kind of value unlock. But I wouldn't say that they're pulling from a discrete AI budget within their own budgets. S. Kirk Materne: Okay. That's helpful. And then, Don, just a follow-up for you. Obviously, international, another nice quarter. What's sort of the thought process on expanding go-to-market reach in those territories as you go into next year? And kind of how should we think about that from an investment perspective for you all? Dominic Phillips: I think it will be very similar to what we've done over the last couple of years. We tend to invest a little bit more internationally. Again, as Sanjit alluded to in his prepared remarks, there are more physical operations assets and frontline workers in Europe and Canada and Mexico, and those markets are even less penetrated than what we see in the U.S. So we still see a lot of white space opportunity in our core market in the U.S., but these international markets are going to be -- continue to be more important as we think medium and long term and the durability of the growth. And so we will be making more investments in terms of our R&D go-to-market resources in international going into FY '27. Mike Chang: The next question comes from Dylan Becker of William Blair, followed by Alex Sklar with Raymond James. Dylan Becker: Appreciate it. Maybe, Sanjit, just starting with you on the public sector strength. I think it's 100% growth in kind of new ACV or net new ARR there. I know we've got a dedicated team in place, and we've kind of worked through the FedRAMP process. But maybe if you could kind of double click on what that continues to unlock, how we should think about kind of what the public sector opportunity looks like and how we would expect sustained momentum from this segment in particular. Sanjit Biswas: Sure. So one thing that's worth noting is in the public sector for physical operations, most of the work is actually done on the state and local level. So that's where the physical operations are taking place, whether it's maintaining roadways or sort of all the other work that happens. So we're excited to have wins like the City of Los Angeles and Chicago. I think state of New York was another big one. And what's exciting about that is that these state and local customers, they're not competitive with one another. In other words, they share notes. They're happy to share win stories of how they're getting value, and so that's been a big part of the unlock, is kind of growing momentum that this is now possible. You can fundamentally improve safety. You can improve efficiency of asset use. And so it's not about a Fed opportunity as much as it is SLED in our business at least. Dylan Becker: Perfect. Okay. No, that's very helpful. And then maybe for Dom on the enterprise traction piece. Obviously, another very strong quarter with $1 million and $100,000 customers, continues to accelerate and become an increasingly larger share of the overall mix. I guess, how should we think about kind of sustainability? Obviously, the opportunity is significantly large here but within that enterprise cohort and maybe how that helps drive conviction in your guys' outlook or confidence in the durability of the growth framework. Dominic Phillips: Yes. Yes, this is enterprise or strategic areas that we've been investing in for several years, again, from an R&D perspective to make sure that our platform is scalable and secure and that we have more than 350 technology integrations and then on the go-to-market side, making sure that we have the right kind of strategic AE resources but also the kind of the front-end sales engineers and customer successes required to really service these really large enterprises. So a lot of investment, a lot of -- is driving a lot of the momentum. And we feel really good about the size of the opportunity and this continuing to be a big driver of growth for us over time. I will say that, obviously, as I kind of mentioned in my prepared remarks, these larger deals, they're a little bit longer. They're a little bit less predictable on a kind of quarter-to-quarter basis. And so the kind of the timing of when they close could be a little bit different than more of our mid-market customers that just have a lot more predictability in terms of what the sales cycle links. So I think if you're looking at the growth rate over an extended period of time, maybe multiple quarters over a year, we feel really good about the durability. There may be some more variability on a quarter-to-quarter basis. Mike Chang: The next question comes from Alex Sklar with Raymond James, followed by Derrick Wood with TD Cowen. Alex? Okay. Let's ask... Alexander Sklar: Sorry. Sanjit, just first one for you, following up on Dylan's question. Just given some of the success verticalizing that public sector sales force, has that changed your thought process at all on go to market for some of your other end markets? Sanjit Biswas: Well, in general, we are always relooking at what's the best way to sell to these different kinds of customer segments. Nothing specific to announce at this point, but we've been happy with the public sector team. It is quite a different buyer persona and industry vertical than some of the others we sell into. But every year, as we go through the planning process, we have a number of different debates and discussions about how to organize. Alexander Sklar: Okay. Great. And Dominic, just a follow-up for you. Just given the traction on newer products we've talked about, any change to how you're thinking about the expansion motion as part of that 115% NRR framework? Is that something we could see step up as you continue to add products to the overall platform? Dominic Phillips: Our business has been very consistent over the last several years and very balanced in terms of roughly half of the business -- roughly half of the new bookings in a given period coming from new logos and the other roughly 50% coming from expansions. I think there's clearly a lot of expansion opportunity in front of us with some of these larger customers and phased rollouts and all of the newer products that we're releasing, but there's still a lot of opportunity on the new logo side as well. And so I think I would expect it to be pretty balanced going forward, but again, on the expansion side, still a lot of opportunity to grow within the existing customers we've landed. Mike Chang: The next question comes from Derrick Wood with TD Cowen, followed by Mark Schappel with Loop Capital. James Wood: Congrats on my end. Sanjit, the -- I just wanted to ask about the new tariffs that went into effect in November on foreign trucks and truck parts. Just are you seeing this shape customer demand one way or the other? Like does this drive more companies to turn to Samsara to extend lifespan of assets owned? Or just curious how this may have had any impact on end market behavior. Sanjit Biswas: Yes. So Derrick, I was out on the road a lot last quarter, and I asked many of our customers what they thought about the tariffs, how it impact their operations. And really, they didn't think it was going to have much of a change in how they were behaving. You mentioned extending asset life spans. That is something we've seen interest in really for the last several years, which is these trucks have been getting more and more expensive over time. But they're also possible to run for a few more years if you maintain them well. So we launched Connected Maintenance, for example. We have a lot of fault code insights and other AI that we're applying to helping extend asset lifespan. So that is, I think, more of an evergreen thing that we're seeing in the customer base, where they're always trying to figure out can we run these assets a little bit longer by maintaining them in a smarter way but not linked to the recent tariff needs at all. James Wood: Got it. Dom, in your prepared remarks, you called out selling into areas like construction, field services, energy, utilities. These are all impacted by physical AI infrastructure build-out. So could you double click on what you're seeing in that arena, how all the investments in CapEx on AI data centers may be impacting demand from those verticals and how you see that playing out over the next couple of years? Dominic Phillips: Yes, definitely. I mean we called out that construction was our largest industry in terms of net new ACV mix for the ninth consecutive quarter and it's obviously a direct beneficiary of the AI build-out. I think even more broadly, though, just the digital transformation for these physical operations businesses in all these industries really transcends what's going on in kind of in the broader economy. And so I think both of those are contributing to continued success in the industries you mentioned. Mike Chang: Our last question today comes from Mark Schappel with Loop Capital. Mark Schappel: Sanjit, could you share more detail on what you're currently seeing in the telematics market, including any evidence of an accelerating replacement cycle? And then also, too, along those lines, is it fair to assume that you're still seeing high win rates versus some of the legacy providers there? Sanjit Biswas: Yes, absolutely. So I would say telematics, it's part of the market that's been around for some time, really since probably the late '90s, early 2000s. So we are seeing sort of aging incumbents that haven't been able to keep up. Customers are kind of looking for other solutions, and we're very well positioned for that. So that's really this kind of modernization going on. And then more broadly, safety is driving a lot of these new expansions and then new wins. So that's an area where we've seen a lot of strength. And the legacy telematics vendors that have been truly point solutions, they've either partnered for that or have implemented kind of basic safety products. So what we're seeing in the market is people are looking for a broader platform, something that's modern, something where they can really put multiple applications up and get a system of record going. That's different than the kind of telematics point solutions that were common about 20 years ago. Mike Chang: This concludes the question-and-answer portion. Thank you all for attending our Q3 fiscal year 2026 earnings call. Before I let you go, I have a few short announcements. We will be attending the Raymond James TMT and Consumer Conference in New York on December 9 and the FBN Virtual Technology Conference on December 12. We'll also be hosting the Piper Sandler Bus Tour on December 9, the Rothschild Bus Tour on December 9, the Evercore Bus Tour on January 5, the Bank of America Bus Tour on January 5 and the Jefferies Bus Tour on January 6. We hope to see you at one of these events. That's it for today's meeting. If you have any follow-up questions, you can e-mail us at ir@samsara.com. Bye, everyone.
Stocks are back on the doorstep of record territory after a volatile month on Wall Street, but persistent inflation worries and souring consumer sentiment are keeping investors uneasy ahead of the Fed's last policy meeting of the year.
